Sweeping changes to U.S. financial regulations came one step closer to fruition today, as 20 hours of negotiation between the House and Senate came to a close. The new rules, which still have to be approved in a full House and Senate vote before landing on President Barack Obama’s desk, will affect credit card companies, banks, hedge funds and traders of futures, options and derivatives around the country.
“When one says this is the biggest change in our financial regulation in 70 years, that’s not an exaggeration,” said Stuart Eizenstat, former deputy Treasury secretary, in an interview with Bloomberg.
The new regulations will force banks to spin off all but a fraction of their derivatives and swaps desks into separately-financed entities, although an exception has been made for “end users” who use derivatives and futures to hedge the risk from making or using commodities in their businesses.
A new consumer financial-protection bureau will work under the authority of the federal reserve, credit card fees and interest rates will be regulated, credit-default swaps will be overhauled, credit-rating companies will be investigated, and private equity and hedge funds will be forced to register with the SEC.
The so-called “Volcker rule,” which would ban banks receiving federal money from proprietary trading on their own accounts, was adopted with softened rules. Banks will be able to invest in hedge funds and private-equity funds, but are limited to providing a maximum of 3 percent of a fund’s capital.
Another regulation will seek to reduce conflicts of interest in the underwriting of asset-backed securities. Goldman Sachs is being sued by the SEC for alleged fraud committed when Goldman packaged and sold collateralized debt obligations (CDOs) tied to sub-prime mortgages, but failed to disclose to that John Paulson’s hedge fund had picked the securities that made up the CDO and made his own bets against them.
The bill will establish a highly controversial regulatory structure for over-the-counter derivatives, forcing them to be traded on third-party clearinghouses and giving banks two years to spin their trading desks for the instruments off into separately-capitalized subsidiaries.
Stock index futures were mixed early in the morning after the news, but fell as the day’s trading continued. Dow futures were down 59 points, with the S&P 500 down 5 points and the Nasdaq down 16.5.
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