U.S. regulators face renewed pressure from congressionallawmakers to ease Dodd-Frank Act derivatives requirements amidmounting criticism from Wall Street and overseas officials that therules overreach.

The House Financial Services Committee is scheduled to vote onnine measures that would allow more swaps to be traded in units ofbanks such as JPMorgan Chase & Co. and Citigroup Inc. that holdgovernment-insured deposits. One measure would force U.S.regulators to determine the cost of new Basel III capital chargeson banks' swaps with corporate clients.

The measures, which would need approval from the House andSenate before heading to President Barack Obama, are part of aneffort by big banks and their congressional supporters to amend orlimit the regulatory overhaul the president signed into law lessthan three years ago. Dodd-Frank requires the Commodity FuturesTrading Commission and Securities and Exchange Commission to createswap-market rules after largely unregulated trades helped fuel the2008 credit crisis.

Congressional efforts to change the law have so far failed towin passage as the CFTC and other regulators seek to finish writingregulations. Representative Jim Himes, a Connecticut Democrat whowrote legislation that would alter Dodd-Frank, said the billsprobably won't become law.

“If I were betting, I would say none of these bills will becomelaw,” Himes said at a Bloomberg Government breakfast in Washingtonon April 25. “I don't think there's a lot of appetite in the Senateto get into which of these bills make sense and how are theybalanced.”

One measure calls for altering a requirement that banks withaccess to deposit insurance and the Federal Reserve's discountwindow move some derivatives trades to affiliates that have theirown capital. Commodity, equity and structured swaps tied to someasset-backed securities would be allowed in such banks under thelegislation.

Representative Maxine Waters, the top Democrat on the HouseFinancial Services Committee, said last year that “legitimateconcerns have been raised about whether pushing a significantportion of swaps out of banks is the best way to mitigate againstfuture systemic risk.”

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

A second bill, supported by the Securities Industry andFinancial Markets Association, as well as Philadelphia-basedchemical company FMC Corp., would require the U.S. FinancialStability Oversight Council to examine the costs of internationalBasel capital charges for derivatives.

EU Exemptions

European Union lawmakers insisted on granting exemptions inBasel rules from the credit valuation adjustment, or CVA, to banks'trades with companies in industries such as energy and chemicalsthat use swaps to hedge against price swings. The Europeanlawmakers warned that applying the Basel rules as planned woulddrive up such companies' costs.

The House measure requires the 10-member council, led byTreasury Secretary Jacob J. Lew, to determine the costs to U.S.bank competitiveness from the differences in capital regulationsand recommend ways to limit the impact.

The EU's exemption for non-financial companies was necessarypartly to counter “an inbuilt bias” toward the U.S. in this part ofthe Basel rules, Sharon Bowles, the chairwoman of the EuropeanParliament's economic and monetary affairs committee, said in aninterview.

This bias arises from a requirement that firms calculate the CVAby seeking data from the market on how risky their counterparty isperceived to be.

Under the Basel rule, this is done either by looking at thepremium that companies' have to pay to take out credit defaultswaps that insure them against losses on the counterparty's debt,or by examining the price movements of other co-called proxysecurities.

The deep liquidity of U.S. bond markets, and consequent highprobability that a trader can hedge at an acceptable price, couldfavor U.S.-based banks in this respect, Bowles said. “It'snot that we want special treatment for Europe, it's just that themodel of using proxies to calculate the risk doesn't seem to workanywhere else than the U.S.,” said Bowles, who led calls to writethe exemption into the EU's Basel III law. “In Europe, we wouldhave ended up with an artificially high charge.”

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