In the early morning hours of June 25, House and Senate conferees completed action on financial regulatory reform legislation (H.R. 4173) by approving a final conference report by a vote of 20-11 among House conferees and a vote of 7-5 among Senate conferees.  The votes capped off two weeks of official, publically televised conference negotiations, during which time conferees from the two chambers traded offers and counter-offers, and ultimately agreed upon a final package that combined elements of the two competing versions of H.R. 4173 – the one passed by the House in December 2009, and the one approved by the Senate in May 2010.

Throughout the conference, agreements were reached on provisions such as consumer protection, executive compensation, regulations for hedge funds and credit rating agencies, and systemic risk.  Leading up to the final agreement, the most pivotal compromise revolved around the controversial issue of derivatives trading by banks, and was reached after a long day of debate.

Under the derivatives compromise, banks would be able to keep their business in derivatives tied to interest rate swaps, and would also be permitted to continue to trade in derivatives related to foreign exchange swaps, credit, gold and silver, investment-grade credit default swaps and any transaction used to hedge risk.  Banks would need to divert derivatives related to commodities, energy, metals, agriculture, equities and below-investment-grade credit default swaps into a separately capitalized entity walled off from federally insured deposits.  Any credit default swaps remaining in the bank would go through a central clearinghouse, which will act as a neutral party that guarantees a derivatives trade.

House and Senate conferees also reached a last-minute agreement on another controversial provision – the so-called Volcker rule, which would curb proprietary trading by banks.  Under that compromise, banks could not invest more than three percent of their tangible common equity in a hedge fund or private equity firm.  In addition, hedge funds and large banks would face a new fee under the conference agreement, in order to generate $19 billion to help offset the costs of the legislation.

Completion of the conference report marks a major step forward in getting the long-awaited legislation to President Obama’s desk before the July 4th holiday, and is also a significant victory for Senate Banking Committee Chairman Christopher Dodd (D-CT), who is retiring at the end of the year.  Democratic leaders must now hold their caucus together in order to move the conference report to final votes on the House and Senate floors – steps that are expected to occur next week.

We will continue to monitor this important piece of legislation and will provide updates at InsureReinsure.com.