After a 20-hour marathon session, legislators reached agreement last Friday on a final version of a financial reform bill that, if enacted, will transform financial regulation in the U.S. It is expected that there will be enough support to for the bill to pass in both chambers later this week.
In some respects, the agreement is tougher on the banking industry than the bill drafted by the Treasury department last summer. Lawmakers agreed to a provision known as the "Volcker rule," named after former Federal Reserve Chairman Paul Volcker, which restricts the ability of banks whose deposits are federally insured from trading for their own benefit. In order to win wider support for the legislation, Democrats agreed to allow financial companies to make limited investments in areas such as hedge funds and private-equity funds, although banks can invest no more than 3 percent of a fund's capital and those investments could also total no more than 3 percent of a bank's tangible equity. This would have a significant impact on many Wall Street firms such as Goldman Sachs and Morgan Stanley that have long engaged in amounts of trading for their own accounts.
The final version of the financial reform bill also includes a provision restricting banks' derivative trading. However, it is not as strict as Senator Blanche Lincoln's proposal which would have required banks and their parent companies to segregate much of the derivatives trading business. The agreed-upon version of the bill would allow banks to trade in derivatives to hedge their own risk, but would forbid banks from speculating in highly risky credit default swaps and other exotic instruments. As an additional safeguard, the Commodity Futures Trading Commission would be given greater oversight of derivative trading.