Why Citi - and banks large and small - support the swaps push-out fix
By Ed Skyler, Executive Vice President for Global Public Affairs, Citi
December 12, 2014 02:10 PM
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.