Senate Ag Committee

OKs Lincoln Wall St
reform bill in bipartisan 13-8 vote

By Jon H. Harsch

© Copyright Agri-Pulse Communications, Inc.

Washington, April 21 – Senate Agriculture Committee Chair Blanche Lincoln (D-AR) moved quickly in a markup session Wednesday morning to have her committee first reject a Republican substitute in a straight 12-9 party line vote – and then pass her derivatives reform bill in a 13-8 vote. The difference, making Lincoln’s bill bipartisan, was that Sen. Chuck Grassley (R-IA) first voted for the substitute offered by Ranking Member Saxby Chambliss (R-GA) which would have created greater exemptions from derivatives clearing requirements – and then voted for Lincoln’s bill after the Chambliss substitute had been rejected by the committee.

The next step – guaranteeing another all-nighter for Senate staffers – is to merge Lincoln’s derivatives bill with the larger financial reform bill passed earlier by the Senate Banking Committee. The expectation now is that the combined bill will be taken to the Senate floor as early as tomorrow.

One Democrat expressing concerns about the Lincoln bill was the former Ag Committee Chair, Sen. Tom Harkin (D-IA). He questioned Commodity Futures Trading Commission (CFTC) Chair Gary Gensler closely about whether the CFTC would be have the staff, the funding and the expertise to provide the real-time surveillance of derivatives trading called for in the bill. Both Gensler and Lincoln agreed that the CFTC will need more personnel and more funding in the future.

In Wednesday morning’s markup, Lincoln made the case that:

·        “. . . financial market oversight reform is the single most important factor in our long-term economic recovery; it will be the foundation for our nation’s financial future. We must reaffirm the integrity and soundness of our financial system. This stability is the only thing that will maintain our nation’s preeminence as a global leader in worldwide financial markets. Reform will also give comfort to consumers and businesses so they can trust our markets to determine fair prices and manage risk.

·        “In 2008, our nation’s economy was on the brink of collapse. The greed and excess on Wall Street spiraled out of control and families and small businesses were left to pay the price. America was held captive by a financial system that was so interconnected, so large and so irresponsible that its failure almost destroyed our economy and our way of life.

·        “At the heart of financial regulatory reform is reforming the over-the-counter derivatives market. Within a decade, this market exploded to $600 trillion dollars in notional value. We must bring transparency and accountability to these markets.

·        “This is not a partisan issue. I believe every Republican and Democrat in this body is committed to doing what is right to put our economy back on track. All of us are committed to creating jobs, to protecting America’s preeminence as the center of the global financial world, and to restoring a free market system that does not rely on the backstop of the U.S. Treasury.

·        “We Senators have a solemn obligation to protect our nation. This is no time for small fixes or tweaking around the edges. This is the time for bold change and big decisions about the future of our country and the global financial system.

·        “This bill will bring 100% transparency to a currently unregulated, dark market. It will lower systemic risk through clearing and exchange trading and real-time price transparency. It will close loopholes and make sure that regulators forever have the authority to go after those entities that would evade the law.

·        “We have an important but narrow end user exemption, appropriate restraints on the regulator where necessary, and provisions that recognize we are competing in a global financial world. This is a robust package that balances the needs of strong, meaningful reform and recognizes the importance of these markets.”

Ag Committee Ranking Member Chambliss, joined by Republican colleagues, lamented that after six months of bipartisan work on derivatives provisions, this effort was abandoned in favor of a last-moment bill drafted by Democrats on their own “behind closed doors.”

Chambliss commented that the bipartisan bill “required clearing of swaps by those entities contributing to systemic risk, a substantial change from current law; provided the Securities Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) with the authority to establish capital and margin requirements – an authority they currently do not have; allowed the CFTC to impose aggregate position limits – another new authority; and provided the much needed transparency that has been absent from the swaps market.  This represents a 180-degree shift from current law.”

Chambliss stressed that “Just as important as the new regulation included in the compromise, was the recognition that we needed to preserve the ability of businesses to legitimately hedge risk without additional costs, and it did this for all businesses, whether they are manufacturers, processors, or even financial in nature.” Chambliss and other Republicans warned that in the Lincoln bill, Farm Credit institutions would become subject to addition costs along with large dealers like Bank of America, Goldman Sachs or JP Morgan. Chambliss warned against “unintended consequences resulting from applying complicated regulations too broadly.  If we subject these financial institutions to the increased costs of clearing their interest rate swaps, they will likely be forced to raise interest rates they offer to their customers – our constituents and farmers.”

Chambliss warned that smaller institutions “who are hedging their risk and also engaged in developing products for their customers should not inadvertently be captured in a new regulatory category designed to apply to big financial dealers.” He warned against imposing “overreaching regulations on the businesses and financial entities that had nothing to do with the meltdown of our financial system.”

Chambliss concluded that while there is 90% agreement on derivatives legisatioin, “the remaining 10 percent of the issues involved here – namely the extent of the end-user exemption; and whether there is a mandatory trading requirement on exchange for swaps instead of the more functional price reporting – are very important because they involve real costs for businesses, and real implications for properly functioning derivatives markets.”

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