What's Inside the Financial Reform Bill

Senate and House negotiators reached agreement early Friday morning on the most sweeping overhaul of financial regulation since the Great Depression. Consumers came out the big winners, with the adoption of proposals to create a consumer financial protection watchdog and put limits on debit card charges.

"This makes a huge difference," said Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, who led the negotiations.

Agreement on the massive bill will allow President Obama to present the final package to world leaders at the G-20 meeting in Toronto this weekend.

While consumers stand to benefit, big banks such as JPMorgan Chase (JPM) may take a hit to earnings as the proposal puts limits on some highly profitable trading operations. And Rep. Barney Frank disclosed that the conference committee had agreed to impose a new $19 billion levy over five years on banks with assets over $50 billion and hedge funds with assets over $10 billion to pay for the new consumer protection bureau and other parts of the legislation.

Deal Limits Banks on Derivatives Trading

Although full details on the compromise legislation have yet to emerge, it's known that it does include a version of the so-called Volcker rule, named after former Federal Reserve Chairman Paul Volcker. Now the chairman of Obama's Economic Recovery Advisory Board, Volcker had proposed banning banks from owning hedge funds, private-equity investments or engaging in so-called proprietary trading, which means placing bets with their own money. Under the compromise version of the Volcker rule, banks will be able to invest up to 3% of their capital in hedge funds and private-equity investments.

Another deal was reached on derivatives, which are contracts based on other financial instruments or indexes. It was huge investments in unregulated derivatives such as credit default swaps that nearly destroyed the giant insurer AIG, requiring a $180 billion taxpayer bailout.

The compromise gives big banks like JPMorgan and Citigroup (C) two years to move their derivatives trading businesses, known as swaps desks, into separately capitalized subsidiaries. That will ensure that depositors' funds aren't put at risk, meaning the banks won't be able to go to the Federal Reserve for assistance if their subsidiaries incur huge losses.

Banks will still be able to trade such derivatives as interest rate swaps -- in which banks trade fixed-rate instruments for floating-rate instruments -- and foreign exchange swaps, if they're used to hedge the bank's own risks.

The deal on derivatives, proposed by Sen. Blanche Lincoln (D-Ark.), would also require most derivatives to be traded on exchanges. Companies that use derivatives to reduce their risks -- such as airlines that buy oil futures, or food companies that buy derivatives on corn, for example -- would be exempt from the restrictions.

Cutting Into Credit Card Transaction Fees

The legislation provides for the creation of an independent consumer protection bureau to be based in the Federal Reserve that will take over the consumer watchdog role from six different agencies. The bureau will regulate almost all retail financial transactions, with the exception of loans arranged by car dealers, which will remain under the authority f the Federal Trade Commission.

The legislation also authorizes the Federal Reserve to establish "fair and proportionate" fees that banks can charge merchants for the processing of debit cards transactions. The bill is expected to sharply reduce the $48 billion banks collect from merchants each year. In theory, some of those savings would be passed on to consumers.

Not so, says Cameron Fine, head of the Independent Community Bankers of America told CNBC, calling the agreement on debit card fees "horrendous." "The consumer is going to get dinged." Fine said, explaining that banks will likely move to make up that lost revenue from merchants by charging consumers higher up-front costs.

During the early-morning negotiations, the conference committee also decided to remove language that would have required big banks to pay for losses suffered if government-backed mortgage lenders Fannie Mae and Freddie Mac go bust. The two firms, which guarantee $5 trillion in mortgages, are expected to lose between $400 billion and $1 trillion due to fraud and widespread foreclosures in the housing market.