Warren Puts $10 Trillion Price Tag on Swaps Rule Partial Repeal

  • Lawmakers say Dodd-Frank revision let banks keep risky trades
  • Letters urge SEC and CFTC to respond to legislative reversals

U.S. Sen. Elizabeth Warren (D-MA) addresses the 10th annual Make Progress National Summit on July 16, 2015 in Washington, DC.

Photographer: Chip Somodevilla/Getty Images

Two of Congress’s leading Wall Street critics have tried to put a price tag on one of the finance industry’s biggest wins in Washington in recent years, claiming that the 2014 rollback of a controversial swaps measure has allowed banks to keep $10 trillion of risky trades on their books.

Senator Elizabeth Warren and Representative Elijah Cummings based their calculation on letters from financial regulators that detailed the impact of the revision to the Dodd-Frank Act. While the two Democratic lawmakers failed to keep the change out of must-pass spending legislation at the end of 2014, they’re using their estimate to try to prevent the Republican-led Congress from giving banks similar relief this year.

In letters to the Securities and Exchange Commission and the Commodity Futures Trading Commission Warren and Cummings called on the agencies to counteract the legislative rollbacks as they complete rulemaking under Dodd-Frank, the law passed five years ago in response to the 2008 financial crisis. In a separate letter, they called on the Government Accountability Office to investigate the impact of last year’s reversal of a provision requiring banks to separate swaps trading from deposit-taking units.

“While the Dodd-Frank rollback and the weak margin requirements imposed by prudential regulators have created new risks for taxpayers and the financial system, your agencies are in position to mitigate these risks,” Warren of Massachusetts and Cummings of Maryland said in the letter to the SEC and CFTC. The lawmakers said their letters represent the first investigation into the impact of the change as regulators failed to “fully assess the economic and taxpayer risk.”

The new letters were prompted by responses to requests for information from financial regulators including the Federal Reserve and Federal Deposit Insurance Corp., that Warren and Cummings used to study the impact of last year’s changes. The lawmakers previously said JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc. provided insufficient responses to questions they sent earlier this year.

The regulators said the derivatives affected included commodity, equity and credit default derivatives, representing only 4.4 percent of outstanding derivatives contracts.

Banks have argued that those notional derivatives numbers, which represent the face value of transactions, overstate the actual risk to lenders. In a letter this year to Warren, Bank of America said the number “fails to account for how credit risk is managed and mitigated.”

Last year’s battle over the so-called swaps pushout provision was one of the most contentious fights since the law was enacted. Banks prevailed in December in a near-full repeal of the requirement after lobbying by the financial industry, including JPMorgan Chief Executive Officer Jamie Dimon, to get lawmakers to support the change. Banks argued that the requirement presented unnecessary costs that complicate their ability to trade with clients.

Bank lobbyists are once again trying to force the Obama administration into a game of chicken to see how far it’s willing to go to maintain industry reforms. Warren, fellow Democrats and the administration have been engaging early to thwart attempts to weaken the Dodd-Frank by including changes to this year’s spending bill.

Bank regulators “backed down” on critical rules when they finalized a rule in October that would govern how much money financial firms must set aside in derivatives deals, Warren and Cummings said. They also urged regulators to stand against the banking industry’s efforts. She called on the SEC and CFTC to ignore industry lobbying and avoid backing down on an upcoming margin rule.

“We write today to urge that you act quickly to mitigate the risks posed by uncleared swap activities by imposing strong margin requirements for swaps between bank affiliates and other entities under your agencies’ authority,” the lawmakers wrote.

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