Why Citi - and banks large and small - support the swaps push-out fix

December 12, 2014 02:10 PM By Ed Skyler, Executive Vice President for Global Public Affairs, Citi

Much has been said and written about efforts to amend section 716 of the Dodd-Frank Act, the so-called "swaps push-out" provision. Here are a few points to consider.

Citi has been and remains a strong supporter of financial reform, and specifically of Dodd-Frank. While most of Dodd-Frank was well considered and has strengthened our financial system, "swaps push-out" has always been an exception. That provision was included in the bill without any debate and has since been widely criticized by a variety of stakeholders for several reasons.

The provision requires financial institutions to move certain types of derivatives transactions out of the bank and conduct them through a separate entity. The hope is that with such transactions no longer directly affecting banks' balance sheets, the financial system will become safer overall.

It's a well-meaning idea, but unfortunately the reverse is probably true. Pushing derivative activity into less-regulated markets is likely to increase, not decrease, systemic risk. The language also places additional costs on U.S. financial firms and imposes new burdens on American companies who use such transactions to manage their risk.

The proposed correction, on the other hand, simply limits the swaps that are "pushed out" to the riskiest types, while preserving banks' ability to serve clients in the agriculture, energy and farm commodities sectors.

Further, this modification is not a new proposal; it passed the House of Representatives last year in a bipartisan 292-122 vote. That's because stakeholders from former Federal Reserve Chairmen Ben Bernanke and Paul Volcker to Dodd-Frank co-author Barney Frank have questioned its necessity while raising concerns about unintended consequences.

Citi is strongly committed to the safety and soundness of the financial system. We also support a regulatory framework in which U.S. companies can be as competitive as possible. This correction to the "swaps push-out" provision supports both goals. And that is why we--along with banks of every size, throughout the country--support the amendment.

For more information, please see the ABA and FSF fact sheets.

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spawsnomore - 01/16/15 01:01 PM

You have 2 contentions:
1. Swaps would be pushed to unregulated markets increasing risks
2. The language will put additional burden on doing business for Financial instruments

Why wouldnt the new entity be as truly regulated as all the other bank entities are currently done, now that the Feds actaully regulate every entity. I think this is just a specious arguement.

As to the cost of doing business, swaps are the biggest revenue generators for financial firms. An additional cost to manage them, if they are truly providing benefits to the clients, should be factored into doing this business.

Hopefully we are not backing ourselves into a corner with the new rules

Jack - 12/16/14 07:06 AM

But, you don t really address why the US should back these reduced risks?

Craig - 12/15/14 02:16 PM

Isn t that the point of the push outs? If an investment is risky why should it federally insured? Are you saying the American public has been misinformed? Because I am under the impression that the whole point of the push out laws is to push riskier investments outside of being federally insured. High risk usually equals high reward. While this does increase cost for the banks it protects the American taxpayer from bailing out said bank if the bank loses money. The systemic risk inherited outside federal oversight should rest squarely on the shoulders of the bank that stands to make the money.
If you feel that banks should be able to gamble with taxpayer money, surely you wouldn t mind letting me take lets say $10 million of your money to Vegas? If I hit I get to keep the proceeds. If I lose you can file an insurance claim and let the feds bail you out.

Jack - 12/13/14 07:46 AM

So, is Elizabeth Warren way off base here? What are the incentives?

Kiffmeister - 12/12/14 03:45 PM

I take my most comment back as I see you ve corrected it. Thank you.

Kiffmeister - 12/12/14 03:44 PM

You say the provision requires financial institutions to move most derivatives transactions out of the bank and conduct them through a separate entity. Most? That s not what I ve been reading.

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