JPM JP Morgan Chase and Co

By Gabriel T. Rubin 

WASHINGTON -- On the heels of a legislative victory this week for small and midsize banks, bigger banks including JPMorgan Chase & Co. and Citigroup Inc. are lobbying congressional Republicans in an effort to ensure a victory of their own.

Large banks are pushing Congress to redefine swap transactions made between different affiliates of the same company so that they aren't subject to certain rules stemming from the 2010 Dodd-Frank Act. The move would prevent regulators from forcing banks to post collateral for those transactions, potentially saving banks hundreds of millions of dollars in compliance costs.

Legislation that would legally change the definitions of those transactions -- exempting them from Dodd-Frank collateral rules -- has passed the House, but has died in the Senate due to Democratic opposition.

Now, House Republicans have taken a harder-line approach to push the legislation through. In recent budget negotiations, they linked the exemption to increased funding for the Commodity Futures Trading Commission, the primary swaps regulator that hasn't seen a funding increase since 2014. When some Senate Democrats objected to the exemption, it was stripped from the budget. The CFTC ended up having its funding cut by $1 million.

"My colleagues in the minority and particularly over in the Senate have refused to discuss any reasonable bipartisan offers for long-overdue policy changes unless they increase funding," said Rep. Robert Aderholt (R., Ala.), a senior member of the House Appropriations Committee, at a committee hearing last week.

Swaps, contracts in which two parties agree to exchange payments based on fluctuations in interest rates or other benchmarks, were targeted by U.S. lawmakers for greater oversight and transparency after they played a central role in the 2008 financial crisis. Companies use the multitrillion-dollar swaps market to hedge risks or make bets in areas such as fuel prices or interest rates.

Last week's appropriations hearing was unusual for its frank discussion of policy riders, the sort of sausage-making that tends to remain behind closed doors.

"The will of the House and of this committee cannot be ignored," said Rep. Steve Womack (R., Ark.), a sponsor of legislation similar to the swaps rider.

Republicans are sticking to the strategy of linking a significant bump in the CFTC's budget to the swaps-rule exemption, despite complaints from Trump-appointed regulators at the CFTC, who have warned of an extended hiring freeze and possible buyouts.

JPMorgan and Citigroup have lobbied extensively on legislation that would change the swaps definition, according to congressional aides and lobbying disclosures, though congressional aides say it was House Republicans who decided to pair the issue with a CFTC budget increase to put pressure on Senate Democrats.

Representatives for JPMorgan and Citigroup declined to comment.

The potential deal bears a striking similarity to the "swaps pushout" deal, a policy rider attached to a 2014 spending bill that repealed part of Dodd-Frank's swaps rules. The measure was also linked to the CFTC's budget, and the regulator got its most recent funding boost at that time. That rider attracted surprising popular opposition led by Sen. Elizabeth Warren but also celebrities including Cher, who warned in colorful language that it could lead to another financial crisis. The deal ultimately passed, though some liberal Democrats, including Ms. Warren, voted against it.

Regulators have been playing whack-a-mole with firms on the issue for several years, closing loopholes that allowed banks to transfer risk to subsidiaries that, because of location or the nature of their business, faced less stringent regulatory requirements.

Supporters of the legislation contend that interaffiliate swaps don't pose the same risks as swaps between unrelated companies, and therefore shouldn't be subject to the same rules. Major trade groups like the U.S. Chamber of Commerce have made the case to Congress that the primary beneficiary of such a rule change would be derivatives end-users, like energy companies and farmers.

Write to Gabriel T. Rubin at gabriel.rubin@wsj.com

(END) Dow Jones Newswires

May 23, 2018 14:46 ET (18:46 GMT)

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