Something strange and a little disorienting is happening in the fight to reform Wall Street: It looks like the reformers are actually starting to win.

This is not something you could have said as recently as six weeks ago. Back then, House Financial Services Committee Chairman Barney Frank had just released a proposal to regulate derivatives, essentially bets on the movements of other assets (like stocks, bonds, commodities) or interest rates. Derivatives are in some respects the key battle in the broader regulatory campaign. They were at the center of last fall’s financial crisis--Lehman’s balance sheet was stacked with them, and they triggered AIG’s collapse. But because they’re so poorly understood by the general public, the fight has unfolded almost entirely in Congressional backrooms, where the banks and their lobbyists naturally have the upper hand.

Frank’s "discussion draft" seemed to reflect that. The proposal the Obama administration unveiled this summer would have forced banks and hedge funds to trade derivatives on exchanges and “centrally clear” them. Clearing means inserting a well-capitalized middleman between two parties on either side of a trade. When derivatives trades are cleared, the failure of one institution doesn’t threaten everyone else it has traded with, which is what happened with Lehman. The only downside is that clearing requires the trader to post margin--a kind of cash cushion--to the middleman, which they’re generally loath to do. Before long, dozens of companies were flocking to Congress to plead their case.

In order to ensure the measure’s eventual passage, Frank found himself having to strike a deal with a group of moderate New Democrats on his committee. The so-called “end-user exemption” they settled on would give a pass to industrial companies that use derivatives simply to hedge the risk that, say, oil prices or interest rates might rise. The thinking was that hedging by the Caterpillars and the 3Ms of the world wasn’t what brought down the financial system last fall; it was speculation by the likes of Lehman. The New Dems who supported the compromise argued that it would only exempt some 15 percent of standardized derivatives contracts. (That is, contracts that follow a straight-forward template, which reformers want to force onto exchanges.)

But independent experts who studied the measure came to a different conclusion: that it could exempt between 60 and 80 percent of the standardized market because of its vague wording, including many firms who were speculating rather than simply hedging risk. A few days after Frank unveiled his draft, Commodity Futures Trading Commission Chairman Gary Gensler, official Washington’s leading advocate of regulating derivatives, testified about his concern that the compromise “could have the unintended consequence of exempting a broad range of entities,” possibly even major Wall Street firms.