Where is financial regulation headed in 2011?

(Reuters) – A torrent of new rules for Wall Street and U.S. banks is pouring off Capitol Hill into the federal regulatory agencies, unleashed by the devastating 2008-2009 financial crisis.

The agencies are where the action will be this year and next as regulators, lobbyists and lawmakers struggle to implement the Dodd-Frank financial reforms.

With parallel efforts under way in Europe, Dodd-Frank is likely to be implemented as written, though banks are lobbying for softening parts of it to protect their profits and business models.

Here’s what lies ahead in 2011:

DEBIT CARD FEES: Dodd-Frank ordered cuts in fees charged on debit card transactions and changes to how card networks operate.

Carrying out this mandate, the Federal Reserve released a proposal favorable to retailers that called for deeper fee cuts than markets expected, and changes that would expose the big card networks to more competition. Debit cards are a lucrative line of business. Billions of dollars in profits are at stake.

Shares in top networks Visa and MasterCard initially fell on the news of the Fed proposal.

The Fed is taking comments on its proposal until February 22. Lobbyists will push to soften the rule until then. A final rule is due by late April to take effect in late July.

“It is tough to handicap exactly what the Fed will finally settle on,” said Keefe Bruyette & Woods analyst Brian Gardner.

“That being said, we think … the door is open to changes to the proposal that may not be as onerous,” he said.

BANK CAPITAL: U.S. banks are thickening their capital cushions due to Dodd-Frank, with a new global pact known as Basel III also driving a broad capital build-up worldwide.

The Federal Deposit Insurance Corp and other bank regulators last month proposed a rule to force bank holding companies to keep the same capital levels as their federally insured bank units. The idea is to keep strong banks from propping up weak holding companies.

The rule, mandated under Dodd-Frank’s controversial Collins amendment, would also apply to non-bank firms that the Fed oversees as “systemically” important” to the economy.

Banking regulators will accept public comment on the proposal until February 28. Basel III will be implemented over several years. Exactly how it will interact with Dodd-Frank is still unclear.

In any case, said MF Global analyst Jaret Seiberg, the new standards “will make it more expensive to be a bank.”

COMMODITY SPECULATION: The Commodity Futures Trading Commission unexpectedly delayed a plan to limit speculation in increasingly volatile commodity derivatives markets after commissioners could not agree on some of its details.

Mega-firms that have stormed into the markets in recent years, such as JPMorgan Chase and Goldman Sachs, make huge profits there and want to keep it that way.

The CFTC wants to set “position limits” on how many derivative contracts a single speculator can hold. The agency’s push for these limits dates back to early 2008, before the financial crisis. Now it is converging with a post-crisis push under Dodd-Frank to rein in off-exchange derivatives markets.

Analysts see a fluid situation. “We expect some effort to delay implementation of the rules,” said Keefe Bruyette & Woods analyst Brian Gardner.

Funding for the CFTC and Securities and Exchange Commission — which share jurisdiction for swaps markets — will also be a key issue.

FANNIE, FREDDIE: When the new Congress convenes this week, Republicans will be in charge of the House of Representatives and its financial oversight committees. Analysts expect a lot of noise, but few concrete results, on housing finance and what to do with its crippled, twin giants — Fannie Mae and Freddie Mac.

The Treasury Department is expected to issue a proposal on reforming Fannie and Freddie this month.

“Legislatively this is a 2011 story and could extend past the 2012 elections,” said MF Global analyst Chris Kruger.

NEW FACES: Republican Representative Spencer Bachus will replace his nemesis, Democrat Barney Frank, next month as chairman of the House Financial Services Committee.

In the Senate, Tim Johnson will take the helm of the banking committee from fellow Democrat Christopher Dodd. Both Bachus and Johnson are more conservative than their predecessors, which some analysts see as a plus for banks.

But both men will assume power in a divided Congress that analysts see as unlikely to legislate on financial regulation beyond a possible Dodd-Frank “technical corrections” bill.

Key appointments lie ahead next year for the Obama administration, which must name new leaders at the FDIC, the Office of the Comptroller of the Currency, and the newly forming Consumer Financial Protection Bureau.

The nomination of North Carolina bank commissioner Joseph Smith to head the agency that oversees Fannie Mae and Freddie Mac died on Dec 22 as the Senate adjourned without acting on it.

While President Barack Obama could renominate Smith to head the Federal Housing Finance Agency after the new Senate convenes on January 5, he may be reluctant to do so, given Republican opposition. (Reporting by Kevin Drawbaugh, Dave Clarke, Christopher Doering, Rachelle Younglai, Corbett Daly; Editing by Richard Chang)

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