WASHINGTON The House Financial Services Committee passed nine bills largely related to the derivatives market on Tuesday, exposing critical divisions among Democrats on the panel.
The provisions would make key changes to Title VII of the Dodd-Frank reform law. Most of the bills received bipartisan support, though Rep. Maxine Waters, the top Democrat on the panel, voted against several key measures.
"As we approach the three-year anniversary of the passage of the [Dodd-Frank] Act, with only about one-third of the required rulemakings having been completed, I am exceedingly nervous about re-opening the bill and making major adjustments to what is still an unfinished project, particularly with regard to the derivatives reform we accomplished under Title VII of the Act," the California Democrat said in her opening statement. "And especially on issues where regulators have the authority under the Wall Street Reform Act to address any legitimate issues raised by the industry, I am concerned about legislation that might tie their hands or constrain their ability to respond to evolving markets."
The bills passed by the banking panel cover a range of issues, from when swaps can be traded between company affiliates to how swaps are regulated internationally. Several minor bills were passed unanimously by members of both parties, and Democrats were united in voting against one bill, passed with support from the GOP majority, which would require the Securities and Exchange Commission to conduct a rigorous cost-benefit analysis of each of its rules. Many of the other provisions, however, including some of the most critical ones for the industry, were subject to lengthy debate.
Supporters of a bill to narrow the types of swaps that must be "pushed out" of a bank and into an affiliate balked, for example, when Waters expressed concern about the measure after supporting it last Congress.
"We're smarter now, we know a lot more about derivatives and we certainly know a lot more about [the Volcker rule] than we did before," she told lawmakers, including Rep. Jeb Hensarling, R-Texas, the committee chairman, who expressed confusion over her change of heart.
Several Democrats, including Rep. Edwin Perlmutter, D-Co., defended the provision, H.R. 992, against a variety of concerns, including that the bill could expose taxpayers to another bailout due to the presence of risky derivatives trades.
"The chief criticism of H.R. 992 is that it opens the door to taxpayer bailouts," he said. "There is no swap, no derivative, or security which is in any way exempted from the very clear legal prohibition on any taxpayer bailout of swaps activity."
But others warned that the legal prohibition contained in section 716 of the Dodd-Frank Act isn't enough.
"That provision in the law says that there shall be no bailouts. To me that's kind of like saying there will be no more murder' and expecting there won't be any," said Rep. Keith Ellison, D-Minn., warning that the bill could be creating the conditions that would make such a bailout necessary regardless of what the law says. The bill passed the committee by a vote of 53-6.
Waters also spoke out against a bill, H.R. 1256, that would require the SEC and the Commodity Futures Trading Commission to harmonize their regulation of cross-border swaps and would exempt traders in G-20 countries from complying with U.S. rules unless regulators determine the country does not have "broadly equivalent" regulations.
The California Democrat offered an amendment to the bill that would require regulators to instead determine which countries had regulations that were "broadly equivalent" rather than assuming all were unless otherwise determined, a move that some lawmakers opposed.
"This one maybe turns it on its head a little bit in terms of what we're trying to do," said Rep. Scott Garrett, R-N.J, referring to the effects of the Waters amendment.
The amendment, which was then further amended by Rep. John Carney, D-Del., to minimize its impact, was ultimately voted down along party lines, while the cross-border swaps bill passed the committee by a vote of 48-11. The banking panel also approved an amendment by Rep. Dan Kildee, D-Mich., to focus the bill's cross-border exemption not on G-20 countries but on traders operating in the nine largest swap markets around the world.
Additionally, lawmakers clashed over a bill, H.R. 677, which would allow certain swaps made within affiliates to be exempt from reporting, clearing and other requirements. The bill differs from a version that passed the committee last year by excluding insured depositors from being eligible for the exemption.
Reps. Steve Stivers, R-Ohio, and Gwen Moore, D-Wisc., two of the bill's sponsors, introduced an amendment on Tuesday to take the issue one step further excluding all depository institutions and bank holding companies from the swaps requirements as well. The committee accepted that amendment, while a second amendment by Moore to restrict the inter-affiliate swaps exemption largely to U.S. traders, failed by a vote of 24-33, after being vigorously debated by lawmakers.
Waters said during discussion over the bill she generally agreed that some swaps should be exempted from the rigorous swaps requirements laid out in the Dodd-Frank law, but questioned the need for the bill after the CFTC has already taken action on the issue and raised concerns about whether the exemption could import added risk back into the country.
"We should not unnecessarily remove this important regulatory tool," she said.
The California Democrat ultimately voted against the bill, which passed the committee 50-10.