Congressional negotiators on Friday approved the most sweeping overhaul of U.S. financial regulation since the Great Depression, following a 20-hour negotiation session between House and Senate lawmakers to reach deals on a proprietary trading ban by banks and oversight of the derivatives market.
The legislation still needs to be approved by the full House and Senate. Congressional leaders aim to hold those votes next week and present it for President Barack Obama's signature by July 4.
“This is going to be a very strong bill, and stronger than almost everybody predicted that it could be and that I, frankly, thought it would be,” House Financial Services Committee Chairman Barney Frank, D-Mass., told reporters Wednesday as lawmakers prepared for the final round of talks.
The bill creates the Consumer Financial Protection Bureau, a new consumer protection agency that will be able to regulate record keepers and other firms that provide administrative services to defined benefit and defined contribution plans.
Exactly how much authority the new agency will have over the service providers won’t be clear until lawmakers release the fine print of the deal they cut over financial reform legislation in the early hours of Friday, lobbyists said.
Also included in the bill are provisions to curb risks, boost surveillance of emerging threats to markets and give regulators more emergency powers to avoid future taxpayer-funded bailouts of too-big-to-fail firms.
“They are huge accomplishments,” Senate Banking Committee Chairman Christopher Dodd, D-Conn., told reporters Wednesday.
The Obama administration’s proposal to ban banks from proprietary trading, nicknamed the Volcker rule after former Federal Reserve Chairman Paul Volcker, was softened by Senate negotiators.
Banks will be allowed to invest in private equity and hedge funds, though they will be limited to providing no more than 3% of the fund’s capital. Banks also can’t invest more than 3% of their Tier 1 capital.
Senate negotiators also agreed to give regulators less say than previously proposed to define a ban on proprietary trading.
Large hedge and private equity funds will be forced to register with the SEC, subjecting them to mandatory federal oversight for the first time. Venture capital funds were exempted from the registration rule. Any firm with $150 million or more in assets will be covered by the law. Funds also must hire a chief compliance officer and set up policies to avoid conflicts of interest.
Under the derivatives rules, banks will be forced to push some of their swaps trading into subsidiaries, on the theory it would reduce taxpayers’ risk if the trades are walled off from depositary institutions that enjoy federal benefits such as access to the Federal Reserve’s discount lending window.
The original proposal by Sen. Blanche Lincoln, D-Ark., chairman of the Senate Agriculture Committee, would have banned all swaps trading by commercial banks.
In the end, all parties agreed that banks will be able to maintain their trading operations so long as they are used to hedge risk or trade interest rate or foreign exchange swaps, a victory for banks that were on the verge of losing the desks entirely. The proposal will force a fundamental shift in the industry, giving federally insured banks up to two years to send instruments such as uncleared credit default swaps off to a separately capitalized subsidiary.
“We target the riskiest players and ask more of them, as we should,” Ms. Lincoln said Friday.
Beyond the swaps-desk provision, the Senate legislation will push most OTC derivatives through third-party clearinghouses and onto regulated exchanges or similar electronic systems, a measure that will make it easier for the market and regulators to track the trades. It will mean higher margin costs on some transactions.
Businesses that use derivatives to hedge risk from producing or consuming commodities, deemed “end users,” will be exempt from the clearing requirements if the activities were being undertaken as a way to hedge legitimate business risk.
Reporter Doug Halonen contributed to this story.
