A group of House Democrats wants congressional leaders to change rules on how swaps can be traded and drop a plan to separate derivatives trading from commercial banking as the U.S. overhauls its financial industry.
The 69-member New Democrat coalition drafted a letter to lawmakers who are meeting to reconcile House and Senate overhaul measures. The letter supports an independent consumer protection agency, allowing the U.S. to dismantle failing financial firms and removing a fiduciary duty standard applied to banks selling swaps to municipalities, according to a copy of the letter that was obtained by Bloomberg News.
To redo the $615 trillion over-the-counter derivatives market, lawmakers have focused on requiring most swap trades be processed by clearinghouses and traded through regulated exchanges such as Chicago-based CME Group Inc. or on so-called swap execution facilities. Senate plans, which are the basis for the conference committee bill, are more restrictive on how swaps can trade than what the House passed in December.
The Senate bill “does not provide a workable definition for a trade execution facility or appropriate direction to the regulators that will allow them to evaluate the impact of exchange trading or clearing” on how often swaps are traded, what’s known as liquidity, the letter said.
With 69 votes in the House, the New Democrats have become a growing force within their party and can prevent legislation from passing if they vote together, assuming no Republican support. The group is chaired by Rep. Joseph Crowley of New York. Its vice-chairmen are Melissa Bean of Illinois, Ron Kind of Wisconsin, Adam Smith of Washington and Allyson Schwartz of Pennsylvania, according to the group’s website.
Adam Pace, executive director of New Democrat Coalition, didn’t immediately return a call and e-mail seeking comment. None of the New Democrat members signed the letter obtained by Bloomberg News.
How credit-default or interest-rate swaps are allowed to be traded under the new law is a contentious area of regulation for banks because of the wide profit margin they make by keeping their prices private. A change in the definition of swap execution facility would be at least the fifth time the rules have been altered since House began considering changes last year.
The five largest U.S. dealers, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., earned an estimated $28 billion in trading revenue in the over-the-counter derivatives market last year, according to reports from the New York-based banks collected by the Federal Reserve and people familiar with banks’ income.
The letter is being sent to New Democrat members for signatures of support and is expected to be forwarded today to Representative Barney Frank, the Democrat from Massachusetts who is chairman of the conference committee reconciling the bills.
The Senate approved a bill last month that included a proposal by Senator Blanche Lincoln, an Arkansas Democrat, to prohibit commercial lenders from running swaps desks. It may cost banks more than $200 billion, the Securities Industry and Financial Markets Association, a financial industry lobbying group, estimated in April.
The letter opposes the Lincoln plan and says it would increase systemic risk by “forcing derivatives transactions into less regulated and less capitalized institutions and impede effective regulatory oversight of the derivatives markets.”