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New York Lawmakers See 'Competitive Disadvantages' in Derivatives Rules

A bipartisan, bicameral group of New York lawmakers on Tuesday urged regulators not to implement a new rule governing financial derivatives for fear it would harm U.S. competitiveness abroad.

In a letter, lawmakers asked regulators to reconsider proposed regulations that would set new margin requirements for derivatives trades between non-U.S. subsidiaries of U.S. financial institutions and non-U.S. counterparties.

The lawmakers said they were worried the proposed rule would encourage foreign companies to avoid doing business with overseas affiliates of U.S. financial institutions; they urged regulators to hold off on the rule and work with their counterparts abroad to ensure equally stringent rules are adopted in other countries.

"We are concerned that these proposals will inevitably result in significant competitive disadvantages for U.S. firms operating globally," lawmakers wrote. "Moreover, the proposals are inconsistent with congressional intent regarding the territorial scope of the new regulatory framework for derivatives."

The letter was sent to Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corporation Chairwoman Sheila C. Bair, Commodity Futures Trading Commission Chairman Gary Gensler and acting Comptroller of the Currency John G. Walsh.

The letter was signed by Democratic Sens. Kirsten Gillibrand and Charles E. Schumer and 16 members of the House: Democrats Gary L. Ackerman, Yvette D. Clarke, Joseph Crowley, Eliot L. Engel, Steve Israel, Carolyn B. Maloney, Carolyn McCarthy, Gregory W. Meeks, Edolphus Towns and Anthony Weiner, and Republicans Chris Gibson, Michael G. Grimm, Richard Hanna, Nan Hayworth, Peter T. King and Tom Reed.

Under the proposed rule, the lawmakers noted, the margin requirements do not apply to non-U.S. banks doing business with non-U.S. clients, but do apply to non-U.S. subsidiaries and the affiliates of U.S. institutions doing business with non-U.S. clients outside the United States.

One top financial services lobbyist applauded the lawmakers' letter.

"It's probably the biggest issue for domestic derivative dealers in the derivatives title," he said. "This could kill U.S. dealers' business internationally."

Last year's financial regulatory overhaul (PL 111-203) provided the authority to regulate the sprawling over-the-counter derivatives market for the first time. But the New York lawmakers said the proposed rule goes beyond the intent of the law by imposing a regulation that would harm the competitiveness of U.S. financial institutions more than it would protect the safety of the broader financial system.

Dennis Kelleher, president and CEO of the public interest group Better Markets, disputed that argument and urged regulators not to weaken the proposed rule.

"Industry claims about competition and all sorts of other supposed harms from regulation resulted in little or no regulation in the decade before the last financial crisis," Kelleher said. "Rather than repeating those mistakes, regulators must stand firm against political and industry pressures. Repeating the mistakes of the past will pave the way to the next crisis, and nothing should be more important than preventing that."

House Republicans are advancing legislation (HR 1574) that would delay the regulation of derivatives for 18 months, to Democrats' dismay. The House Agriculture Committee approved the bill by voice vote May 4, although Democrats were united in their opposition. The House Financial Services Committee is scheduled to consider the bill next week, and the measure is expected to be approved along party lines.



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