06/24/2010 09:45 am ET Updated May 25, 2011

Bloc Of House Dems Battling Back Against Wall Street

Democrats in favor of tough Wall Street reform are entering a House debate that has been dominated the past week by the New Democrat Coalition and members representing New York state. A trio of lawmakers -- Reps. Bart Stupak (D-Mich.), Rosa DeLauro (D-Conn.) and Jackie Speier (D-Calif.) -- began circulating a letter to conferees on Wednesday pushing back on the effort to weaken Blanche Lincoln's derivatives reform proposal.

By the end of the day, they'd gathered 50 signatures, giving House leadership a boost in its effort to persuade the New Democrats -- typically Wall Street friendly members from the suburbs -- to get in line behind strong reform.

The House released its derivatives proposal to the Senate on Wednesday evening; advocates of reform are worried that the last-minute Wall Street push will be enough to derail the legislation. The measure will be debated on Thursday. "We are reviewing [the House language] now, but are very upset that 'balance sheet risk' was added back in, even though they provide exceptions to who may claim it as a legitimate hedge," said Jim Collura, a New England fuel dealer who has been leading a coalition of derivatives end-users demanding reform. "Balance sheet risk" would appear to allow companies to trade unregulated derivatives if the purpose is to reduce risk on the company's balance sheet -- a purpose very easy to claim.

Read the letter:

June 23, 2010

Dear Conferees:

We write to urge you to preserve the strong Senate language regulating the derivatives markets in the final financial reform legislation. Effective regulation of the $600 trillion derivatives market is fundamental to our financial security because the significant unregulated over-the-counter market was a fundamental cause of the financial crisis, and without change will remain an ever present danger. Effective regulation also is necessary because unchecked speculation in these markets causes price fluctuations in vital commodities including food and oil that hurt businesses and consumers.

Warren Buffett has called unregulated derivatives 'financial weapons of mass destruction' and Nobel prize-winning economist Joseph Stiglitz asserted, "If [Congress] fails to pass strict oversight of dangerous over-the-counter derivatives and swaps the U.S. economy will continue to be vulnerable to significant financial risk."

In particular, we strongly urge you to preserve the following aspects of the Senate bill:

Broad clearing and exchange trading requirements to make the market safe

The Senate bill applies crucial elements of derivatives reform including requiring transparency and the posting of margin to make the system safer for approximately 90 percent of all trades. The House language would exempt 40 to 50 percent of transactions. Despite Wall Street claims to the contrary, the Senate language excludes businesses using derivatives trades to hedge commercial risk from these requirements, although it permits them to clear and exchange trade.

Where it differs from the House bill is in clearly limiting exceptions to commercial entities hedging commercial risk. The House language would allow financial firms to take advantage of the exceptions it provides, creating an enormous loophole, while the Senate language expressly prevents financial firms from doing so.

Reporting requirements that allow regulators and participants to understand the market

The Senate bill requires real time reporting to regulators and the public on transactions in the multi-trillion dollar derivatives market, allowing businesses that use swaps to shop around for the best prices, and ensure that regulators can monitor the markets to prevent systemic risk. Conversely, the House language would allow the public to see only "aggregate" data from swaps transactions. This means that businesses would not be able to access information to allow them to shop for best prices.

Capital and Margin Requirements

The Senate bill ensures that whenever a financial institution trades swaps there are clear capital and margin requirements to increase stability in our financial markets. We are concerned that the House bill's ambiguous language creates a loophole that could allow any financial institution that is not 'systemically risky' to trade swaps without money to back up its trades.

Fiduciary Duty

Revised Senate language collaboratively drafted between the Senate Agriculture and HELP Committees imposes a heightened standard of care on swaps dealers when they give advice or recommend swaps transactions to government entities, pension funds, endowments, and retirement plans. This is essential to combating the kind of abuses that have left government entities and non-profits across the country struggling under staggering derivatives-related debts, and to giving essential protections to less sophisticated institutional investors, including pension funds and endowments, and the taxpayers and workers on whose behalf they invest.

Separation of derivatives market making from commercial banking (Section 716)

The Senate bill includes important provisions that remove the ongoing Federal subsidy to the derivatives businesses of the five large banks that dominate this market. This language will help ensure that taxpayers are not supporting this risky activity with deposit insurance or other benefits. It will increase transparency and safety by making sure that derivatives market making activities are separately capitalized. As a result, it will also redirect bank capital towards lending and investment in Main Street, rather than empty speculation.

It is crucial to ensure that the legislation is effective by closing the enforcement gap left when the Senate Banking and Agriculture Committee versions of the bill were combined, and ensure that rules cannot be evaded by clearinghouses simply refusing to clear trades that the regulators have ordered to clear. Rules to prevent domination of the clearinghouses by the biggest traders, like the language of the Lynch amendment in the House, in addition to the rulemaking authority on conflicts of interests provided to the regulators in the Senate bill are also important.

Thank you for your attention to these import issues.