US Senate panel seen approving financial reform

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OTC DERIVATIVES IN FLUX

The bill repeats language first proposed by Dodd in November to crack down on the USD 450-trillion over-the-counter derivatives market. Risky derivatives instruments such as credit default swaps, a type of insurance used by bondholders, have been blamed for helping to cause the financial crisis.

A compromise proposal being worked on by two other senators, Democrat Jack Reed and Republican Judd Gregg, is expected eventually to replace what is in the bill now.

The Dodd bill also proposes enforcing the "Volcker rule" -- first introduced by Obama early this year and named after White House economic adviser Paul Volcker -- that would curb proprietary trading at banks and force them out of the hedge fund business. No rule, however, could be imposed until a proposed council designed to oversee systemic risk in the financial system studies the issue.

"This seems like it is less than a total ban and it is a point that will need to be clarified before the committee votes," said Jaret Seiberg, an analyst at Concept Capital.

The bill also calls for stricter bank capital and liquidity standards, but they are not clearly defined. The details will depend on the efforts of international banking supervisors tasked with developing new standards.

Both Democrats and Republicans seem to agree on other issues, such as forming the new systemic risk council and putting in place a new process for dealing with large financial firms that get into trouble.

With that as a backdrop, Dodd is likely to ram his bill through the banking committee next week, possibly with no Republicans voting in favor it, Seiberg said.

"Once the committee votes, the real negotiations will start," he said.