The U.S. Senate Committee on Banking and Housing approved a financial reform bill titled ‘Restoring American Financial Stability Act of 2010’, in March of 2010.(3) The bill was released by Senator Christopher Dodd (D) and did not initially garner enough votes to pass through the Senate in late April of 2010. A no vote from Senate Majority Leader Harry Reid (D) however, allowed the bill to return to the Senate according to an April 26, 2010 Reuters report.(1) In early May, the bill once again became active in the Senate as Democrats attempted to rally enough votes to pass the bill.
Among the objectives of the financial reform bill is the regulation of derivatives, financial instruments that’s value is derived from underlying commodities or assets. Out of control derivatives spending is a culprit that led to the collapse of the U.S. Housing Market that began in 2007, and subsequently to massive financial assistance to large U.S. Banks deemed too big to fail. The Restoring American Financial Stability Act of 2010 was designed to prevent similar scenarios from becoming as damaging to the U.S. economy in the future.
The original bill’s text sought to extend the capacity and reach of financial regulation including insurance of derivatives, oversight and requirements of banking holding companies, derivative security swaps, corporate executives compensation, hedge fund administrative laws and risk reporting, and higher operating standards for derivative markets. The bill also aimed to create a Financial Stability Oversight Council to improve financial stability via risk management. The U.S. Senate Banking Committee summarized the bill into 8 objectives including “Transparency and accountability for exotic instruments’, investor protection, and closer supervision and oversight of large companies.(2)
After the Restoring American Financial Stability Act of 2010, revisited the Senate, it became clear that further negotiations would become necessary in order for the bill to pass. Of the adjustments considered for the bill was an Amendment to the bill that had been proposed by Senator Barbara Boxer (D) of California before the bills first Senate rejection. This amendment aimed to eliminate tax payer risk for the mistakes of large derivative trading institutions that are too big to fail.(4) This increases the accountability of derivative trading institutions via the same standards applicable to smaller companies i.e. liquidation upon failure according to Daniel Indiviglio, in a May 1, 2010, Atlantic.com report.(5)
The Restoring Financial Stability Act of 2010 was not the only attempt at regulation of derivatives as other bills with the same objective had also been proposed including the Wall Street Transparency Act set forth by U.S. Senator Blanche Lincoln (R) from Arkansas; and the Accountability Act of 2010 and the Derivative Trading Accountability and Disclosure Act, proposed by Representative Michael McMahon (D) of New York. This latter bill was still waiting for House of Representatives Committee approval at the time the Senate Banking Committee’s bill was being debated in the Senate. Evidently, the Senate Banking Committee bill advanced by Senator Dodd, became the regulatory bill to be debated.
Financial regulation of derivatives, an Obama administration agenda priority, is believed by many to eventually pass. This would put a Democratic spin on the trading, risk management, and regulation of financial derivatives that won’t necessarily fuel the industry or provide excessive liquidity for derivatives markets, but intends to prevent financial derivatives from becoming a catalyst for financial meltdown. The bill attempts to protect the American people, and the U.S. economy from collapse and perhaps bypasses the drivers of market ingenuity and capitalization of banking erudition within the derivatives market.
(1) http://bit.ly/cHRLRd (Reuters)
(2) http://bit.ly/aTYdIO (Senate Banking Committee bill summary)
(3) http://bit.ly/aSA2qg (Senate Banking Committee Bill)
(5) http://bit.ly/ccrICe (The Atlantic.com)