Banks Would Be Forced to Push Out Derivative Trading Under Plan [View All]

http://www.businessweek.com/news/2010-04-14/banks-would-be-forced-to-push-out-derivative-trading-under-plan.html
April 15 (Bloomberg) -- Goldman Sachs Group Inc., JPMorgan Chase & Co. and their biggest rivals would be forced to wall off derivatives trading operations from their commercial banks under a measure to be introduced by Senate Agriculture Committee Chairman Blanche Lincoln, a congressional aide said.

Lincoln, an Arkansas Democrat, will propose a “no-bailout provision” as part of an overhaul of derivatives regulation she plans to unveil today, according to the aide, who declined to be identified because the plan isn’t public. The measure aims to ensure banks don’t endanger depositors’ money with risky trading of over-the-counter derivatives, the aide said.

Along with forcing commercial banks to spin off their swaps dealers to a different corporate entity, Lincoln’s derivatives legislation would bar dealers, exchanges, clearinghouses and other swaps-market participants from being able to take advantage of emergency lending from the Fed, according to the aide.

It would also increase protections for clients by requiring swaps dealers to treat them as a fiduciary -- obligating them to put customers’ interests ahead of the company’s, the aide said.

The measure requires most over-the-counter derivatives to be traded on exchanges or through clearinghouses. Companies that use swaps to hedge the cost of materials or other non-investment purposes would be exempted from the requirements, the aide said.

Like the Volcker rule, which would ban commercial banks from proprietary trading, the wall-off provision would separate derivatives trading from traditional banking activities such as taking deposits and making loans.
Cheaper Funding

 It is also an effort to crack down on the possibility that banks would use cheaper funding provided by deposits insured by the FDIC. to subsidize their trading activities, the aide said.