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Disagreement over US derivatives bill rumbles on after Volcker letter

Wednesday 12 May 2010 - by Luke Nelson

White House economic adviser and former Federal Reserve chairman Paul Volcker has written to Senate Banking Committee chairman Sen. Chris Dodd to voice concerns over the plans included in Sen. Blanche Lincoln’s derivatives bill which would force banks to spin off their derivatives arms.

In the letter, also sent to US Treasury Secretary Timothy Geithner, Volcker says he understands the concerns that have motivated Sen. Lincoln in terms of the risks and potential conflicts posed by proprietary trading in derivatives concentrated in a limited number of commercial banking organisations.

But Volcker argues that these concerns are dealt with in the bill in its previous draft. He also says he supports the idea that derivatives transactions should be centrally cleared or traded on a regulated exchange, as included in both the original Dodd Bill and the Lincoln plan.

The Lincoln derivatives plan was incorporated into the Dodd package after the Senate Agriculture Committee agreed on language – Sen. Charles Grassley was the only Republican to join with 12 democrats in approving the Wall Street Transparency and Accountability Act.

Dodd’s financial reform package had included placeholder language on derivatives after Sen. Judd Gregg and Sen. Jack Reed failed to come to an agreement in the Senate Banking Committee.



Sen. Gregg, Sen. Bob Corker and Sen. Saxby Chambliss have criticised the Lincoln bill and have tabled an amendment to the financial reform package suggesting that a strong derivatives bill is needed that causes more trades to be cleared and increases transparency. They argue that the current bill, in removing swap desks from commercial banks, would lower the amount of capital available for actual lending.

In response Sen. Lincoln argues that just because these swap desks will no longer be overseen by the Federal Deposit Insurance Corporation, it does not mean that they will not be subject to the bill’s strong regulation by the market regulators – the Securities and Exchange Commission and the Commodity Futures Trading Commission.

She said: “Let me reiterate – every swaps dealer and major swap participant will be subject to strong regulation. Using these products to manage risk, and designing exotic swaps – which have led to the financial demise of places like Jefferson County, Alabama, Orange County, California, and the country of Greece – are two very different things.”


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