Two key Republican lawmakers urged financial regulators to slow down the progress of new rules for the nearly $500 trillion over-the-counter derivatives market, an early sign that the new Republican House majority aims to delay and scale back the landmark financial regulatory overhaul that President Obama signed into law in July.
"As our economy slowly recovers, we have serious concerns that the Dodd-Frank bill for Wall Street reform will force American companies, which did not cause nor contribute to the financial crisis, to move billions of dollars in capital onto the sidelines to comply with the law," Reps. Spencer Bachus, R.-Ala., and Frank Lucas, R.-Okla., wrote in a letter dated Thursday, Dec. 16, to the heads of the Treasury Department, Securities and Exchange Commission, Federal Reserve Board and Commodity Futures Trading Commission. The two are the incoming chairmen of the House Financial Services and Agriculture Committees, respectively.
The Republicans' strategy is to delay implementation of the Dodd-Frank legislation until 2012, in hopes that a new Republican president and Senate will roll back or repeal the law, said David Min, associate director for financial markets policy at the Center for American Progress.
"They're trying to run out the clock a little bit," Min said. "They will try to delay the process through hearings, through tough letters and proposed legislation, but ultimately the presidency is held by Obama and the Senate is held by Democrats."
Scott Talbott, senior vice president of the Financial Services Roundtable, noted that Dodd-Frank calls for over 300 separate rulemakings by the various financial oversight agencies.
"If the rules are written too constrictively, it will stifle economic recovery and put the U.S. at a competitive disadvantage," Talbott said. "While it's important to get the substance right, it's just as important to get the timing right."
Also on Thursday, the CFTC voted to move forward on the eighth set of new derivatives rule proposals, part of the Dodd-Frank mandate to shed light on the opaque derivatives markets, prevent manipulation and bring the majority of market activity, possibly 80 or 90 percent, onto clearinghouses and centralized trading facilities. Derivatives — financial contracts whose value is based on the price of an underlying asset such as a commodity, interest rate or currency — have been a driving force behind excessive Wall Street profits in recent years.
At stake in the 30 rulemakings before the commission is which market participants will profit from derivatives trading and how much new oversight will cost. The commission aims to make the complex market more transparent to avoid a repeat of the 2008 financial crisis, when uncertainty about which institutions were exposed to losses caused capital markets to freeze up and threatened a chain reaction of bank failures. Big corporations want to avoid falling subject to requirements aimed at derivatives dealers, while financial institutions want to protect their profit margins and preserve the ability to innovate, which caused OTC derivatives to explode in volume over the last two decades.
Bachus and Lucas wrote that regulators should:
- Exempt “end users” from having to set aside cash to cover their derivatives trades, known as margin. End users are companies that use derivatives only to protect against business losses, rather than to speculate or serve as a dealer.
- Narrowly define who is considered a dealer or participant in the derivatives markets.
- Exempt currency swaps and forward contracts from having to be cleared and traded on exchanges.
- Guard against "a forced concentration of risk onto a few exchanges, trading platforms or execution facilities."
"We stand ready to work with you even if that means we all consider delaying statutory deadlines or moving forward with legislation to preserve a viable American derivatives marketplace," the letter concluded.
While the CFTC is an independent federal agency, Congress oversees the commission and approves its budget. CFTC Chairman Gary Gensler has stressed the enormous demand the Dodd-Frank rulemakings have put on his staff in his request for additional funding next year.
Min noted that the letter echoes comments from financial services industry lobbyists, and cited a recent Bachus interview in which he said, "Washington and the regulators are there to serve the banks."