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May 3rd, 2011

Dear Representative,

On behalf of Americans for Financial Reform, we are writing to urge you to oppose H.R. 1610, a bill that would introduce various new exemptions into the derivatives provisions of Title VII of the Dodd-Frank Act. Americans for Financial Reform is an unprecedented coalition of over 250 national, state and local groups who have come together to reform the financial industry. Members of our coalition include consumer, civil rights, investor, retiree, community, labor, religious and business groups as well as prominent economists.

The report by the Financial Crisis Inquiry Commission concluded that “over the counter derivatives contributed significantly to this crisis. The enactment of legislation in 2000 to ban the regulation…of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis.” Because of the clear connection between unregulated OTC derivatives and the worst financial crisis since the Great Depression, AFR was a strong proponent of reforms in the Dodd-Frank Act that are designed to make the derivatives markets more transparent, safe and sound.

HR 1610 would introduce significant loopholes into the Dodd-Frank derivatives reforms. The bill weakens derivatives regulation in two important ways.

First, it would prevent regulators from designating significant derivatives markets players for enhanced oversight as “major swaps participants” unless their derivatives positions created enough net counterparty exposure to threaten financial stability. The addition of the word “net” here is very significant, as it would mean that companies could amass derivatives positions large enough to threaten financial stability, but avoid oversight so long as they claimed these positions were hedged. This would lead to a situation where regulators could not fully take into account the counterparty credit risk created by derivatives exposures – that is, the risk that a counterparty for a hedging position could fail, leaving a supposedly hedged position suddenly vulnerable. This is exactly the type of situation that created market panic around the failures of AIG and Lehman in 2008.

Second, the bill adds a convoluted and poorly defined statutory “end user exemption” to the Dodd-Frank requirement to back up derivatives bets with margin. This new exemption is completely unnecessary, as the regulators’ proposed rules in this area consistently exempt derivatives transactions used to hedge legitimate commercial risks from new margin requirements. The exemption as drafted would create a loophole for numerous derivatives transactions that have nothing to do with hedging risk for production of real economy goods and services. The bill does not limit the exemption to transactions used to hedge commercial risk, so purely speculative derivatives bets could be exempted from collateral requirements. Many purely financial institutions (such as real estate investment trusts, an indeterminate number of banks, and possibly other financial entities as well) would also fall under the exemption.

AFR is concerned that amendments to the Dodd-Frank Act will provide an opportunity for those who oppose financial regulation to make damaging changes to this landmark legislation. The proposals under consideration during the mark-up of the Subcommittee on Capital Markets and Government Sponsored Enterprises go far beyond technical amendments. Bills like HR 1610 would significantly weaken the first meaningful attempt to bring oversight to the unregulated derivatives markets that played such an important role in creating the worst financial crisis since the Great Depression. AFR, therefore, urges you to oppose H.R. 1610 and similar attempts to weaken the Dodd-Frank Act.

Sincerely,

Americans for Financial Reform