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TABB Group On Senate Financial Regulatory Reform: Getting The Hill Out Of The Street
Getting the Hill out of the Street
By Kevin McPartland, Senior Analyst, TABB Group
The US Senate has passed its version of financial regulatory reform that will include serious changes, some expected, some not, specific to the OTC derivatives market. The passage of this bill will lead to a compromise bill created jointly by the House and Senate and ultimately President Obama signing it into law before 4th of July barbeques are under way.
Although its contents are questionable, getting the bill out of the Senate is a good thing as the Hill will finally be removed from the Street.
But as we’ve learned during the entire, multi-year reform process, the devil is really in the details and unfortunately many of the details continue to be a bit hazy. At last check, there were 434 proposed amendments to the Senate bill. Most of these amendments will fall by the wayside now as the Senate was anxious to move the process along, but sorting out and knowing what’s in, what’s out and what replaces what may well require a gaggle of Congressional staffers. Even with the final text made clear, most of us at TABB Group are left trying to decipher the “spirit” of the law.
I am not a congressional staffer (I prefer the subway frankly, not the Metro) but what follows are several of the key OTC derivative reform issues and where they stand.
Senator Blanche Lincoln put forth an amendment to replace the original OTC derivatives reform text in the Dodd Bill. It is the contents of the Lincoln Amendment that provides the Senate’s plan for OTC derivatives. Although the plan is similar to what the House passed in December 2009, it creates a more onerous (and market-growth inhibiting) structure for OTC derivatives. One provision within that amendment stands out above the others, and will continue to be the source of great debate as the bill goes to committee.
Senator Lincoln proposes that banks that trade OTC derivatives would no longer be allowed access to the Fed, FDIC or other emergency funding sources for banks. What this means in practice is that banks would need to spin off their swaps businesses into separate legal entities, a provision that is not good for the market, period (but that is a debate for another time).
We have learned through various sources that this provision may yet be dropped when the Senate and House meet to create a compromise bill. The support for this particular provision of the bill has decreased dramatically in Washington during the past weeks, making it less likely the proposal will become law. However, given the poor optics of being soft on banks, the escalating punitive nature of the regulation in recent weeks, the impending election and the stick nature of the Lincoln Amendment despite lobbying efforts the fate of this provision will remain unclear until a compromise bill is approved.
The so-called Volcker Rule that would ban banks from engaging in proprietary trading is also included in the Senate bill, despite the defeat of an amendment that would put additional restrictions on how banks trade with their own capital. Although this provision seems too extreme to make its way into the compromise bill, populist fervor and support from other prominent politicians makes possible some ban on proprietary trading at banks. This would have significant implications to bank earnings and the prominence of the US in the global capital markets.
Mandates for central clearing and trading through a registered execution venue are a near guarantee as both the Senate and House (not to mention Democrats and Republicans) see these moves as necessary to increase transparency and therefore reduce systemic risk. Exactly who falls under these mandates, however, continues to be a source for debate. The Senate bill provides few exemptions as compared to the House bill and would likely force firms with no systemic importance to centrally clear certain trades, which means they would need to put up additional margin, ultimately putting an undue burden on these organizations’ balance sheets. The exact wording of the law is also important. For example, if Swap Execution Facilities are defined as “trading facilities,” then technically, phone-based transactions would become illegal based on the definition in the Commodities Exchange Act.
Other amendments that passed increase the CFTC’s power in dealing with market manipulation, raise capital standards for banks trading OTC derivatives and put heavier regulations on the trading of mortgage-related derivatives. One notable amendment that was not passed was a proposed ban on the trading of naked credit default swaps. We’ll leave that to Germany for now.
For the next month, all eyes will be on the discussions between Representative Barney Frank and Senator Chris Dodd as they work out a compromise bill. The Lincoln proposal to spin-off swaps desks, a potential proprietary trading ban and far-reaching clearing and execution mandates could be game changers for the entire market based on the bill’s final wording. K Street lobbyists will remain close to the Hill to push for these proposals (such as those by Senator Lincoln to spin off bank swap desks and the Volcker Rule), to die.
The debate will not end at President Obama’s desk. As I’ve discussed in previous papers, the rule-writing process at the CFTC and SEC will become the next focus as regulators work to implement the laws passed by Congress. Keep an eye out for comment periods and continued fierce debate.
While the House bill may be closer to a realistic solution than the one passed by the Senate, the Senate bill may be closer to what gets passed, given the current, charged political environment and the pressure not to side with the banks.
TABB Group believes that the bill that passes will go inevitably too far in some cases, likely making the clearing mandate, for example, impact more firms that is necessary to reduce systemic risk. Unfortunately, this situation has become more about politics (bipartisan issues, reelections, etc.)And less about market structure.
