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SEC rules on swaps reporting, Dodd-Frank rollback, big banks

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(Bloomberg) — U.S. regulators adopted rules that will require most swaps trades to be publicly reported, a response to lax derivatives oversight in the run-up to the credit crisis.

The rules approved yesterday by the Securities and Exchange Commission call for an interim period during which all swaps must be reported to public databases within 24 hours. Regulators said the requirements could change as they study how the reporting affects the cost and ability of banks and other firms to make large trades.

The regulations are the latest step in efforts by the SEC and the Commodity Futures Trading Commission to boost transparency in the swaps market, more than six years after the collapse of Lehman Brothers Holdings Inc. and the government rescue of American International Group Inc., which was partly rooted in unregulated swaps.

By creating a record of swaps trades, regulators aim to monitor for systemic risk while giving investors a better idea of fair prices.

JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley control 95 percent of cash and derivatives trading for U.S. bank holding companies as of Sept. 30, according to the Office of the Comptroller of the Currency. While the CFTC oversees the bulk of the market, the SEC regulates swaps based on a single company’s bonds or loans, equities and indexes based on nine or fewer securities.

The CFTC has already approved rules that require dealers and other investors to provide information to the databases and the public.

Banks have lobbied for reporting delays for large trades, an issue the SEC said it would continue to study.

SEC Commissioners Daniel Gallagher and Michael Piwowar, both Republicans, voted against the rules yesterday, citing an objection to the inclusion of heightened liability measures for employees of swap data repositories.

Congressional vote on Dodd-Frank

House Republicans made one of their first attempts in the new Congress to roll back Dodd-Frank constraints on Wall Street, in what has poised to become a recurring battle with Democrats who oppose changing the law.

Yesterday’s 271-154 vote on legislation to delay aspects of the Volcker Rule restriction on banks’ making risky investments followed a failed effort to advance the bill last week. The measure faces an uncertain path in the Senate, and President Barack Obama has indicated he will veto the legislation if it reaches his desk.

The bill, which includes measures that passed the House with bipartisan support last year, would give banks until July 2019 to sell certain securitized pools of commercial and corporate debt. House passage moves the measure to the Senate, which didn’t take up last year’s version while under Democratic control.

The Volcker Rule is a key provision of the law that bars banks from making trades with their own capital and restricts their investments in hedge funds and private-equity.

The legislation approved by the House yesterday would allow banks to hold on to investments in collateralized loan obligations until July 2019. The Federal Reserve had already granted a two-year delay until July 2017.

Risks multiply in China’s online loan sites as regulators watch

Rising failures in China’s peer-to-peer lending industry may pressure authorities to regulate a segment of Internet finance that almost quadrupled in size last year.

The number of platforms that went bankrupt or had difficulty repaying money climbed to 275 in 2014 from 76 a year earlier, according to Yingcan Group, which tracks China’s more than 1,500 online lending sites. Last month, police started investigating the originator of two Sina Corp. wealth products for illegal fundraising.

The swift expansion of online peer-to-peer lending, which Yingcan estimates grew to almost $17 billion last year, is part of a wave of financial innovation in China. For now, the government is leaving the industry largely unregulated, betting that the economic gains from extra channels for funding outweigh the potential for investor losses.

Peer-to-peer lending sites are online marketplaces that match investors with individuals and small businesses seeking loans for activities from stock investing to home and car purchases. More than 1 million Chinese investors loaned money through these platforms last year, nearly four times the total in 2013, according to Yingcan.

Outstanding credit surged to 103.6 billion yuan ($16.7 billion) from 26.8 billion yuan in 2013, the consultancy said in a report this month.

China’s government is fostering innovation to improve smaller companies’ access to funding and give market forces a greater role to sustain the growth of a slowing economy.

Breaking up big banks creates new problems

Jim Sinegal, an analyst at Morningstar Inc., talked about JPMorgan Chase & Co.’s fourth-quarter earnings reported yesterday and the state of the banking industry.

“A lot of potential improvement in earnings is out of management’s hands,” Sinegal said, referring partly to regulators and compliance expenses.

Sinegal spoke with Betty Liu on Bloomberg Television’s “In the Loop.”

–With assistance from Dave Michaels, Silla Brush and Cheyenne Hopkins in Washington and Aipeng Soo in Beijing.