* Lincoln, administration agree on swaps desk compromise
* Banks must spin off CDS, equity, commods swaps in 2 yrs
* Lincoln says it will "get the risky stuff out of banks"
* Approval of plan rebuts predictions it would be scrapped
(Adds quote and more details)
By Charles Abbott
WASHINGTON, June 25 U.S. Senator Blanche
Lincoln credited common sense for helping forge a compromise on
her proposal to force banks to spin off their swap trading
operations, allowing them to retain the bulk of their books but
bar them trading commodities, equity and credit default swaps.
The plan was not as sweeping as Lincoln's original proposal
to require banks to spin off their swaps desks, instead
narrowing the focus to those derivatives perceived as riskier
than the interest rate and foreign exchange swaps that make up
nearly 90 percent of the global swaps market.
But Lincoln upended predictions that her idea would be
scrapped due to broad opposition by Wall Street and allies in
"Quite frankly, common sense prevailed," said Lincoln,
chairman of the Senate Agriculture Committee, shortly after
House and Senate negotiators agreed on a financial reform
"Our objectives were to get the risky stuff out of banks.
We figured out how to do that," said the Arkansas Democrat.
Lincoln's proposal was one of the major disputes for
negotiators on the financial reform bill.
In the final hours of overnight talks, Lincoln and Obama
administration officials agreed on a compromise.
Business-friendly Democrats tried to derail the spinoff but
failed during discussions held on the sidelines.
Under the agreement, banks could continue to handle foreign
exchange, interest rate, gold and silver swaps and to hedge
their own risks. Activity in commodities, agricultural, energy,
equities swaps and credit default swaps that are not traded
through a clearing house would have to move to an affiliate
within two years.
"The beneficiaries of the derivatives compromises worked
out in the final stages include banks, clearinghouses, and
financing arms of manufacturers," including companies such as
Ford, Deere and Caterpillar, said Martin Fridson, global credit
strategist at BNP Paribas Asset Management.
"On the face of it, the modifications appear reasonable and
aimed at avoiding adverse consequences that are unnecessary in
terms of achieving the legislation's main objectives," Fridson
For a Q&A on the focus on swaps see: [ID:nN07163869]
"This is a good middle ground," said House Agriculture
Committee chairman Collin Peterson.
While the Bank for International Settlements puts the total
value of all over-the-counter derivatives is $615 trillion,
that figure includes options, forwards and other derivatives
that are not swaps. When those are removed, the estimated value
of the swaps market in December 2009 was $425 trillion.
According to the most recent data effective December 2009,
some 82 percent of all defined over-the-counter or OTC swaps
were on interest rates at just over $349 trillion, with another
5.0 percent in foreign exchange and less than 1.0 percent on
equities and commodities.
Lincoln is expected to face a strong challenge for
re-election this fall from John Boozman, a fifth-term
Republican member of the House. She won nomination for a third
term in early June.
Gary Gensler, head of the Commodity Futures Trading
Commission, said the bill "is truly historic." It will reduce
risk in financial markets, he said.
"We haven't discussed that," Gensler said when asked how the
bill might affect CFTC consideration of position limits on
energy contracts. The bill allows CFTC to set position limits
on physical commodities.
The reform must still win final approval from both chambers
of Congress before Obama can sign it into law, giving Wall
Street one final chance to deploy its army of lobbyists on
Capitol Hill. Quick approval is expected and the reform could
go to Obama for his signature by July 4.
Final implementation of the rules also will be a challenge
in the coming year, analysts said.
"Regulators have a year to work out implementation, during
which time there will no doubt be aggressive lobbying on the
design of the rules," BNP Paribas' Fridson said. "So financial
services firms may roll back some of the substance of the
legislation through concerted lobbying while Congress and the
public's attention move on to other issues."
(Reporting by Charles Abbott and Walden Siew in New York;
Editing by Alden Bentley)