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Blanche Lincoln Is Gone. Will Dodd-Frank Derivatives Rules be Next?

The hard fought battle last summer over derivatives regulation reform may be about to be replayed—but this time one of the strongest proponents of stricter legislation will be absent on the field of battle.

U.S. Sen. Blanche Lincoln (D-AR)
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U.S. Sen. Blanche Lincoln (D-AR)

Democratic Senator Blanche Lincoln became a staunch advocate of derivatives reform while facing a primary challenge from her party's left. Many thought that she would soften her stance on derivatives following her primary victory, especially because even many Democrats thought her proposals went too far.

Instead, she stuck to her guns, proposing amendments to Dodd-Frank that limited the ability of banks to engage in proprietary trading of derivates, forcing them to spin-off or separately capitalize derivatives trading desks. A slightly modified compromise version of this proposal made it into the final bill, albeit with an implementation time table that stretched out for years.

Lincoln lost to her Republican challenger Rep. John Boozman Tuesday night. Now the incoming head of the House financial services committee, Spencer Bachus, is saying the derivatives provisions of Dodd-Frank may be rewritten.

“There are lot of job-killing provisions in that [Dodd-Frank] bill and there is a lot of just new bureaucracies created,” Bachus said on CNBC on Wednesday. “Putting all derivatives on exchanges is just one example of something that is going to dry up liquidity, that is going to impact the economy, and is going to cost jobs.”

The exact shape of the changes to the derivatives legislation remain to be seen. It's likely Bachus will carve out an exemption to the rules so that they better mirror the Volcker Rule, allowing banks to carry on derivatives trading outside of the nascent clearing house system so long as they are connected with providing financial services to customers who use derivatives in their business. Critics of such an exemption are already crying foul.

"What House Republicans will likely aim to do — if their rhetoric during the financial reform debate is any indication — is try to grant wide exemptions to the exchange and clearing requirements, letting all sorts of activity that is purely speculative continue unabated," Pat Garofalo argues at Wonk Room.

Clearly, the opponents of Lincoln's derivatives reform have a huge advantage now that Lincoln herself is out of the Senate.

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