The U.S. House Financial Services Committee approved legislation to limit the international reach of Dodd-Frank Act derivatives rules that banks said would hurt their ability to compete with foreign-based rivals.
The bipartisan measure, approved by a 41-18 vote at a committee meeting in Washington today, would restrict the 2010 law’s clearing, trading and collateral regulations from applying to trades between foreign-based affiliates of U.S. banks and their overseas clients.
“This bill seeks to do something very, very narrow,” said Representative Jim Himes, the Connecticut Democrat who is co- sponsor of the bill. “The notion that this is creating an unregulated environment for anybody is flat-out wrong.”
Lawmakers in the Republican-led House acted after Goldman Sachs Group Inc. (GS:US), JPMorgan Chase & Co. (JPM:US) and Morgan Stanley (MS:US) argued that applying the rules to their overseas branches would hurt their ability to compete with rivals based outside the U.S. The legislation would need passage by the full House and Senate before it could be sent to President Barack Obama for final approval. Neither chamber has scheduled a vote.
Dodd-Frank’s derivatives provisions were enacted as Congress sought to limit risk in the $708 trillion global swaps market after unregulated trades helped fuel the 2008 credit crisis. The Commodity Futures Trading Commission and Securities and Exchange Commission, the agencies assigned to write the rules, have yet to release proposals for defining their reach.
‘Eviscerate Our Ability’
Applying Dodd-Frank margin requirements to overseas swaps would “eviscerate our ability to serve clients overseas and cede the global market to foreign competitors,” JPMorgan Associate General Counsel Don Thompson said at a Financial Services Committee hearing Feb. 8. The International Swaps and Derivatives Association Inc. and Institute for International Bankers also backed the House measure.
An amendment to give the SEC and CFTC authority to impose margin and other requirements on trades with non-U.S. clients if they present systemic risks was rejected by the committee. Representative Barney Frank, the Massachusetts Democrat who co- wrote the 2010 law that bears his name, sponsored the amendment to provide a safety net even if the norm would be that it wasn’t necessary.
It would be a “very very grave error” to not have such a backstop, he said before the vote. “The bill as it is presented to us leaves us no residual authority to step in,” Frank said.
The House panel approved by voice vote legislation that would repeal Dodd-Frank’s requirement that foreign governments indemnify swap data repositories and U.S. regulators for litigation costs. The SEC has urged Congress to repeal the provision, saying it would inhibit access to market data.
Foreign regulators lack authority to provide the indemnification, which could lead to fragmentation of market information, Ethiopis Tafara, the SEC’s head of international affairs, told lawmakers on March 21.
“This bill is an important first step in helping to develop a global trade repository system to support systemic risk management and oversight,” Dan Cohen, managing director and head of government relations for the Depository Trust & Clearing Corp., said in an e-mail after the vote. DTCC provides clearing, settlement and information services for financial instruments including over-the-counter derivatives, according to its website.
The panel also approved the Emergency Fiscal Solvency Act, which would require the Federal Housing Administration to set a minimum annual mortgage premium. It would ban lenders with high- default rates from participating in FHA programs, and would force fraudulent lenders to repay FHA losses.
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