Associated Press | A Senate panel approved legislation Wednesday
that would limit the ability of Wall Street banks to trade complex
financial tools called derivatives. The bill offered by Senate
Agriculture Committee Chairman Sen. Blanche Lincoln, D-Ark., would also
improve transparency of most derivative trades.

The legislation was approved on a 13-8 vote. Sen. Charles Grassley,
R-Iowa, joined the panel’s 12 Democrats in supporting the measure. His
defection suggests some Republicans may break party ranks and support
the Obama administration’s financial regulatory reform effort.

Derivatives are financial products — such as corn futures or stock options –  that rely on the value of some underlying investment. Companies use them to hedge against risks, such as interest rate swings or oil price spikes. But derivatives have become a vehicle for speculation, with critics blaming them for contributing to the financial crisis.

Democrats have seized on the speculative side to help advance regulatory reform. The measure approved by the Agriculture Committee is expected to be included in the broader financial overhaul, which the Senate could take up next week.

Lincoln’s proposal is more sweeping than those offered by the Obama administration and the House. It would severely restrict banks’ ability to run derivatives trading desks — a major source of revenue for them as credit remains tight in the recession. That’s because most derivatives activity would be prohibited at financial companies that enjoy federal guarantees, such as insurance from the Federal Deposit Insurance Corp.

Banks, such as JPMorgan Chase & Co. and Bank of America Corp., would have to place their lucrative derivatives desks into subsidiaries and would have to fund them with bank capital rather than lending against that money. The banks argue this would restrict lending unnecessarily.