UPDATE 2-FDIC concerned with swaps rules in Democrats’ bill

* FDIC fears losing US oversight for risky swaps

* Swaps desk spin-off not the right policy-OCC

* Senate to start debating Democrats’ bill next week
(Adds OCC position)

By Rachelle Younglai

WASHINGTON, May 1 (BestGrowthStock) – A top U.S. banking regulator
is concerned with a provision in a bill by Senate Democrats
that would require banks to spin off their swaps desks,
according to a letter obtained by Reuters on Saturday.

Federal Deposit Insurance Corp Chairwoman Sheila Bair said
this could move some of the riskiest parts of banks’ business
out of the purview of federal oversight.

Her comments come as the regulator of the biggest U.S.
banks — Comptroller of the Currency John Dugan — said
limiting banks participation in the swaps market was not the
right policy and could cause capital to leave the lending part
of the banks. [nWEN3673]

Bair voiced her concerns in a letter to the two senators in
charge of writing rules for the $450 trillion swaps market,
Senate Banking Chairman Christopher Dodd and Senate Agriculture
Chairman Blanche Lincoln.

Lawmakers have been trying to shed light on the
over-the-counter derivatives market in an attempt to avoid a
repeat of the chaos and near collapse of American International
Group (AIG.N: ), which had a hefty swaps portfolio.

Next week, the Senate is expected to start debating and
changing the Democrats’ bill, which would impose new rules for
Wall Street and try to ensure better protections for consumers
and investors.

Rules for the over-the-counter derivatives market is one of
the most controversial parts of Democrats’ legislation and some
senators are trying to change the language.

Under the Democrats’ bill, banks would be forced to choose
between keeping their federal guarantees like deposit
insurance, or keeping their derivatives trading desks.

Bair said if all derivatives activities were moved outside
of banks, “most of the activity would no doubt continue, but in
less regulated and more highly leveraged venues.”

“I urge you to carefully consider the underlying premise of
this provision — that the best way to protect the deposit
insurance fund is to push higher risk activities into the
so-called shadow sector,” Bair said in her letter to Dodd and
Lincoln, dated April 30.

The bill would also require most swaps to be cleared by
clearinghouses, which would assume the risk if one party
defaults, and mandatory clearing and trading of most swaps on
exchanges or electronic platforms.

Bair said directing standardized derivatives products on
exchanges or through clearinghouses would “accomplish the
stabilization of the over-the-counter market … and would
still allow banks to continue the important market-making
functions that they currently perform.

Investment Analysis

(Reporting by Rachelle Younglai)

UPDATE 2-FDIC concerned with swaps rules in Democrats’ bill