SCENARIOS-Three routes to swaps reform in U.S. Congress

March 17, 2010

WASHINGTON, March 16 (Reuters) – The path to government regulation of the $450 trillion market in over-the-counter derivatives must wind through the U.S. Senate Agriculture Committee, which oversees futures markets.

The journey began in the House of Representatives in December with the passage of a bill that would bring OTC derivatives under government regulation for the first time.

The Senate Banking Committee is also involved. A bill unveiled on Monday by its chairman calls for new rules for the market, which is dominated by a handful of Wall Street firms, including Goldman Sachs and JPMorgan Chase.

The Obama administration and most congressional Democrats favor an OTC derivatives crackdown, with many Republicans on board as well. But Wall Street lobbyists keen to protect the substantial profits produced by derivatives trading are pushing to write loopholes and exemptions into the new regulations.

There is wide consensus among lawmakers to require mandatory clearing and exchange trading of standardized derivatives. Trading of customized swaps would be reported, with the expectation of higher margin and capital requirements.

The details of the legislation will guide how regulators wield their new power over the market.

With only a few weeks of actual legislating time remaining before lawmakers shift their focus to the November elections, here are three potential routes for reform.


Agriculture Committee Chairman Blanche Lincoln is working with the Republican leader on the panel, Senator Saxby Chambliss, toward a comprehensive bill.

Early on, Lincoln said her goal was “increasing transparency and accountability” in the markets. More recently, she said it was reasonable to consider an exemption for non-financial “end users” from sending their deals through clearinghouses.

Chambliss has said trades should be reported and that end users should not face higher costs due to reform.

Aides say Lincoln intends to unveil a bill next week, at the earliest, or by mid-April at the latest.

Lincoln prefers operating as a centrist and to have cosponsors for controversial legislation, which suggests she would seek general agreement on a bill before opening it to committee debate. If so, her bill would face few challenges and be approved quickly in committee.

The bill most likely would become part of an omnibus financial reform bill assembled by the Banking Committee, but Lincoln has said her committee plans to go ahead regardless.


Banking Committee Chairman Chris Dodd unveiled a panoramic reform bill on March 15, after unsuccessful efforts to compromise with Republicans. The bill is expected to be approved at the committee level next week before a two-week congressional break.

A vote of the whole Senate would be possible in April, but Dodd would need some Republican support to overcome procedural roadblocks.

Dodd’s draft calls for forcing as many swaps as possible to trade on regulated exchanges and to go through clearinghouses.


Dodd has said two banking committee members, Democrat Jack Reed and Republican Judd Gregg, are working on a compromise proposal for OTC derivatives that may replace what it is the bill now.

Reed said on March 12 that any exemption from mandatory clearing of standardized swaps should be limited to end users who are “hedging real economic risk.”


If the banking committee moves quickly, it could move its bill to the Senate floor before the agriculture committee plan or a Reed-Gregg proposal is completed. In that case, the banking committee bill could be amended to include the alternatives on swaps.

If the banking committee waits until April to vote on a bill, it might incorporate Reed-Gregg or the agriculture panel’s initiatives before sending a final bill to the floor.

Many elements could be contentious, particularly the finer details, such as who is exempt from clearing; whether they should be required to trade on transparent platforms; which agency oversees clearinghouses; and how to set margin and capital requirements for customized swaps.


There are many points in the legislative process that can snag a bill or snarl reform. Among the dangers:

– A mutiny among banking or agriculture committee members could defeat the chairman’s plan, preventing a bill from going to the floor, or attaching a “killer” amendment that dooms it. Committee members also could rewrite the bill so extensively that the chairman halts the bill-writing process.

– Procedural obstacles cannot be overcome. While not as polarizing as health care, swaps reform has its own set of flash points — like the scope of end user exemptions — that could inspire lawmakers to filibuster the bill or use Senate rules to make progress painfully slow.

– Senators could amend the bill on the floor to water down reform or delete key points altogether.

– Time runs out for the year, either for the Senate to pass a bill or for House-Senate negotiators to reconcile disagreements between their bills. If bills are not approved before adjournment this fall, they will die because Congress reconstitutes itself in January following congressional elections in November.

Reuters Insider: Sen Dodd news conference

Reuters Insider: Sen. Gregg interview

(Reporting by Charles Abbott; Editing by Walter Bagley) ((; +1 202 898 8319)) Keywords: FINANCIAL REGULATION/USA

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