The Wall Street Reform Act "takes steps to protect consumers and to put a leash on financial institutions on Wall Street," Al Jazeera's Nick Spicer, reporting from Washington, said.
Drafting this legislation makes for good domestic politics and will help Obama as he travels to Canada for the G20 summit, our correspondent said.
Mike Konczal, an economist, told Al Jazeera the proposed reforms offer little protection to prevent another global financial crisis.
"We're going to keep the mega banks in power; we're going to have the six largest banks that are still very global varying every business line," he said.
"We did not separate out the derivatives dealers from the major banks in a way that would actually force them to compete against each other.
"In that sense we're still going to have a financial sector that looks very much like 2006 and that's a very dangerous financial sector. Therefore, it's not clear necessarily, that we won't have another crisis in a decade."
The new legislation marks the first major attempt to regulate the over-the-counter derivatives market, which is valued at $615 trillion.
Derivatives are contracts whose value is derived from stocks, commodities, bonds or even specific events such as the weather.
"Washington wants to set the expectations so low in that whatever victory is achieved they can declare that a win over Wall Street for Main Street"
Shahien Nasiripour, business reporter
The murky market in these contracts has been blamed for making the global recession worse, because banks from all over the world bought financial products derived from the US mortgage market.
These investments, which were supposed to be safe, turned out to be almost worthless.
Large investment operations, such as Goldman Sachs and JP Morgan Chase, will have to separate some of their profitable derivatives trading operations from traditional banking activities.
This separation was designed to protect depositors and the government from having to pay for risky derivatives bets.
The new rules also demand a greater separation between traditional banks and hedge funds.
Rating agencies such as Moody's, and Finch, could face major changes to their business models as a result of regulations.
Agencies have been criticised for conflict of interest violations because they have rated and assesed the same firms who hire them.
Our correspondent in Washington said that legislators, especially many Republicans who often oppose government regulation of business, did not want to vote against the bill.
"I think politicans are riding, surfing, on a wave of anger against Wall Street, against the bailout. People from across the spectrum, right and left, are angry about what happened."
|Obama's advisers are hoping the reforms will boost poll numbers ahead of elections [EPA]
The bill includes the creation of a new a consumer financial-protection bureau which will police banks and financial services companies for credit-card and mortgage lending abuses.
While polling numbers for Barack Obama, the US president, have been down recently, his advisers are hoping the financial overhaul will lead to a boost in his popularity ahead of congressional elections in November.
Shahien Nasiripour, a business reporter for the Huffington Post, a news website, told Al Jazeera: "Washington wants to set the expectations so low in that whatever victory is achieved they can declare that a win over Wall Street for Main Street."
"It's a way to give folks across the country some kind of a win even if it's an artificial win over the big bankers on Wall Street for causing the worst financial crisis in the country since the Great Depression," he said.
"The Obama administration has elections to win and there is one coming in November, two years after the financial crisis hit its apex in September 2008, and they had to get a bill done in time for that election.
"Otherwise Republicans would paint them as the party that was unable to reign in Wall Street for two years after the financial crisis."