This week, President Barack Obama is expected to propose a massive regulatory overhaul of the financial and banking industry. The proposal puts the Federal Reserve in the position of systemic regulator to manage the largest financial institutions. It also puts the government in control of breaking up systemically important institutions and calls for the creation of a consumer-oriented financial product regulator, unnamed sources told the Wall Street Journal. The revamped regulation would mandate new rules of the financial industry on many fronts, from mortgage underwriting to the trading of exotic financial instruments, according to the WSJ. Reports last week indicated the overhaul proposal would see regulators take on broader authority, rather than the consolidation of several agencies into one, as reports had stated before. The proposal, slated to arrive as early as Wednesday, is already making waves in the industry as market players anticipate the largest reform since the policy responses to the Great Depression. The Securities Industry and Financial Markets Association (SIFMA) has voiced its support for the overhaul and specifically for regulatory reform in the derivatives market. Over-the-counter derivatives, SIFMA said, play an important role in hedging companies against a wide range of risks and should be protected in any regulatory reform adopted. Regulatory reform on the part of the Federal Reserve, in particular, should consider trading and other capital market activities, according to a speech today by Daniel Tarullo, member of the board of governors of the Federal Reserve Board. In comments on regulation of systemically significant financial firms and community banks, Tarullo says systemic risk was essentially built into the financial system. The regulatory overhaul, therefore, must take steps to address this deep-set risk. The Fed must strengthen its existing regulations in cases with significant bank involvement in trading and markets, according to his statements. Tarullo also calls for the Fed to look at bank holding companies as more systemic when considering their risk and risk management. “There is a growing, though certainly not unanimous, view that supervision and regulation must be substantially more oriented toward containing systemic risk and addressing the associated problems posed by institutions considered too-big-to-fail,” he says. “The public policy agenda will thus rightly be dominated for some time by proposals for legislative and administrative measures directed at systemic risk.” Write to Diana Golobay. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.