After Senate passage, what's next for financial reform bill?

Negotiations with the House over the final financial reform bill are expected to be more transparent than they were with health-care reform. Exemptions or special deals sought by industry lobbyists are likely to stir intense debate.

By Gail Russell Chaddock, Staff writer / May 21, 2010

Washington

On a barely bipartisan 59-to-39 vote, the Senate on Thursday approved the most sweeping overhaul of financial-industry oversight since the New Deal era. Next: negotiations with the House, final passage expected by July 4, and a reprise of the main themes of the debate in partisan ads for the fall midterm elections.

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The Senate bill gives Washington broad new powers to shut down large, failing firms or require that businesses deemed at risk hold more capital. A new Consumer Financial Protection Bureau will be tasked to establish new rules for mortgages, auto loans, and credit-card lending, as well as other financial products. The bill extends government oversight to the vast $600 trillion financial derivatives market, including new limits on trading by Wall Street banks.

“The recession we’re emerging from was primarily caused by a lack of responsibility and accountability from Wall Street to Washington,” President Obama said in the White House Rose Garden after a key procedural vote on Thursday that all but ensured that the Senate bill would pass. Next to health-care reform, financial regulation is a top domestic priority for the administration.

“The reform I sign will not stifle the power of the free market – it will simply bring predictable, responsible, sensible rules into the marketplace. Unless your business model is based on bilking your customers and skirting the law, you should have nothing to fear from this legislation,” he added.

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WSJ - AT A GLANCE: Financial Overhaul Advances In Senate

THE EVENT: The Senate cleared the way for a final vote on legislation that would constitute the biggest overhaul of U.S. financial regulations since the 1930s, voting, 60-40, to end more than three weeks of debate on the sweeping measure. President Barack Obama called the action a "major step forward."

KEY POINTS IN DEBATE: Republican critics have generally opposed the bill as an excessive intrusion by government into the markets. They also said the legislation doesn't deal with the circumstances that led to the severe decline in housing prices.

SUMMARY OF BILL: The legislation, broadly, is designed to close the regulatory gaps and end the speculative trading practices that contributed to the 2008 financial market crisis. Among other things, the bill would create a regulatory system to manage the collapse of a failed financial institutions; create a new consumer protection agency; change the way mortgages and credit cards are regulated and how financial firms interact with regulators; and boost the government's ability to deal with systemwide failures.

MARKET REACTION: Bank stocks briefly pared some of their losses after the vote, but closed lower. Concerns about exposure to Europe's debt woes continued to weigh on bank shares and on the broader market, with the Dow Jones Industrial Average falling 376.36 points, or 3.6%, to close at 10068.01, off 10.15% from its 2010 closing high hit on April 26.

WHAT'S NEXT: Senate Democrats would need to clear a handful of procedural hurdles for a final vote to occur Thursday evening, but leadership was discussing the possibility, according to several congressional aides. If the Senate approves the bill, it will have to be reconciled with a version in the House of Representatives. The House passed its version of the bill last year and the two chambers have approached a number of issues, including how the government should fund the cost of winding down a large financial firm, in very different ways.

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SEC says no single cause of market plunge

(Reuters) - The top securities regulator said no single event had been found to explain Thursday's mysterious market plunge, but the shocking drop was unacceptable and additional safeguards were coming.

U.S. Securities and Exchange Commission Chairman Mary Schapiro said on Tuesday it would take time to pinpoint the cause and warned that investor confidence could suffer if there were no reforms.

"The markets failed many investors on May 6, and I am committed to finding effective solutions in the very near term," she said in testimony to the U.S. House of Representatives Subcommittee on Capital Markets.

The SEC said after the hearing that it had received recommendations from exchanges and the broker-dealer watchdog Finra for trading curbs and for dealing with erroneous trades. It said it would review them over the next few days.

With U.S. stock markets back near levels before the May 6 debacle, many lawmakers appeared satisfied with the SEC and fellow market watchdog, the Commodity Futures Trading Commission.

"After hearing the testimony from our two regulators I feel a lot more secure," said Paul Kanjorski, the Democrat from Pennsylvania who chairs the subcommittee.