Some reform is good, but going too far will be just like putting your car up on cinder blocks to ensure it doesn’t get into an accident.
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Another watered down bill to be signed, good luck with financial crisis V3.0.
Just cut the big banks into tiny, tiny pieces, resolve to let them fail, and none of this will be necessary.
How about getting the street out of the fucking hill?
I second that emotion.
This all consuming focus on a handful of WS entities that primarily speculate for their own books - is out of control. Just read " TBTF" - great book - but getting the same concern after reading it - You have the most powerful people in the country working round the clock to figure out the fates of these same handful of casinos. Why? Are they working round the clock on creating a huge new program to improve American technological lead/ Or create some new industry? or create jobs? No .
Problem is people in the Fed/Treasury are too imbedded in their own world view and backgrounds - all they know is WS and deal making - so that what they gravitate to. They lack perspective.
I wonder if we are like the Easter Islanders in their final years - vigorously debating who owns the right to the various stone statues - or some other such superstition. As they went into permanent decline.
The clowns currently sitting in our bicameral legislature are clearly not up to comprehending the nature of the speculative disease currently infecting our capital markets and thus incapable of passing any reform that would heal said markets. The same is true of their attempts to distort and manipulate said markets through GSEs, tax incentives, and all other manner of attempting to legislate morality among the fundamentally immoral.
Sadly, our judiciary has hamstrung any and all attempts to break the stranglehold that said clowns have on our electoral process.
It was a nice republic while it lasted.
Wait. What the fuck did I just read?
primefool,
Nice analogy, continuing to cut down what was left of their forests so that they could continue to roll ever more statues to their standing stones. Nice one.
DavidC
This is due to be signed by POTUS in early *July.* How many times will the *entire* game have changed by then? This will be changed or junked by then.
Old Joe Cassano and co. got their get out of jail card. or better yet, a do not prosecutecard. Long live the Corleone family!
Looks like this TABB guy is on the payroll of the TBTF banksters... pearls like "populist fervor" and "significant implications to bank earnings" and "prominence of the US in the global capital markets" speak for themselves. Never in his treatise he bothered to mention that this Bill is a BS passed by corrupt politicians to appease the gullible sheeple as if they are actually "fixing the system" to prevent the next financial collapse. He is not talking about risk reduction, or about bankrupt fractional system, or about "naked" shorts (the idea in and of itself as corrupt as Wall Street and the Hill themselves). He is only concerned about "bank earnings" (and bonuses, i suppose) and "banks prominence" -- since, of course THAT is what really important for the US economy and its people (God forbid banksters will earn less or seriously suffer from being less "prominent" than, say, French banksters at their next BBQ at IMF). I guess it is good to read what the Banksters' shills are pushing as "arguments" (in addition to a few more $000 under the table) to the pocket politicians who are there to "serve"...
FINANCIAL REFORM IS NEAR:
http://williambanzai7.blogspot.com/2010/05/financial-reform-is-near.html
TBTF - isn't that a required step in becoming TBTB (To Big To Bail)?
okay...posters here don't understand the dynamics of what's going on. (marla, you know I do.)
As I mentioned here last week, many key bank lobbyists were doing everything in their power to get the bill OFF the Senate floor. The amendments waiting in the wings were so bad, the banks had to stop the bleeding.
People are talking about the upcoming conference committee as though its an exercise between the House and Senate. That is FLAT OUT WRONG. The reason the Street is willing to risk billions on the conference committee is that the Admin. will have a HUGE SAY in the conference. (This is the under-reported reality from what I have seen.) That means The Street is hanging its biz on TG and BB. NOT on House and Senate conferees. Think about it; The Reps, who they trust, don't have the votes. The Dems have demonstrated that they can't be trusted...in spite of all that campaign money. Who is left?
The conference will last a month. Plenty of time for the Street to work out problems with the bill. And before anyone starts squawking at me, I think the bill stinks. Not because bank reform isn't long overdue, but because the whole foundation of this bill is ridiculous.
This bill should be about higher cap limits, more sunshine, changes in bankruptcy laws, (rather than new moronic bureaucracies.) Instead we are getting a massive bill...like healthcare...which insures that every bureaucrat from The Fed, SEC, Treasury, FDIC, etc. will have a high paying job after their federal service. What this bill does is insure the same hypocrisy that missed the dot.com and structured finance bubble will miss the next bubble as well. But don't worry the revolving door between Washington and Wall Street is preserved. Oh, one more thing, lobbyists will be working for years on this piece of crap. Remember SARBOX? Its a day at the beach by comparison.
Okay, so this was the Hill Bill. Does that mean that those who passed it could from now on be officially deemed as HillBillies?