In the battle over regulation, Wall Street is poised to notch another win.
Lobbyists for the nation's biggest banks have persuaded federal regulators to soften a proposed rule under the Dodd-Frank Act, the financial overhaul law passed after the crisis of 2008. The rule, which regulators plan to approve today, could protect Wall Street's control over the $700 trillion derivatives market, a lucrative business that helped cause the financial crisis.
Regulators initially planned to force asset managers such as Vanguard and Pimco to contact at least five banks when seeking a price for a derivatives contract, a requirement intended to bolster competition among the banks. Now, according to officials briefed on the matter, the Commodity Futures Trading Commission has agreed to lower the standard to two banks. In about 15 months, it will automatically rise to three banks, though the rule requires the agency to eventually produce a study that could undermine the higher standard.
That compromise was forged from much internal wrangling at the five-person commission, which was sharply divided over the plan. Gary Gensler, the agency's Democratic chairman, championed the stricter proposal. But he met opposition from the Republican members on the Commodity Futures Trading Commission, as well as Mark Wetjen, a Democratic commissioner who has sided with Wall Street on other rules.
Mr. Wetjen argued that five was an arbitrary number, according to the officials briefed on the matter. He also noted that the lower requirement would not prevent companies from seeking additional price quotes.
Mr. Gensler, eager to rein in derivatives trading but lacking an elusive third vote, accepted the compromise.
People close to the agency, who were not authorized to speak publicly, defend the decision to strike a compromise on the derivatives plan, arguing that the rule will still push derivatives trading from the shadows of Wall Street onto regulated trading platforms. They also note that the agency plans to adopt two other rules today that will subject large swaths of trades to regulatory scrutiny.
But the compromise, coming on the heels of other Wall Street lobbying victories, still illustrates the financial industry's continued influence in Washington. "It's really on the edge of returning to the old, opaque way of doing business," said Marcus Stanley, policy director of Americans for Financial Reform, a group that supports new rules for Wall Street.
The compromise also concerned Bart Chilton, a Democratic member of the agency, who has called for greater competition in the derivatives market. While he might propose an amendment today that would require quotes to be submitted to at least five banks for a majority of the derivatives, Mr. Chilton signaled that he might vote for the rule either way. "At the end of the day, we need a rule, and that may mean some have to hold their noses," he said.
The push for competition follows concerns that a few select banks control the market for derivatives contracts, which companies buy from Wall Street to hedge risk. Just five banks -- JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs -- hold more than 90 percent of all derivatives contracts.
That grip, regulators and advocacy groups say, empowers those banks to overcharge some asset managers and companies. It also raises concerns about the safety of the banks, some of which nearly toppled in 2008 after the derivatives contracts soured.
"It's important to remember that the Wall Street oligopoly brought us the financial crisis," said Dennis Kelleher, a former Senate aide that now runs Better Markets, an advocacy group critical of Wall Street.
With that history in mind, Congress inserted in Dodd-Frank a provision that forces derivatives trading onto regulated trading platforms. The platforms, known as Swap Execution Facilities, were expected to open a window into the secretive world of derivatives trading. But Congress left it to Mr. Gensler's agency to spell out how the trading would work.
There was a time when Mr. Gensler envisioned the strictest rule possible. In 2010, he pushed a plan that could, in essence, make the bids for derivatives contracts public. Facing widespread complaints, the agency instead proposed a plan that would require at least five banks to quote a price for all derivatives contracts passing through a swap execution facility.
But even that plan prompted a full-court press from Wall Street lobbyists. Banks and other groups that opposed the plan held more than 80 meetings with agency officials over the past three years, an analysis of meeting records shows. Goldman Sachs alone attended 19 meetings; the Securities Industry and Financial Markets Association, Wall Street's main lobbying group, was there for 11.