But some Republican members of the committee questioned the wisdom of regulators taking action before the causes of the market roller coaster were clear.

Although Schapiro gave greater weight to theories that a confluence of events were responsible, no regulator or exchange has provided a full account of events or concluded what caused a lightning-fast 700-point drop in the Dow Jones Industrial Average that rattled investors worldwide.

"The sudden evaporation of meaningful prices for many major exchange-listed stocks in the middle of a trading day is unacceptable and clearly contrary to the vital policy objective of maintaining fair and orderly financial markets," Schapiro said.

CFTC Chairman Gary Gensler said his agency asked some traders for "all communications" and positions related to E-mini Standard & Poor's 500 futures contracts. That suggested a more muscular thrust in the complicated probe, and bolstered industry rumors circulating around that contract over the last five days.

Schapiro and Gensler both said that computer-driven high frequency trading (HFT) strategies may have exacerbated the sell-off when some of those firms stopped making markets in stocks and futures contracts.

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SEC, US Exchanges Agree On Market-Wide Circuit Breaker

Fawn Johnson

Dow Jones  Newswires

WASHINGTON (Dow Jones)--The U.S. Securities and Exchange Commission and the major trading exchanges agreed Monday a market-wide "circuit-breaker" system should be established to handle the type of market volatility demonstrated in Thursday's unsettling market plunge, according to people familiar with the matter.

At the meeting, the exchanges each agreed to give regulators a plan for how to alter their own rules to meet a more unified standard within 24 hours, the people said.

The exchanges agreed with SEC Chairman Mary Schapiro that the disparity between how markets handle market hiccups needs to be eliminated.

"The parties agreed on a structural framework, to be refined over the next day, for strengthening circuit breakers and handling erroneous trades," according to an SEC statement.

Some lawmakers and some market analysts say that because NYSE Euronext (NYX) is the only major exchange with a "slow mode" that shuts down computer trading and relies on humans for volatile stocks, Thursday's reaction from other exchanges may be a factor that sent the market into a free fall.

Schapiro met Monday with the leaders of six exchanges--NYSE, Nasdaq OMX Group Inc. (NDAQ), BATS Exchange, Direct Edge, International Securities Exchange, Chicago Board Options Exchange--and the Financial Industry Regulatory Authority. They met earlier Monday with officials from the Commodity Futures Trading Commission.

Executives from the various exchanges, Schapiro, and CFTC Chairman Gary Gensler also met Monday with U.S. Treasury Secretary Timothy Geithner. Officials at CME Group Inc. (CME), the largest U.S. futures exchange, also attended that meeting.

A Treasury spokesman said Geithner "reinforced the need for a coordinated and timely response to help ensure the proper functioning of our markets."

Gensler said the exchanges have been "very cooperative in providing essential data and analyses" on the May 6 market events.

Regulators and the exchanges want to come up with a standardized way to handle market volatility that is simpler than the current rule, which was established in the late 1980s before trading became largely computerized and decimalized.

The new system would be more sophisticated, with guidelines based on times of day and also directed at particular stocks, the people said.

The agreement on a rule framework is just one of a number of areas in which the SEC is working with exchanges to examine Thursday's plunge.

Regulators haven't yet isolated a single cause for the tumble, although they are noting the market sensitivity around Greece and a five-second hold in a "mini" future that is considered a leading indicator for the Standard & Poor's 500.

The cause of the market plummet may be less troubling than the ripple effects that regulators and the exchanges are hoping to stem in the future. Regulators and the exchanges are constructing a timeline of the market events that occurred during the half-hour period on Thursday afternoon when the Dow Jones Industrial Average fell nearly 1,000 points before it recovered somewhat.

For now, at least, the exchanges and the regulators have agreed the SEC will be the voice behind their efforts. "I think Mary [Schapiro] provided great leadership. There's a lot of work to do, and she'll be the spokesman for the time being," said Chicago Board Options Exchange Chairman William Brodsky after Monday's meeting.

-By Fawn Johnson, Dow Jones Newswires; 202-862-9263

fawn.johnson@dowjones.com
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