Strengthening Financial Reform
By Ed Skyler, Head of Global Public Affairs Citi May 24, 2013 11:55 AM
Today the New York Times reported on Citi's effort to fix a misguided provision of the Dodd-Frank financial reform law. Here's some additional context to the story.
Citi has been a strong supporter of financial reform--not just Dodd-Frank Act but also Basel III's higher capital requirements and a range of other issues. Yet, as with any effort to address complex issues, some ideas clearly miss the mark.
Case in point: Section 716 of Dodd-Frank, or the "swaps push-out" provision, requires financial institutions to push most derivatives transactions out of the bank into a separate entity. This provision does absolutely nothing to create a safer financial system. In fact, Section 716 would negatively impact U.S. companies, financial firms, and their counterparties, while actually increasing systemic risk. This provision would create undue costs and burdens on U.S. financial firms. Swaps and other instruments covered by this rule are legitimate financial tools that are useful to a variety of companies in a range of circumstances. 716 won't make them go away. Rather, those companies that need to use these services will simply do business elsewhere, hurting U.S. competitiveness, and often pushing that business into less regulated corners of the financial system.
Everyone from Federal Reserve Chairman Ben Bernanke to former House Financial Services Chairman Barney Frank, the bill's namesake, has expressed concerns over the potential consequences of Section 716. Rarely do we see such bipartisan consensus across Congress, financial regulators, and the financial industry--and not just here in the U.S., but also amongst foreign banks that have significant U.S. operations.
Citi has taken on a lead role in working with our peers and Members of Congress to find a common sense solution. The result of this collaboration is legislation outlining a more straightforward and simplified approach to derivatives transactions--one that would not force swaps into lesser regulated entities.
Moreover, this new bill has received widespread bipartisan backing. Earlier this month in the House Financial Services Committee, the legislation garnered an overwhelming, bipartisan vote of support, 53 to 6. Efforts to modify Section 716 are a great example of how the industry and Congress can work together to find common ground toward our shared goal of strengthening the financial system.