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Frank balks at derivatives measure

Says provision in Senate finance bill ‘goes too far’

Representative Barney Frank and Senator Christopher Dodd will have staff members meet to look for areas of compromise in the House and Senate versions of a financial overhaul bill. Representative Barney Frank and Senator Christopher Dodd will have staff members meet to look for areas of compromise in the House and Senate versions of a financial overhaul bill. (Jason Reed/Reuters)
By Alison Vekshin
Bloomberg News / May 26, 2010

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WASHINGTON — Representative Barney Frank, who will lead congressional talks to produce a financial regulation bill, said yesterday that Senate language requiring commercial banks to wall off their swaps-trading operations “goes too far.’’

The comments by the Massachusetts Democrat at a conference in Washington are the latest indication that the swaps-desk provision might not survive final negotiations over the legislation.

A separate measure in the Senate bill that could restrict banks’ proprietary trading — called the Volcker rule after former Federal Reserve chairman Paul Volcker — could address concerns targeted by the swaps-desk plan of Senator Blanche Lincoln, an Arkansas Democrat, Frank said.

“I don’t see the need for a separate rule regarding derivatives, because the restriction on banks engaging in proprietary activity would apply to derivatives,’’ said Frank, who leads the House Financial Services Committee and represents a district based in Newton.

Banks should be able to use derivatives to hedge risks for themselves and their customers, Frank said.

Frank will lead a bipartisan panel of lawmakers assigned to merge the House and Senate versions of legislation that will overhaul rules governing Wall Street. The House approved its version of the bill in December and the Senate approved its measure last week.

Legislators must resolve the plans’ different approaches to regulating derivatives, financial instruments based on the value of another security or benchmarks such as stock options. The rule requiring banks to push out their swaps desks, which Lincoln said was necessary to rein in banks’ risk-taking, has drawn opposition from the banking industry and government officials including Volcker, who serves as an adviser to President Obama.

Federal Reserve chairman Ben Bernanke and Federal Deposit Insurance Corp. chairwoman Sheila Bair also oppose the Lincoln swaps-desk language.

A group of House Democrats is considering ways to strip the swaps-desk measure from the bill. Representative Gary Ackerman, a Democrat from New York who serves on the House Financial Services Committee, had his staff circulate a draft letter to House members seeking their opposition.

The Senate yesterday named 12 negotiators, including Lincoln, the Arkansas Democrat who leads the Senate Agriculture Committee, to work with Frank and other House counterparts to narrow differences between the two bills.

Staff for Frank and Senate Banking Committee chairman Christopher Dodd, another negotiator who wrote the Senate bill, will meet this week and next to look for areas of compromise. Negotiators plan to begin official meetings in two weeks.

Frank and Dodd have said they want to get a merged bill to Obama by July 4.