NYX Nyse Euronext

A Democratic member of the Senate Banking Committee wants to limit controlling stakes by dealer banks in swap clearinghouses and trading platforms.

Sen. Sherrod Brown (D., Ohio) has crafted an amendment to the financial overhaul bill that is similar to one inserted by Rep. Stephen Lynch (D., Mass.) into the House financial overhaul bill in December. The issue could come up when the U.S. Senate begins debate on the financial bill in April.

His amendment, like Lynch's, would restrict banks that deal in swaps from acquiring an ownership interest in a clearinghouse if that acquisition would collectively give the banks more than a 20% voting stake. It aims to prevent conflicts of interest by banks that have a hand in both trading swaps and then potentially making decisions on which of those get routed to clearinghouses, which guarantee trades.

"If we're worried about banks being too big to fail, should we encourage them to get bigger and more opaque? My amendment would promote a small measure of competition and transparency where it is sorely needed," Sen. Brown said in a statement Wednesday. "The five biggest banks already control 97% of all U.S. derivatives. They shouldn't control the marketplace for those derivatives, too."

The fight around the Lynch amendment in the House drew fire from many in the financial industry last year, after it became known that Nasdaq OMX (NDAQ) was among its biggest backers.

Nasdaq owns a majority stake in a new interest-rate swap clearing venture called the International Derivatives Clearing Group, which is still trying to drum up business.

Opponents of the measure last year included interest-rate swap clearing rivals LCH.Clearnet, the dominant clearinghouse for interest-rate swaps, and NYSE Euronext (NYX), which has partnered with the Depository Trust & Clearing Corp. to launch a new venture that will clear a variety of fixed income and interest-rate derivative instruments.

Rivals were worried that the measure could give Nasdaq an unfair competitive advantage. LCH.Clearnet is 83% controlled by its users, including big banks--well above the 20% threshold. The DTCC operates as a utility and is also owned by some of the financial firms that are among its biggest users.

Both Lynch's amendment and Brown's latest proposal contain language seeking to protect existing clearing ventures from being affected by any new rules. But that language alone is not likely to quell opposition.

Larry Thompson, DTCC's general counsel, said Wednesday he hadn't yet seen the details of Brown's amendment, but the Lynch amendment is problematic because it creates artificial ownership barriers and doesn't appreciate the benefits of a cooperative utility model like DTCC's, which allots shares based on usage.

"We want the members who use us to have skin in the game," Thompson said. "It makes sense for them from a risk-management standpoint."

A Senate staffer said Wednesday that Brown has met with Nasdaq, along with many other interested parties, on the issue.

It's still uncertain if Brown will opt to push for his amendment or some version of it to be included in the final bill.

Right now the financial overhaul bill crafted by Senate Banking Chairman Christopher Dodd (D., Conn.) doesn't mandate any specific restrictions on voting rights for banks that own equity stakes in clearinghouses, but it does give regulators the tools to write rules to address potential conflicts in this area.

The bill, however, could still be changed, because the section on derivatives must be reconciled with a version that the Senate Agriculture Committee is planning to unveil sometime after Easter.

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

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