Photographer: Andrew Harrer/Bloomberg

Wall Street Gets Early Win as House Tries to Ease Swaps Rules

  • Republican lawmakers approve legislation to rein in CFTC
  • Bill stalled last year, but might have new life under Trump

Republican lawmakers who want to rein in Wall Street’s watchdogs aren’t waiting around for Donald Trump.

In a likely preview of things to come, the GOP-controlled House passed legislation 239-to-182 Thursday that would make it much harder for the top U.S. regulator of the $544 trillion derivatives market to justify new rules.

The bill also could reduce the Commodity Futures Trading Commission’s authority over some swaps trades made overseas, even if the transactions involve U.S. banks. Wall Street and Republicans have sought such a change for years.

The derivatives legislation marks one of the first financial measures to advance in the new Congress. While a similar bill stalled in the Senate last year, Trump’s surprise victory in the presidential election has increased the prospects that at least some of its provisions will become law.

President Barack Obama had previously said he’d veto the legislation, but Trump has vowed to cut regulations and dismantle the 2010 Dodd-Frank banking reform law. Still, Republicans will likely need some Senate Democrats to back the CFTC measure for it to reach the president’s desk, a high hurdle.

Industry Lawsuits

The House bill requires the CFTC to perform a rigorous economic analysis of its rule proposals, essentially forcing the agency to more thoroughly show that the benefits of its regulations will outweigh the costs. Business groups, such as the U.S. Chamber of Commerce, have successfully sued Wall Street regulators in the past for failing to conduct adequate economic analyses of their rules.

Meanwhile, the bill’s provisions on cross-border swaps transactions direct the CFTC to define when firms can be exempted from U.S. rules. It would also give Wall Street firms a reprieve from some requirements when they trade derivatives between their own affiliates.

Companies and Wall Street traders use derivatives to protect themselves from swings in the valuations of everything from currencies to oil. The products drew blame for contributing to the financial crisis, and prompted the U.S. government to bail out firms at risk of collapsing because of swaps transactions they had entered into that were tied to the housing market. Dodd-Frank gave the CFTC authority over derivatives that were mostly unregulated before the 2008 meltdown.

The legislation passed by the House Thursday, sponsored by House Agriculture Committee Chairman Michael Conaway, broadly lays out the scope of the CFTC’s power to regulate banks, derivative exchanges and other traders.

Insufficient Funds

It would also make it harder for the CFTC to pass rules required under Dodd-Frank that cap how much traders can speculate on commodities, and set the the agency’s annual funding at $250 million, no change from when Congress last approved its budget in 2015. Outgoing CFTC Chairman Timothy Massad, a Democrat, has frequently argued that the agency lacks resources to handle all the new responsibilities it took on under Dodd-Frank.

While Conaway’s bill could advance on its own, some or all of it could also be attached to a broader financial reform package. Housing Financial Services Chairman Jeb Hensarling, a Texas Republican, plans to introduce sweeping bill to replace Dodd-Frank in the coming weeks.

The House passed a separate bill on Thursday that forces the Securities and Exchange Commission to bolster its economic analysis of proposed regulations. Ironically, while requiring more rigorous analysis might slow the CFTC and SEC down, it also might require the agencies to do more work to justify weakening rules that they implemented during the Obama administration.

The bills “could backfire on those looking to ease regulations on industry by throwing up new roadblocks to issuing guidance and revised rules,” said Tyler Gellasch, a financial services consultant who previously worked as a Democratic staffer on Capitol Hill.

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