The Senate approved the so-called Lincoln’s bill that imposes tougher rules for derivatives by introducing higher transparency requirements and providing strong oversight of market participants. Congress is expected to pass a far-reaching overhaul of the financial regulatory system soon.
The Senate Agriculture Committee approved a bill that imposes tougher rules for derivatives by introducing higher transparency requirements and providing strong oversight of market participants.
The so-called Lincoln's derivatives bill is expected to be incorporated into the broader regulatory legislation before it is taken up by the full Senate.
Under the current proposals, companies such as AIG would be subject to closer regulation and would have to keep minimum levels of capital to protect against market downturns. All the major plans would require that most derivatives be settled in a centralized system and traded over exchanges.
What sets Lincoln's bill apart is a rule that would bar companies that receive federal guarantees, like insurance from the FDIC, from most derivatives activities. That would shut down a revenue stream that's become more important for banks as lending has declined.
The banks could set up separate derivatives operations under their holding companies. But these desks would have to be funded with money from the banks' capital base. That would further restrict lending.
Senate Republicans and Democrats predicted on Wednesday that Congress would soon pass a far-reaching overhaul of the nation’s financial regulatory system.
Financial Reform Proposals:
The bill proposed by President Obama and the bill adopted by the House would rearrange the responsibility of a raft of federal agencies, and would create an independent agency devoted to consumer protection in the financial markets.
The Senate Banking Committee introduced a Democratic bill after months of negotiations with a Republican on the committee failed to produce a bipartisan measure. The major points of disagreement with Republicans concerned the scope of authority for a new Consumer Financial Protection Bill to be established within the Fed; the scope of exemptions under new rules governing the trade of derivatives; and the mechanism by which the government could seize and dismantle a large company on the verge of failure.
Obama plan:
- Regulators would receive more authority to monitor everything from mortgages to complex securities.
- Financial firms would be forced to reduce the debt they take on and to hold more capital in reserve.
- The government would be allowed to seize a collapsing financial firm, much as it can already do with a traditional bank.
House Version:
- Consolidates authority for protecting consumers, which is currently dispersed, into one free-standing Consumer Financial Protection Agency, with an independent director, appointed by the president.
- Gives the new agency broad powers to write as well as enforce rules for banks, credit unions and other financial companies.
- Exempts certain categories of businesses, including retailers and auto dealers, from the new agency’s oversight.
- Preserves the federal ability to pre-empt tougher state consumer protection laws under certain circumstances.
Senate version:
- Creates a Consumer Financial Protection Bureau within the Federal Reserve, with an independent director, appointed by the president, and a budget financed by the Fed.
- Gives the new bureau broad powers to write rules, but limits its enforcement powers to banks and credit unions with assets of at least $10 billion; nonbank mortgage companies, including loan originators and servicers; and the largest nonbank financial companies, a category that includes payday lenders and debt collectors.
- Permits state attorneys general to sue violators of the new consumer rules.
- Exempts certain categories of businesses, including retailers, accountants, real estate brokers, lawyers and makers of modular homes, from the new agency’s oversight.
- Preserves the federal ability to pre-empt tougher state consumer protection laws under certain circumstances.
See also Senate PR on Wallstreet Reform Legislation.
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