NPR logo Senate Panel OKs Tougher Derivatives Rules

Senate Panel OKs Tougher Derivatives Rules

The Senate Agriculture, Nutrition and Forestry Committee approved a bill to rein in the financial-derivatives industry, a response to the credit markets meltdown in 2007 that contributed to the deepest recession since World War II and raised fears of a global depression. (Here's a bill summary.)

Derivatives are a spectrum of products used for different purposes. For instance, the Farm Credit System uses derivatives to hedge their interest-rate risks.

Others use some forms of derivatives for pure speculation to bet, for instance, on whether interest rates will rise or fall or whether a company will default on its debt. If they guess right, a lot of money can be made.

One cause behind credit markets freezing up in 2007 was a lack of transparency. Banks and investors had little way of knowing the kind and amount of derivatives held by financial institutions.

So they refused to enter into transactions with them out of fear of the unknown.

To counter that problem, the legislation approved by the Senate panel Wednesday would require many derivatives to be traded through a clearinghouse. That would enable their prices as well as the volume traded to be publicly known. The plan is for the approved legislative language to be taken up by the full Senate as part of Sen. Chris Dodd's financial regulation bill that the Senate is expected to soon take up.

The legislation would also prohibit banks from the swaps business unless banks that wanted to continue trading those products gave up their federally insured businesses like taking consumer deposits.

The banking industry opposes much of the bill.

The derivatives legislation actually received a bipartisan vote if you call one Republican — Iowa's Sen. Chuck Grassley — out of the nine on the panel bipartisan.

NPR's Audie Cornish reported for the network's newscast on some of the Republican opposition to the legislation:

Ranking member on the agriculture committee, Saxby Chambliss of Georgia, criticized the bill for forcing nearly all financial institutions onto formal exchanges and clearing houses. Chambliss said the bill should make more allowances for so-called end-user businesses in agriculture and manufacturing and the smaller banks that serve them.

CHAMBLIS: Who may not use swaps or derivatives on a regular basis but they do from time to time all of a sudden they would be treated like Goldman Sachs or JP Morgan or these other major dealers on Wall Street and I don't think that's what we intended.

Republicans and some Democrats have also raised concerns about a proposal requiring banks to spin off their derivatives business or lose access to federal reserve credit.