WASHINGTON — The Senate rejected a derivatives substitute Wednesday 59 to 39 that would have struck a prohibition that would force banks to spin off their swaps trading desks.

The ban on letting banks serve as swaps dealers was inserted into regulatory reform by Agriculture Committee Chairman Blanche Lincoln and is adamantly opposed by the banking industry and federal regulators.

The failed GOP amendment would have removed the ban and made several other changes, including broadening which endusers are exempt from requirements to clear derivatives contracts.

The measure, from Sen. Saxby Chambliss, the Senate Agriculture Committee's top Republican, was supported by several other Republicans including the Banking Committee's top Republican Sen. Richard Shelby.

The Chambliss measure would have altered the definitions of swap dealer and swap participant to protect businesses using swaps to hedge their risk. It would also have expanded the clearing exemption for endusers to ensure that true endusers are not subject to increased clearing costs.

Lincoln staunchly criticized the Georgia Republican's amendment on the floor.

"The Chambliss amendment does not meet the test of what our markets require. It is a stark reminder that if we do not act boldly in the face of the near-collapse of our economy, tragic Wall Street abuses and abysmal regulatory failures, we will all suffer the consequences. I have a number of concerns with the Chambliss amendment," she said.

"Clearing and exchange trading are at the heart of reform, mitigating risk, reducing leverage and forcing accountability on derivatives marketplace. This amendment would remove the underlying bill's mandatory exchange trading requirement and weaken the mandatory clearing provision. This is not acceptable."

She specifically stood up for her ban on banks acting as swaps dealers which is meant to prevent federal aid to derivatives dealers including access to the Federal Reserve Board's discount window or deposit insurance.

"The Dodd-Lincoln bill includes important conflict of interest provisions that would allow the regulators to ensure that no market participant unduly influence or monopolizes the market. What does the Chambliss amendment do with this provision? It would eliminate it — in effect handing more power over to Wall Street," Lincoln said. "These changes are simply an effort to weaken the bill and riddle it with loopholes. I understand many of my colleagues are being pressured to take this path, but we must forge ahead and enact meaningful reform."

Senate Banking Committee Chairman Chris Dodd sought to fend off the Chambliss alternative on the Senate floor saying it would effectively gut the derivative regulation section of the bill without addressing banks specifically.

"The Republican substitute has no requirement for transparent trading and weakens those safeguards for major market players," said the Connecticut Democrat. "It loosens capital requirements on big Wall Street firms, a huge mistake that would practically beg for another AIG-type crisis. It limits the central clearing requirement to only those trades that take place between the very largest firms, providing a blanket carveout to other financial firms and letting much of the market continue to operate with no accountability, no transparency, and no regulation."

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.