Critics say the changes will allow major Wall Street banks to continue to dominate the $700 trillion derivatives market.
The Commodity Futures Trading Commission approved the rule on a 4-1 vote. Commissioner Jill Sommers cast the lone dissenting vote.
Under the rule, investment firms would be required to request price quotes for a derivatives contract from a minimum of two banks this year and three beginning in 2014. An earlier proposal had called for price quotes from at least five banks.
Derivatives are investments whose value is based on some other investment, such as oil and currencies. The market was largely unregulated before the 2008 financial crisis. The rule was mandated by Congress under the 2010 financial regulatory overhaul.
By requiring fewer price quotes, critics worry that the market will be less competitive. Five of the largest U.S. banks — JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley — account for more than 90 per cent of total derivatives contracts.
Dennis Kelleher, the president of Better Markets, a group that advocates stricter financial regulation, said banks opposed the requirement for more price quotes "to prevent a level playing field, competition and transparency."
Requiring a larger number of quotes gives banks and financial firms that aren't in the dominant group the opportunity to enter the market and makes it more competitive. That could potentially lower prices for all users of derivatives, such as farmers, airlines or oil companies.
Under the rule, banks and other financial institutions would be required to trade derivatives contracts on new electronic exchanges.
CFTC Chairman Gary Gensler says that will create more transparency because everyone who wants to compete in the marketplace will be able to see prices before deciding to invest. Prior to the rule, they could not.
"This is a significant shift toward market transparency from the status quo," Gensler said.
Commissioner Bart Chilton said the commission could have achieved greater transparency by approving the original proposal. But he said a compromise was better than no action.
"By failing to act, we leave in place unregulated dark markets. These are the very dark markets that got us into the economic mess in 2008," Chilton said.
Wall Street banks had opposed requiring a minimum number of bids for derivatives contracts.
An official for the Securities Industry and Financial Markets Association, Wall Street's largest lobbying organization, says the rule could ultimately hurt the everyday investor that it seeks to protect.
Kenneth E. Bentsen, Jr., acting president and CEO for SIFMA, contends that more bids could chase financial firms out of the trading exchanges. That's because some might fear confidential price information could be widely broadcast. Fewer firms could lead to less liquidity in the market. That would slow trading.
Under the rule, however, the bids would not be made public.
The lower requirement illustrates how banks have managed to tweak rules written by Congress three years ago that are still being finalized by regulators.
The banks have also succeeded in weakening a rule that would ban banks from trading for their own profit. The latest version of the so-called Volcker Rule includes an exemption for banks to make such trades when they are used to offset others risks taken.
The rule was named after former Federal Reserve Chairman Paul Volcker. Its adoption has been delayed largely because of the banks' objections.