In the weeks leading up to a July deadline for a controversial Dodd-Frank Reform Act provision on the cross-border regulation of derivatives, dozens of representatives of major banks and financial trade associations met with government regulators — and they got at least part of what they wanted.
Of 32 meetings held in June between Commodity Futures Trading Commission (CFTC) officials and outside financial interests such as the Institute of International Bankers, Citigroup, JP Morgan Chase, Bank of America, and Credit Suisse, 25 included discussion of cross-border issues, according to an analysis of meeting logs by Sunlight. In contrast, two reform-oriented groups were consulted: Better Markets, founded by former Democratic congressional aide Dennis Kelleher, and Americans for Financial Reform, which represents a coalition of consumer and labor organizations.
The rules at issue go to the heart of the Dodd-Frank law. In September 2008, the U.S. agreed to bail out the insurance giant AIG, whose risky trades by a London subsidiary set the entire world economy into a tailspin, demonstrating how deeply financial activity outside the country's borders can affect America. The bailout eventually cost $182 billion, which the company has since repaid. Meanwhile, JP Morgan's losses last year from another set of risky London trades in which it lost nearly $6 billion show how banks continue to engage in such risky activity.
The lobbying frenzy around the rules is also a textbook case of how the same financial interests that lobbied Congress when the Dodd-Frank reform legislation was being considered have turned their efforts toward the executive branch as it crafts rules implementing the law.
The same month that banking representatives were expressing their concerns about regulation of cross-border derivatives to federal regulators, a half dozen Democratic senators, led by New York's Chuck Schumer and Kirsten Gillibrand, wrote a letter to Treasury Secretary Jack Lew asking that the rules be delayed until the CFTC and the Securities and Exchange Commission (SEC) harmonized their approaches. Earlier in the month, the House had passed a bill supported by big financial institutions that would compell the SEC to work together with the CFTC on joint regulations. Big banks and foreign regulators had criticized the rules as well, as demonstrated in dozens of comment letters received by the independent agency.
At the CFTC’s July 12 meeting, Chairman Gary Gensler pushed ahead with his vow to finalize the final guidance despite the lobbying; the commission approved it by a vote of 3 to 1. However, at the same time, the Commission approved, also by a vote of 3 to 1, an extension for compliance with parts of the new guidance until December and opened up a comment period to collect public input on the delay.
Meanwhile, the day before, Gensler struck a deal with his European Union (EU) counterparts on the cross-border issue, agreeing that foreign subsidiaries could comply by adhering to EU rules–a sticky point for banks doing business outside the United States.
And as one reform-oriented observer points out, the lobbying isn't over yet: "[This] mixed bag of some very good, some not-so-good and some soon to-be-determined provisions will mean that Wall Street's war on regulation of high risk cross-border derivatives dealing will not end today," commented Kelleher of Better Markets upon the CFTC's actions. "[This] critically important regulation will not be implemented for months, if not years in certain aspects. And, the CFTC opened yet another 75 day comment period on the exemptive order and industry will no doubt flood the CFTC with yet dozens more comment letters and demands for meetings."
The most active organization on the issue, the Institute of International Bankers (IIB) represents internationally-headquartered financial institutions that operate in the United States. The group reported spending nearly $500,000 on federal lobbying efforts in the last election cycle, according to Influence Explorer; the group reported another $100,000 for the first quarter of this year.
One of those meetings occurred on July 8, just four days before the CFTC took action. The organization's CEO, Sally Miller, along with a lawyer, Colin Lloyd, from the its for-hire lobbying firm, Cleary Gottlieb, were listed as attending the meeting with Gensler and his counsel, Megan Wallace. IIB had a total of eight meetings with commission staff this year alone on the issue of cross-border regulation, records show.
The IIB's formal comments to the commission are referenced often in its guidance; one of the group's main issues was the definition of "U.S. person," which ultimately defines which entities the U.S. regulates. The IIB specifically asks for a phase-in for any new definition, repeated in this email dated July 8, the same day of its most recent meeting, from Miller to Gensler. The CFTC did grant the phase in–and now Miller says the organization will push to extend further.
"While we need to see the actual guidance, the actions taken today by the CFTC appear to be a big step forward," commented Miller after the CFTC decisions. However she added that "we question whether the phase-in period provides market participants enough time to come into compliance…and plan to address this matter as part of our comments to the CFTC." The IIB did not return a request for further comment.
The Securities Industry and Financial Markets Association (SIFMA), a financial trade group, raised similar concerns; the group also is listed as sending representatives to two meetings with the CFTC on the cross border issue, one in June and one in April. At both meetings, the trade group attended along with several other banks, including Barclays, JP Morgan Chase, Vanguard, and Goldman Sachs. In June, SIFMA applauded SIFMA is a powerhouse on Dodd-Frank federal lobbying, reporting spending $10.8 million in the last election cycle and another $1.45 million in the first quarter of this year. A SIFMA representative said the organization was still analyzing the guidance and did not yet have a reaction.
Gillibrand's office said in a statement provided to Sunlight that she approved of the CFTC's actions. "The CFTC heeded our call to work together with other regulators to implement thse rules, and ensure that the world's financial regulations are robust enough to stymie future risks posed to our economy. Senator Gillibrand will continue to watch this issue closely, we cannot allow the regulators to continue to kick this can down the road."
Schumer's office did not return calls requesting comment on the CFTC's actions. The two New York senators count many of the nation's mega-banks as constitutents. The securities and investment industry is the top contributor to Schumer's campaigns and second-most generous to Gillibrand, according to Influence Explorer. Schumer is a member of the Senate Banking Committee.