Wall Street Wins Under Swap-Rule Changes Moving in House

U.S. House lawmakers advanced legislation that would ease Dodd-Frank Act derivatives rules and give banks greater ability to trade swaps overseas.

The House Agriculture Committee voted today to move seven measures, including one to allow trading of almost all types of derivatives by units of banks that hold government-insured deposits -- such as JPMorgan Chase & Co. and Citigroup Inc. A separate bill would restrict U.S. regulators’ ability to apply rules to overseas transactions.

The measures, which would need approval from the House and Senate before heading to President Barack Obama, are part of an effort to amend or limit the regulatory overhaul the president signed into law less than three years ago. Dodd-Frank requires the Commodity Futures Trading Commission and Securities and Exchange Commission to create swap-market rules after largely unregulated trades helped fuel the 2008 credit crisis.

The bills are “common-sense tweaks,” Representative Frank Lucas, the Oklahoma Republican who leads the agriculture panel, said at the meeting. “They are intended to restore the balance that I believe can exist between sound regulation and a healthy economy.”

The lawmakers are working to undo Dodd-Frank provisions even as the CFTC and other regulators are trying to complete the overhaul. The House panel’s moves were assailed by Senator Carl Levin, the Michigan Democrat who last week released a report and held a hearing on a derivatives bet that cost JPMorgan more than $6.2 billion in 2012.

‘Watering Down’

“Last year, some members of Congress supported watering down Dodd-Frank derivative safeguards, but abandoned those efforts after the world learned that JPMorgan Chase had lost billions of dollars on derivative trades,” Levin said in a statement. “It is incredible that less than a week after new JPMorgan Whale hearings detailed how the bank’s London office piled up risk, hid losses, and dodged regulatory oversight, that some House members are again supporting the weakening of derivative safeguards.”

One measure, approved on a 31-14 vote, calls for altering a requirement that banks with access to deposit insurance and the Federal Reserve’s discount window move some derivatives trades to affiliates that have their own capital. Commodity, equity and structured swaps tied to some asset-backed securities would be allowed in banks under the legislation.

“You’re putting the taxpayers on the hook,” said Representative Collin Peterson of Minnesota, the panel’s top Democrat, at the hearing. “This could come back to haunt you.”

Opposed Changes

Americans for Financial Reform, a coalition including the AFL-CIO labor federation as well as other unions and consumer groups, has opposed changes to the so-called push-out rule.

A second bill would require the CFTC and SEC to complete joint rules defining when swaps rules apply to cross-border transactions. The full rulemaking process requires agencies to conduct analysis of costs and benefits; federal courts have overturned rules based on inadequate economic assessments.

The CFTC’s proposed guidance, which lacks an economic analysis, has spurred opposition from JPMorgan, Goldman Sachs Group Inc. and other U.S. banks, which say they will be hurt compared with foreign-based rivals.

“What this bill is is an attempt to derail the guidance and tie down the ability of the CFTC to do anything,” Marcus Stanley, policy director for Americans for Financial Reform, said in a telephone interview.

Joint Determination

Representative David Scott, a Georgia Democrat, said the measure allows the two agencies to jointly determine if rules should apply to certain countries. He said Dodd-Frank’s other requirements for bank registration and higher collateral and clearing standards limit the “re-importation of risk” from other countries.

Additional legislation approved today exempts commercial and manufacturing so-called end users from having to post collateral to support trades. A separate bill advanced prevents trades between company units from being considered swaps and subject to clearing and other Dodd-Frank regulations.