Tough US swaps bill faces first test at Senate panel

* Senate Agriculture hearing begins 930 a.m. ET (1330 GMT)

* Democrats file amendments, committee to weigh changes

* Bill will become part of broader financial reform

* Full Senate may consider financial reforms next week

By Roberta Rampton

WASHINGTON, April 21 (BestGrowthStock) – The U.S. Senate
Agriculture Committee will weigh changes to a derivatives
reform proposal on Wednesday and may consider whether to drop a
controversial idea that would keep banks out of the swaps
market.

The hearing to “mark up” or refine the Agriculture
Committee’s swaps bill will be a test of how tough Democrats
are willing to be on the complex financial instruments
dominated by Wall Street firms — and how gingerly Republicans
tread around a populist issue ahead of November elections.

The bill would regulate the $450 trillion swaps market for
the first time, requiring most derivatives to trade on
exchanges and pass through clearinghouses to prevent risky
trades from ricocheting through the economy, as happened during
the financial crisis.

Agriculture Committee Chairman Blanche Lincoln shocked the
market last week when she included in the draft a measure that
would require banks participating in the lucrative but risky
swaps market to give up protections such as federal deposit
insurance and access to the Federal Reserve discount window.

“If you’re going to be a bank, and you want to be a bank,
then you need to be a bank, and you need to spin off the swaps
activity, the risky activity that exists out there,” Lincoln
told reporters on Tuesday, defending her draft.

Staffers worked late into the night on Tuesday on
“technical corrections” to the draft bill, and Lincoln may
offer a “manager’s package” to her committee on Wednesday that
includes some changes, a committee aide told Reuters, noting
the scope of the changes was still unclear.
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The bill is being closely watched by firms that dominate
the unregulated swaps market, like Goldman Sachs (GS.N: ),
JPMorgan Chase (JPM.N: ), Morgan Stanley (MS.N: ) (Read more about the money market today. ), Citigroup (C.N: )
and Bank of America (BAC.N: ).

Goldman Sachs was charged with fraud last week related to a
derivatives deal in 2007 and 2008, boosting momentum for U.S.
financial reforms.

Lincoln’s bill is also important for smaller firms that
count on derivatives to hedge their risk and account for about
10 percent of the market.

A coalition of so-called “end users” praised aspects of
Lincoln’s bill, which more clearly defines that some smaller
players will not be subject to some of the more costly rules.

But the group is still hoping for a raft of changes,
including a broader list of companies exempt from clearing
trades. It also believes banks should not be forced to spin off
swaps desks, said Dave Hall, who works with the coalition.

“If banks are forced to get rid of their swaps businesses,
then there may be no one for end users to do their swaps with,”
said Hall, chief operating officer of Chatham Financial, an
interest rate and currency risk management advisor.

DEMOCRATS FILE AMENDMENTS

New York Senator Kirsten Gillibrand filed amendments to the
bill that would drop the requirement for banks to spin off
swaps desks, and also would exempt foreign exchange swaps from
a requirement to go through clearinghouses.

But it was not clear that Gillibrand, a Democrat, would
propose the amendments during the hearing, or bring them
forward for debate, a staffer said late on Tuesday.

Ohio Democrat Sherrod Brown filed four amendments,
including one that would restrict the ownership of market
infrastructure, like trading platforms and clearinghouses.

Democrat Robert Casey of Pennsylvania plans to raise an
amendment to exempt pension plans from a requirement to clear
derivatives for two years, and another to study the feasibility
of a transaction fee on derivatives, an aide confirmed.

There are 21 members on the committee, nine of whom are
Republicans. Saxby Chambliss, the senior Republican on the
committee, has said he does not support the draft bill.

After the bill passes a committee vote on Wednesday, it
will become part of a broader regulatory reform plan which
could be debated next week.

Christopher Dodd, the Democratic chairman of the Senate
Banking Committee, said on Tuesday he is working with
Republicans on compromise solutions for reforms.
[ID:nN20110894]

To become law, the Senate bill must be merged with a House
bill passed in December, and signed by President Barack Obama,
who said he would veto any bill that is too soft on
derivatives.

Investment

(Additional reporting by Charles Abbott and Christopher
Doering; Editing by Tomasz Janowski)

Tough US swaps bill faces first test at Senate panel