Senate panel approves derivative legislation

WASHINGTON - The Senate Agriculture Committee on Wednesday approved legislation that would put tough new curbs on derivatives, the financial tools that had a big role in worsening the 2008 financial crisis.

The passage, by a 13-8 vote, sent a strong signal that a broader financial-regulatory overhaul is within reach.

Sen. Charles Grassley (R., Iowa) joined the 12 committee Democrats in approving the measures, the first time in this session of Congress that a Senate Republican has joined with the Democrats in favor of key financial legislation. Other GOP members also talked in more conciliatory terms.

The derivatives vote was the final - and probably the most difficult - stop for the bill before it reaches the full Senate, perhaps as soon as Thursday.

The bill, introduced by Blanche Lincoln (D., Ark.), the committee chairwoman, is expected to be incorporated into the broader regulatory legislation before it is taken up by the full Senate. But many are skeptical a provision barring big banks from running derivatives desks will survive. Lincoln said after the committee vote that she did not know which provisions would end up in the final bill.

The overall changes in regulation are key to the Obama administration's effort to avoid another meltdown of the nation's financial system.

"Wall Street's interests are different from Main Street's . . . Wall Street's interest is to keep inefficient markets. This [legislation] is to provide efficient markets," said Commodity Futures Trading Commission chairman Gary Gensler, who worked at Wall Street financial giant Goldman Sachs Group Inc. for 18 years.

Derivatives are financial products - such as corn futures or stock options - whose values depend on the values of separate underlying investments. Companies use them to hedge against risks, such as swings in interest rates or spikes in oil prices. Derivatives in subprime mortgages - those issued to home buyers with shaky credit histories - also became a vehicle for speculation and helped trigger the financial crisis when the homeowners did not meet their mortgage payments.

The committee measure would bring new transparency to derivatives, a market that has thrived on private information flows that critics say they believe have worked to the benefit of Wall Street.

Under Lincoln's bill and other Democratic proposals, companies would be subject to closer regulation. They also would have to keep minimum levels of capital to protect against market downturns.

All the major bills would require that most derivatives be settled in a centralized system and traded over exchanges. Supporters say this would improve market transparency, drive down prices for users of derivatives, and provide more information to regulators.

It would require that derivatives be traded through clearinghouses, where there is a referee between private parties. Many derivatives also would have to be traded publicly on an exchange, where their buyers and sellers could be tracked.