WASHINGTON - The Treasury Department and congressional Republicans have agreed on legislation that would shield bank swaps from increased federal regulation, teeing up the bill for passage as early as today.

The overhaul of the Commodity Exchange Act is expected to be part of a catchall spending package that lawmakers must pass before adjourning for the year. It would, among other things, tightly restrict nonbank regulators' jurisdiction of wholesale swaps contracts executed by banks and establish a special test for determining which regulators would oversee new bank products.

"We hope that Congress will now pass this historic legislation," Treasury Secretary Lawrence H. Summers said in a statement Thursday. The bill, he continued, "will allow the United States to maintain its competitive position in this rapidly growing sector by providing legal certainty and promoting innovation, transparency, and efficiency."

The banking industry has long been clamoring for legislation that would specifically bar the Commodity Futures Trading Commission from asserting authority over bank swaps, warning that such a move would call into question the enforceability of such deals. In a compromise struck between the Treasury Department and the Senate Banking Committee, bankers got much - though not all - of what they were seeking.

The bill would explicitly exempt all banking products - as defined under the Gramm-Leach-Bliley Act - from regulation by the futures commission. This language would protect swaps contracts entered into by financial institutions, governments, and most corporations. It would also cover swaps contracts entered into by individual investors with total assets of $10 million or more in all cases or $5 million if the contract is used solely as a hedging technique. Swaps involving less sophisticated retail customers would not be covered.

Some bank lobbyists had called for an exclusion for retail swaps as well but could not overcome objections from Treasury officials.

The bill also would protect new bank products from futures commission regulation by establishing a so-called predominance test. The test would be used to determine which agency has the most valid claim to regulate a particular new product. It is intended to insure that products which are predominantly bank-related remain under the sole oversight of banking regulators.

If the futures commission wanted to regulate a new product offered by banks, it could do so only with the Federal Reserve Board's permission. If the commission tried to regulate such a product without the Fed's agreement, the central bank could challenge this action in court.

Another section of the legislation would bar the Securities and Exchange Commission from asserting jurisdiction over any swaps except equity swaps and then only in cases of fraud, stock manipulation, or insider trading.

In addition the bill would repeal the Shad-Johnson accord, ending an 18-year ban on the trade in single-stock futures, and would ease some restrictions under which U.S. commodity exchanges operate. Both industry and congressional leaders have warned that without a more flexible framework for commodity exchanges the United States would risk losing most of this market to overseas competitors.

Sens. Phil Gramm, R-Tex., chairman of the banking committee, and Richard Lugar, R-Ind., chairman of the agriculture committee, issued a joint press release Thursday praising the agreement.

"This legislation is important to every American investor," Sen. Gramm said. "It will keep our markets modern, efficient, and innovative, and it guarantees that the United States will maintain its global dominance of financial markets."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.