Derivatives ban may be softened

WASHINGTON (CNNMoney.com) -- Wall Street is poised to score a victory in its efforts to beat back a crackdown on banks that trade the complex financial products known as derivatives.

On Tuesday, Senate Banking Committee Chairman Christopher Dodd, D-Conn., proposed a compromise change to the Wall Street reform bill that would water down a proposed ban on derivatives trading by many financial firms.

Sen. Blanche Lincoln, D-Ark., has been a driver of the push on the swaps ban. Her measure ranks among the top hangups threatening final passage of the overall reform bill.

Lincoln was in Arkansas on Tuesday facing a tough primary election. Her spokeswoman said she would fight to keep the ban.

"Sen. Lincoln is fully committed to her provision and will fight efforts to weaken it," said Lincoln spokeswoman Katie Laning Niebaum. "Her proposal has received bipartisan support and she will defend it on the Senate floor."

Under the changes proposed by Dodd, the swaps ban would be postponed while a council of regulators studies it and recommends to Congress whether the full ban or a partial ban should go forward.

If regulators decide the ban is a bad idea, they must come up with new minimum standards to guide banks about derivative trading. If regulators decide the ban is a good idea, the ban wouldn't take affect for two years, according to the amendment.

The Senate will have to vote on the changes in coming days, but financial services and derivatives groups were breathing a sigh of relief on Tuesday.

"The proposed solution gives some breathing room to a heavy-handed provision that would have resulted in more risk in the system," said Scott Talbott, senior lobbyist for the Financial Services Roundtable.

Congress generally wants to get tougher on derivatives, which are currently traded with no oversight and were a key reason for the taxpayer bailout of American International Group (AIG, Fortune 500). But lawmakers disagree about how much to regulate them.

The measure banning bank swaps goes further than the so-called Volcker rule, named for former Federal Reserve Chairman Paul Volcker. That proposal would block only some banks from doing such trades for their own purposes and accounts.

Lincoln had proposed blocking banks from all derivatives if the banks want access to cheap emergency loans from the Fed. Banks would have had to spin off their swaps desks.

Fed Chairman Ben Bernanke raised concerns about the ban last week. His letter raising alarms was similar to those written by Volcker and Federal Deposit Insurance Corp. Chairman Sheila Bair.

On Wednesday morning, lawmakers are set to vote to officially end debate on the Wall Street reform bill, signaling that a final vote will follow by the end of the week.

The Senate was still working on amendments late Tuesday night and Dodd asked senators to hurry up.

"We could go on indefinitely, but we need to come to closure on this piece of legislation," he said. "It's a good bill."

-CNN Senior Congressional Correspondent Dana Bash contributed to this article.