WASHINGTON -- The derivatives bill introduced on Monday by Senate Banking Committee chairman Don Riegle, D-Mich., goes further than any such pending measure but may never be enacted, market participants said yesterday.
"Riegle's coming to the end of his tenure in the Senate," said one industry official. "He's a lame-duck chairman."
Riegle has announced plans to retire from the Senate at the end of his tenn in January.
At the same time, market participants are concerned that Riegle's bill, or parts of it, will be taken up by whoever replaces him as chairman of the Senate Banking Committee.
"It's a marker out there that people might look to next year," said the industry official, who did not want to be identified.
Sen. Paul Sarbanes, D-Md., is the most likely successor to Riegle if he is re-elected, congressional sources said. Sarbanes is not a co-sponsor of Riegle's derivatives bill, but is often in agreement with Riegle on banking and securities issues, those sources said.
"There is going to be a lot of action on derivatives next year," said one of the congressional sources. "Whoever is chairman of the Senate Banking Committee is going to be active on derivatives."
Riegle's bill, the Derivatives Supervision Act of 1994, seems to be a compilation of other pending derivatives bills but would go further by prohibiting federally insured banks, credit unions, and government-sponsored agencies from using derivatives for speculative purposes.
These institutions would be allowed to use derivatives for hedging or for dealer activities, but only if their derivatives products and activities were generally approved by federal banking regulators.
Speculative activities with derivatives could be done only through uninsured bank holding companies or subsidiaries that were approved by the Federal Reserve Board and regulated by the Securities and Exchange Commission. Under the bill, institutions that were unaffiliated with banks could also speculate with derivatives.
Banks and other federally insured institutions would be required to develop and maintain management plans that set forth their objectives and procedures for using derivatives.
Riegle's bill is similar to the derivatives bill proposed last week by Rep. Edward Markey, D-Mass. in that it would subject the derivatives affiliates of broker-dealers and insurance companies to SEC oversight and regulation. The Riegle bill would bring under the SEC's jurisdiction any "major dealer" that is not federally regulated.
The Riegle bill is also similar to the Markey measure and to another bill proposed by the leaders of the House Banking Committee, Rep. Henry Gonzalez, D-Tex., and Rep. Jim Leach, R-Iowa, in that it would require federal regulators to establish capital, disclosure, suitability, and other standards for derivatives.
The regulators would be required to develop an emergency reporting system that would allow them to obtain confidential derivatives information from major dealers in a crisis situation.
They would also be required to help coordinate the international regulation of derivatives.
In addition, the Riegle bill would require federal regulations to be adopted, within 18 months of the bill's enactment, to reduce the potential for systemic risk from derivatives. This is the risk that the failure of a derivatives counterparty or some other crisis in the derivatives market will spill into, and have disastrous consequences for, other financial markets.