U.S. House Panel Approves Measure Limiting Swaps ‘Push-Out’

The U.S. House Financial Services Committee approved legislation that would let banks keep commodity and equity derivatives in federally-insured units by removing part of the Dodd-Frank Act’s so-called push-out rule.

The bipartisan measure, approved today by voice vote, calls for altering the 2010 law’s requirement that banks with access to deposit insurance and the Federal Reserve’s discount window move some derivatives trades to separate affiliates.

Blanche Lincoln, an Arkansas Democrat who led the Senate Agriculture Committee during talks leading to the regulatory overhaul, sponsored the original provision as a way to limit taxpayer support for risky derivatives trades. Fed Chairman Ben S. Bernanke and Sheila Bair, the former Federal Deposit Insurance Corp. chairman, opposed the provision and argued that it would drive derivatives trading to less-regulated entities.

“I never myself thought it made a great deal of sense,” Representative Barney Frank said today of the original measure. “Passing this bill particularly as amended will not in any way, shape or form reduce sensible regulation of derivatives,” said Frank, the Massachusetts Democrat who co-wrote the law that bears his name.

The measure was included in the final Dodd-Frank bill to help secure Senate passage, he said.

The bill approved today was sponsored by Representatives Jim Himes of Connecticut and Carolyn Maloney of New York, both Democrats, and Nan Hayworth, a New York Republican.

Subprime Mortgages

Dodd-Frank requires that equity, some commodity and non- cleared credit derivatives be pushed out into affiliates. The revision would allow non-structured finance swap activities and structured finance trades tied to assets with high credit quality to remain in bank divisions with insured deposits. Structured swaps tied to asset-backed securities comprised of subprime mortgages would still be pushed out, Himes said.

The legislation would need approval by the full House and Senate before heading to President Barack Obama for signature.

“We are also concerned that clients will migrate their swap contracts to other entities which are not subject to prudential regulation by federal regulators,” Kenneth E. Bentsen Jr., executive vice president for public policy at the Securities Industry and Financial Markets Association, said in a letter supporting the legislation. “As a result, systemic risk may be increased instead of reduced.”

Sifma represents JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. (C) among other banks that have swaps in their insured depository arms.

Americans for Financial Reform, a coalition including the AFL-CIO labor federation as well as other unions and consumer advocacy groups, opposed changes to the push-out rule in a letter before the vote.

Consumer Bureau

The panel also approved by voice vote a measure aimed at protecting attorney-client privilege on information banks provide to the Consumer Financial Protection Bureau. The proposal, which has the support of Richard Cordray, the bureau’s director, would apply the same information protection guidelines as are followed by the other banking regulators.

Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, and Senator Richard Shelby of Alabama, the top Republican on the panel, have introduced a similar proposal.

Two Bills

The committee also approved a bill 54-1 that would ease disclosure requirements for smaller companies seeking public offerings, saying “emerging growth” companies that make less than $1 billion in annual revenue should get a five-year “on ramp” that lessens their burdens for going public. The bill, which passed with bipartisan support, is similar to Senate legislation awaiting its own committee vote.

The panel approved a measure from Representative Scott Garrett, a New Jersey Republican, to require the U.S. Securities and Exchange Commission produce a full cost-benefit justification for any rule before the regulator issues it. The agency last year suffered a court rejection of its rule that would have eased shareholders’ ability to put board candidates on corporate ballots because of inadequate cost-benefit analysis.

The panel approved the measure along party lines, 30-26.

To contact the reporters on this story: Silla Brush in Washington at sbrush@bloomberg.net; Phil Mattingly in Washington at pmattingly@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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