Jack Reed deserves some serious props.  He has been one of the strongest champions for the Consumer Financial Protection Agency and has been tough on derivatives reform as well. He well aware that the country's largest banks want to keep the derivatives market as opaque as possible because they would be able to charge big fat commissions.  Trading the derivatives on an Exchange would mean more transparency and price competition - anathema to the banking industry.

From the National Journal's Congress Daily:

Sen. Jack Reed, D-R.I., stressed again today he wants to limit exemptions for businesses that use derivatives for commercial purposes despite intense opposition from industry lobbyists wanting to keep it as unregulated as possible.

 

Reed, chairman of the Banking Securities, Insurance and Investment Subcommittee, said he is trying to provide relief based on the purpose of the trade rather than give exemptions on the basis of what a company does.

 

"The approach we are taking is trying not categorical exemption. ... We're looking for basically an exemption that focuses on the economic transaction, more hedging against a real economic risk," said Reed in comments before at the Consumer Federation of America's annual assembly.

 

The debate over how far to exempt commercial users such as manufacturers and farmers from additional requirements has been the greatest source of disagreement between Reed and Sen. Judd Gregg, R-N.H., as they worked to tighten regulations on the over-the-counter derivatives market, where trades are conducted privately rather than on exchanges.

 

Reed said he sensed some commercial firms use derivatives rather than taking out a loan because the latter might be harder to execute if it "might violate the covenants of other loans."

 

Senate Banking Chairman Christopher Dodd will spell out the derivatives language when he releases Monday his package to revamp the nation's financial regulatory system. Dodd is expected to incorporate much of the work of Reed and Gregg, although the commercial end-user exemption was left unresolved between the two. Dodd plans a markup the week of March 22.

 

Business lobbyists have been waging a campaign against any new standard for commercial users, such as requiring more trades to go through a third-party clearinghouse that guarantees the transactions. They also oppose a mandate that commercial users put up collateral and margin.

 

The industry had success in the House last fall, when members voted 301-124 for an amendment by Rep. Scott Murphy, D-N.Y., that narrowed the definition of who would be considered as a "major swap participant" to come under greater scrutiny and, in the process, exempted more companies. The Murphy language raised the standard for a major swap participant to one whose trades "could have serious adverse effects on the financial stability" of the U.S. banking system or financial markets.

 

Reed noted "a lot of folks want total exemptions" given how profitable OTC trades are for the big banks that essentially control the $25 trillion gross market. Reed said he wants to create a pathway for cleared transactions to be traded on exchanges.

 

"These transactions are extremely lucrative for the banks. It suggests to me that there is probably a way in the marketplace where you might be able to hedge your risk through standardized products on exchanges on a much lower price. That might be one of the reasons that some people don't want to see this progress," Reed said. 

 

He added that any language would provide the SEC and Commodity Futures Trading Commission with a lot of discretion "to adjust to changes in the marketplace."

 

Dodd's derivatives language will have to be combined with a measure crafted by Senate Agriculture Chairwoman Blanche Lincoln, whose panel has jurisdiction over the CFTC.

 

A Lincoln spokeswoman said she wants to release the draft before the Easter recess, with a goal to mark it up when lawmakers return in April.