CCH Financial Reform News Center

Lincoln-Feinstein Colloquy Reveals that CFTC Should Prohibit Event Derivatives Contracts as Against the Public Interest

This story appeared in Jim Hamilton's World of Securities Regulation.

In a colloquy with Senator Diane Feinstein on Section 745 of Dodd-Frank, which authorizes the CFTC to prevent the trading of derivatives contracts that are contrary to the public interest, Senator Blanche Lincoln agreed that Section 745 should be broadly construed to prevent derivatives that exist predominantly to enable gaming through event contracts, such as the Super Bowl, and serve no commercial or hedging purpose. These types of event contracts would not serve any real commercial purpose and would be contrary to the public interest.

Lincoln-Stabenow Colloquy Clarifies Captive Finance Affiliate Derivatives Risk Hedging Exemption in Dodd-Frank

This story appeared in Jim Hamilton's World of Securities Regulation.

In a colloquy with Senator Stabenow on the day the Senate passed the Dodd-Frank Act, Senator Blanche Lincoln confirmed that the legislation ensures that clearing and margin requirements would not be applied to captive finance or affiliate company transactions that are used for legitimate, non-speculative hedging of commercial risk arising from supporting their parent company's operations. But the Chair of the Agriculture Committee also noted that all swap trades, even those which are not cleared, would still be reported to regulators, a swap data repository, and subject to the public reporting requirements under the legislation. Senator Stabenow noted, and Senator Lincoln agreed, that the legislation recognizes the unique role that captive finance companies play in supporting manufacturers by exempting transactions entered into by such companies and their affiliate entities from clearing and margin so long as they are engaged in financing that facilitates the purchase or lease of their commercial end user parents products and these swaps contracts are used for non-speculative hedging. (Cong. Record, July 15, 2010, p. S5905).

Treasury Deputy Secretary Discusses Reform Bill Effect on Securities Industry

This story appeared in Bank Digest.

"[L]ike the securities laws of the 1930s, the Dodd-Frank legislation lays the foundation for a stronger, safer financial system—innovative, creative, competitive, globally leading, and far less prone to panic and collapse,” Treasury Deputy Secretary Neal Wolin told the Securities Industry and Financial Markets Association's Regulatory Reform Summit. He noted that the creation of the Financial Stability Oversight Council and the Office of Financial Research will enhance the understanding and management of systemic risk. He also said the bill will require stronger prudential standards and establish a comprehensive regulatory framework for derivatives.

Fed Releases Inaugural Opinion Survey on Dealer Financing Terms

This story appeared in Bank Digest.

The Fed has issued a new quarterly survey that collects qualitative information on credit terms and conditions in securities financing and over-the-counter (OTC) derivatives markets, which are important conduits for leverage in the financial system. The Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS) is modeled after the long-established Senior Loan Officer Opinion Survey on Bank Lending Practices, which provides qualitative information about changes in supply and demand for loans to households and businesses at commercial banks. SCOOS is based on responses from 20 financial institutions that account for almost all of the dealer financing of dollar-denominated securities to nondealers and that are the most active intermediaries in OTC derivatives markets.

The survey was conducted during the period from May 24, 2010, to June 4, 2010. The reference period for the core questions in the survey was March 2010 through May 2010.

House Colloquy Clarifies Scope of Volcker Rule in Dodd-Frank

This story appeared in Jim Hamilton's World of Securities Regulation.

Section 619 of Dodd-Frank Act, the Volcker Rule, prohibits firms from investing in traditional private equity funds and hedge funds. Rep. Jim Himes (D-CT), a member of the Financial Services Committee, noted that because the legislation uses the very broad Investment Company Act approach to define private equity and hedge funds, it could technically apply to lots of corporate structures, and not just the hedge funds and private equity funds. A colloquy between House Financial Services Chair Barney Frank and Rep. Himes clarified that, when firms own or control subsidiaries or joint ventures that are used to hold other investments, the Volcker Rule won’t deem those things to be private equity or hedge funds and disrupt the way the firms structure their normal investment holdings. Chairman Frank added that Congress does not want excessive regulation here. He is confident that the regulators will appreciate that distinction and maintain it, and that the congressional oversight committees will make sure that they do. (Cong. Record, June 30, 2010, p. H5226).

Senate Republicans Urged to Oppose Derivatives Provisions

This story appeared in Bank Digest.

House Republican Conferees, led by Financial Services Committee Ranking Member Spencer Bachus, R-Ala.,are urging Senate Republicans to oppose the derivatives provision the Democrats added to the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to a letter sent by the conferees to the Senators, “the provision directs the regulators to set margin requirements for the thousands of businesses across the country that use derivatives to manage their legitimate commercial risk.” The Republican conferees warn that, if the derivatives language is not changed, “our small businesses will not be able to use derivatives to manage risk.”

House Ag Chair Peterson Details SEC, CFTC and FERC Jurisdiction over Derivatives in Dodd-Frank Act

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

In the view of House Agriculture Committee Chair Collin Peterson, the Dodd-Frank Act allocates authority over swaps and security-based swaps as follows. First, the CFTC has exclusive jurisdiction over swaps, including swaps on broad-based security indexes. Within the swap definition is a category of swaps called security-based swap agreements. For this specific category of swaps, the CFTC will continue to exercise its full jurisdictional authority, while the SEC may exercise certain specific authorities over these products. Title VII also clarifies that the SEC has jurisdiction over security-based swaps, which are swaps on narrow-based security indexes and single securities, and that the two agencies share authority over mixed swaps.

Senators Dodd and Lincoln Clarify the End User Exemption in the Derivatives Title of Dodd-Frank

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Dodd-Frank Wall Street Reform and Consumer Protection Act does not authorize regulators to impose margin on end users that use derivatives to hedge or mitigate commercial risk, said Senator Chris Dodd and Senator Blanche Lincoln, who have instructed the SEC and CFTC not to make hedging so costly that it becomes prohibitively expensive for end users to manage their risks. In a letter to the Chairs of the House Financial Services and Agriculture Committees, the senators emphasized that Congress does not intend to regulate end users as major swap participants or swap dealers just because they use swaps to hedge or manage the commercial risks associated with their business. Just as Congress has heard the end user community, they said, regulators must carefully consider the impact of regulation and capital and margin on end users.

First Quarter Trading Revenues Strong; Derivatives Credit Exposures Declined

This story appeared in Bank Digest.

The latest Quarterly Report on Bank Trading and Derivatives Activities, issued by the Office of the Comptroller of the Currency found that bank trading revenues in the first quarter of 2010 rebounded from seasonally lower fourth quarter levels, and credit exposure from derivatives continued to decline. “We expected to see a sharp rebound in trading revenues from the seasonally weak fourth quarter, as client demand is typically very strong in first quarters,” said Deputy Comptroller for Credit and Market Risk Kathryn Dick.

Frank Announces House Offer on Derivatives

This story appeared in Bank Digest.

Financial Services Committee Chairman Barney Frank, D-Mass., on behalf of the House conferees, released the House offer on “Title VII: Wall Street Transparency and Accountability” of the Restoring American Financial Stability Act of 2010. The House proposes numerous amendments to the base text for debate.