Swaps Bill Offers Dodd-Frank Dodge, Consumer Group Says

Big banks like Citibank, JPMorgan Chase could avoid derivatives rules by dealing through foreign affiliates, group says in letter

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Consumer groups are coming out against H.R. 3283, the Swaps Jurisdiction Certainty Act, which was being marked up on Tuesday by the House Financial Services Committee. The groups say it would effectively allow U.S. financial firms with an international presence, like Citibank and JPMorgan Chase, “to avoid Dodd-Frank derivatives regulation simply by dealing through their foreign affiliates.”

In a March 27 letter to members of the committee, Americans for Financial Reform writes that the swaps bill, introduced last October by Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Subcomittee on Capital Markets, “would undermine” the regulatory regime for derivatives laid out by Congress in the Dodd-Frank act “by exempting any derivatives transaction between a U.S. swap dealer and a non-U.S. entity from all the major protections contained in Title VII of the Dodd-Frank Act,” with the one exception being reporting requirements to regulators.

“Because the definition of non-U.S. entities would include many foreign affiliates, U.S. firms could easily avoid U.S. derivatives regulation by routing transactions through their overseas subsidiaries,” the letter says. “This would not be difficult for a large financial institution to do. Major Wall Street banks have at minimum hundreds of subsidiaries in dozens of countries, and the largest can have thousands.”

For example, the letter states that as of 2007, Citibank had over 2,400 different subsidiaries in 84 countries, while JPMorgan Chase had over 800 subsidiaries in 36 countries.

Even more important, the letter goes on to say, “major banks manage the cash flow from these entities on a consolidated basis, so that money can flow at the touch of a computer keyboard from any one entity to any other.”

Members of Americans for Financial Reform argue in their letter that “although swap dealers would be able to evade derivatives regulation using the exemptions in H.R. 3283, the U.S. economy could not evade the fallout from derivatives risks taken by internationalized companies. …Integrated financial companies rely on global cash flows, and losses in foreign subsidiaries can be disastrous to the parent company.”

The letter then notes that AIG was exposed to “massive derivatives losses through an affiliate located in London, AIG Financial Products, and that almost $40 billion of the U.S. taxpayer bailout of AIG was paid to foreign bank counterparties.”

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