Derivatives Reform Prospects Drive Trading

The market took the prospect of tougher rules for the $464 trillion over-the-counter derivatives market seriously on Monday. And with good reason.
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NEW YORK (

TheStreet

) -- The market took the prospect of tougher rules for the $464 trillion over-the-counter derivatives market seriously on Monday. And with good reason.

Shares of the big banks that could have to

divest certain trading operations

were weak across the board, while the publicly traded exchanges that most expect would benefit from the move toward increased transparency posted gains.

The Senate is in the process of voting on whether or not to end debate on a version of a financial regulatory reform bill that is expected to include sweeping reform of the OTC market. Sentiment for a tough bill has swelled of late following the SEC's decision to file civil fraud charges against

Goldman Sachs

(GS) - Get Report

, and one of its traders, and a visit by President Obama to Manhattan to stump for reform last week.

Late Monday, published reports were saying that Senators Christopher Dodd (D., Conn.) and Blanche Lincoln (D., Ark.) had reached agreement on a tough version of derivatives reform that would include provisions such as demanding trading of many products be executed on trading platforms and calling for banks supported by federal guarantees to spin off swap desks, according to

Dow Jones

.

Shares of large banks, including

Goldman Sachs

(GS) - Get Report

,

Morgan Stanley

(MS) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

were lower all day, and the KBW Bank Index finished down more than 3% for the session.

Meantime, the major exchanges, including

NYSE Group

(NYX)

,

CME Group

(CME) - Get Report

,

IntercontinentalExchange

(ICE) - Get Report

and

The Nasdaq OMX Group

I:IXIC

were all finished solidly in positive territory.

The move to push derivatives deals onto trading platforms would hurt profits for the banks but improve prospects for the exchanges that would compete for this business.

--

Written by Dan Freed in New York

.