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AFR Statement: Omnibus Contains Yet More Gifts to Wall Street

Submitted by on March 22, 2018 – 2:27 pm
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The Omnibus budget package contains several policy riders designed to benefit Wall Street investment funds and big banks at the expense of the public.

One provision in the omnibus allows Business Development Companies (BDCs), a type of private equity fund sold directly to retail customers, to double their permitted fund leverage from the current 1-1 level (one dollar of borrowed money for each dollar of investor equity) to 2-1.  BDCs are already the beneficiary of regulatory exemptions since conventional closed-end mutual funds can only leverage 1-2, or borrow one dollar per two dollars of investor equity.

This increase in permitted leverage will boost returns to the managers of the fund but represents a massive and unjustified expansion in risk to ordinary BDC retail investors, particularly since this fund-level leverage is in addition to the leverage that already exists in risky BDC portfolio holdings. BDCs already charge much greater fees to investors than comparable investment products. This change simply serves to increase profits for private equity managers while harming ordinary investors.

Two other provisions benefit participants in the derivatives markets, which is dominated by large financial institutions and giant multinational corporations with trading operations, by exempting them from oversight by the Commodity Futures Trading Commission (CFTC).

  • The Omnibus directs the CFTC to expand exemptions for derivatives transactions between affiliates within large financial holding companies and global corporations.
  • It also requires the CFTC to establish the threshold for designating a derivatives dealer at $8 billion or more of annual derivatives business, a level that is likely to exempt some important players in commodity derivatives markets from full oversight. Under current law the threshold was scheduled to drop to $3 billion.
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