US Congress nears deal on bank trading crackdown $XLF

Some parts of a controversial proposal to curb risky trading by banks appeared likely to be included in the historic Wall Street reforms now being negotiated by US lawmakers, a move that would be a sharp rebuke to the banking industry. Senator Blanche Lincoln, the Democratic author of the plan aimed at limiting swap trading by banks, is modifying her proposal to keep it in the final bill being developed by a Senate-House conference committee, according to a document from Lincoln's office obtained by Reuters on Monday. A senior aide said that portions, at least, of Lincoln's proposal will be incorporated in the legislation. Watch CNBC-TV18 live only on MYTV >> Lincoln got a political boost last week when she won a Democratic primary election in Arkansas by campaigning, in part, on a vigorous attack on unpopular Wall Street banks. The banking industry has fiercely resisted Lincoln's plan since she unveiled it in April. The joint Senate-House conference committee developing the final financial regulation bill will reconvene on Tuesday to consider some less controversial provisions of the bill, which analysts expect to be completed by the end of the month. Once a final bill is approved by the two chambers, it would be sent to President Barack Obama to sign into law. That would give him and fellow Democrats a major domestic policy achievement to add to health-care reform ahead of general elections in November. One provision on Tuesday's agenda would require hedge funds to register with the government. Another would set up a new government office to monitor, but not regulate, the insurance industry, which is now policed by state authorities. A third provision, which may be contentious, would impose a new rulebook on credit rating agencies, such as Moody's Corp, Standard & Poor's and Fitch Rating. Lincoln tweaks plan Despite concerns about profits being cut if the Lincoln plan and other reforms are ultimately approved, stocks in the sector rose on Monday, with the KBW Banks index up 0.41% in early afternoon at midday amid a broadly higher market. "You are going to see a lot of trial balloons over the next several weeks. This is one of many. People are expecting movements on the swap desks and the Volcker rule. That is not a surprise," said Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati. "People are kind of viewing this as, 'Okay, talk to me when we are getting firmer in the details," he said. The Senate bill presently contains Lincoln's initial proposal to force banks to choose between their lucrative over-the-counter derivatives trading desks and access to government protections, such as emergency Fed lending. But that plan faces stiff opposition, despite Lincoln's victory. Derivatives include credit default swaps, a form of insurance used to protect against a borrower's defaulting on its bonds, which have been blamed for playing a role in triggering the global financial crisis. Paul Volcker, a White House economic adviser, said on CNBC television on Monday that Lincoln's original proposal was too sweeping. He said it may make sense to separate some swaps activities from banks, but that it was difficult to draw clear lines between banks, their holding companies and affiliates. "The proposed legislation ... has certainly taken account of some of the objections," he said. The document from Lincoln's office obtained by Reuters showed that Lincoln, the chairman of the Senate Agriculture Committee, wants to give "swaps entities" access to emergency Federal Reserve loans or other "broad based federal assistance." Swaps entities include dealers, participants and clearinghouses. It also outlined a two-year transition period for banks that own swaps desks to comply with the new rules, and proposed swaps dealers could be affiliates of bank holding companies and separately capitalized, a point Lincoln made in May but that was not spelled out in writing. Approval of a bill that includes even portions of Lincoln's hard-hitting plan could have far-reaching structural implications for some of Wall Street's largest institutions. The largely unregulated OTC derivatives market generated about USD 24 billion in industrywide revenues in 2009; an estimated 98% of the total was generated by JPMorgan Chase, Bank of America, Goldman Sachs, Morgan Stanley and Citigroup. Conferees met with Lincoln staff members over the weekend, as well as staffers for other Democratic senators, aides said.