Financial Regulatory Reform Legislation Near Completion

July 14, 2010

By: Roger Bernard, Farm Journal Policy and Washington Editor

Legislation to make sweeping reforms of financial markets and the U.S. banking sector is nearing the final finish line after Democratic leaders believe they now have found enough votes to move the package through.

Senate Majority Leader Harry Reid (D-Nev.) is now pledging to deliver the final package (HR 4173) to President Obama this week after garnering the support of Sens. Scott Brown (R-Mass.) and Olympia Snowe (R-Me.). With their support, that is expected to mean Democrats can put together 60 votes for the package to avert any Republican block of the bill. This is significant since the death of Sen. Robert Byrd (D-W.Va.) had cast doubt on whether Democrats could muster enough support.

The House already acted on the conference report that was hammered out between House and Senate negotiators, but the Senate action was put on hold in part by the death of Sen. Byrd.

And there have been some changes to the package that are viewed as helping to garner some Republican support. A tax on big banks and hedge funds that was put in the package to help pay the cost, but that was dropped in favor of using $11 billion in funds repaid from the federal bank bailout and changes to FDIC rules that would raise more revenue.

As the plan gets closer to reality, there are concerns sprouting in a lot of areas about the potential impacts from the sweeping changes that the legislation will bring, in particular regarding the use of derivatives. A story in today's Wall Street Journal spelled out some of those potential impacts relative to farmers and others that use futures markets to hedge their risk on production or input costs. Their headline: "Finance Overhaul Casts Long Shadow on the Plains."

The package would require most transactions for derivatives to be standardized and traded on open exchanges and then run through clearinghouses. Most seeking to reassure farmers note that the bill exempted businesses that use derivatives for commercial purposes as the provision that will help protect those like farmers. But what that exemption doesn't address would be the impacts of higher costs for derivatives trade given the new rules and regulations -- the old "law of unintended consequences."

So as financial reg reform nears the finish line, there is still the key implementation. And as farmers well know with things like implementing new versions of omnibus farm legislation.