House Subcommittee Examines Derivatives Proposals

Commentary by Nihal Patel

The Subcommittee on Capital Markets, Securities and Investments reviewed legislative proposals relevant to derivatives end users.

ISDA CEO Scott O'Malia and SIFMA President and CEO Kenneth Bentsen testified in support of several recommendations to improve the current framework for the regulation of swaps and derivatives markets, including:

  • domestic and global harmonization of rules, as well as other efforts to simplify and streamline rules;

  • exemption of inter-affiliate swaps from initial margin requirements;

  • harmonization of SEC and CFTC rules; and

  • amendments to the supplemental leverage ratio to exempt margin posted by clients.

Mr. O'Malia advocated for a retention of the current $8 billion de minimis threshold. Mr. Bentsen said that any determination as to the threshold must appropriately take into consideration cross-border registration implications.

Thomas Deas, Chair of the National Association of Corporate Treasurers and Representative for the Coalition for Derivatives End-Users, emphasized the importance of reducing burdens and costs. He called for an end-user exemption from the Credit Valuation Adjustment capital charges. He argued that, without an exemption, institutions pass along costs to end-users, causing them to pay more for swaps executed with U.S. banking institutions. Mr. Deas also advocated for several proposals intended to ease both costs and complications for end-users.

Andy Green, Managing Director of Economic Policy at the Center for American Progress, argued against the bills presented at the hearing. He said that they "hack away" at the foundation of U.S. financial regulation, and encouraged the SEC to finish its Dodd-Frank rulemaking.

Commentary

None of the legislative proposals addressed at the hearing (the text of which are linked from the hearing page on the committee website) makes drastic changes to the regulation of derivatives under Title VII of Dodd-Frank. The majority of the proposals address relatively technical, but important, aspects of derivatives regulation, including: (i) harmonization of comparable SEC and CFTC rules; (ii) excluding certain entities (including private funds and commodity pools) engaged in limited financial activities from the definition of "financial entity" for purposes of mandatory clearing of swaps; and (iii) a broader exclusion of inter-affiliate transactions from swap regulation.

A number of these proposals have been circulating in some form over the past few years. A handful were included as provisions of the "Financial CHOICE Act" passed by the House in 2017. In theory, these proposals should have greater chance of passage in their current form; i.e., as individually tailored solutions intended to address specific issues, rather than as part of a wide-ranging overhaul of financial regulation. It remains to be seen whether, in this form or any other, these proposals stand much chance of passage given the current political climate.

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