U.S. House and Senate lawmakers introduced legislation that would allow more swaps trading to be conducted at banks that have federal insurance by repealing part of the Dodd-Frank Act.
The bipartisan measures call 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 that have their own capital. Commodity, equity and structured swaps tied to some asset-backed securities would be allowed in banks under the legislation.
“People who object are going to say this allows banks to take huge risks. Not true,” said Representative Jim Himes, a Democrat from Connecticut who is among the bill’s sponsors. “It’s going to allow them to maintain inventory of the swaps that their customers need to buy from them; just the same way when you go to buy a car from a car dealer.”
The legislation, which would need approval by Congress before heading to President Barack Obama for signature, is part of a series of congressional efforts to amend or limit Dodd-Frank’s derivatives regulations. Dodd-Frank requires the Commodity Futures Trading Commission and other regulators to write rules to reduce risk and increase transparency in the market after swaps helped fuel the 2008 credit crisis.
Congressional efforts to change the law have so far failed to win passage in Congress, while the CFTC and other regulators seek to finish writing regulations.
The legislation was introduced today by Senators Kay Hagan, a North Carolina Democrat, Pat Toomey, a Pennsylvania Republican, Mark Warner, a Virginia Democrat, and Mike Johanns, a Nebraska Republican. The House measure was introduced by Himes as well as Representatives Randy Hultgren, an Illinois Republican, Richard Hudson, a North Carolina Republican, and Sean Patrick Maloney, a New York Democrat.
Blanche Lincoln, an Arkansas Democrat who led the Senate Agriculture Committee during talks leading to the regulatory overhaul, sponsored the original so-called pushout 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.
Representative Maxine Waters, the top Democrat on the House Financial Services Committee, said last year that “legitimate concerns have been raised about whether pushing a significant portion of swaps out of banks is the best way to mitigate against future systemic risk.”
Americans for Financial Reform, a coalition including the AFL-CIO labor federation as well as other unions and consumer advocacy groups, has opposed changes to the push-out rule.