Wall Street May Get $40 Billion Reprieve From Trump Regulators

Jesse Hamilton

(Bloomberg) -- Wall Street could soon get one of its most consequential wins of the Trump era as regulators are considering ripping up a rule that’s forced banks to set aside billions of dollars for swaps trades, according to people familiar with the matter.

At issue is a requirement approved during the Obama administration that’s made lenders post tens of billions in margin when engaging in derivatives transactions with their own affiliates. Industry lobbyists have long argued that the demand, which came out of the 2010 Dodd-Frank Act, is redundant and puts U.S. banks at a competitive disadvantage to overseas rivals.

Banks now appear poised to get their way. The Federal Deposit Insurance Corp. will hold a public meeting Tuesday to propose eliminating the margin requirement, said two people briefed on the plan. Other agencies, including the Federal Reserve and the Office of the Comptroller of the Currency, are also expected to recommend scrapping the rule, said the people who asked not to be named the proposal hasn’t been publicly disclosed.

The FDIC announced last week that its board would meet Sept. 17 to vote on a swap margin proposal without providing any further details.

Leash Loosened

The move is the latest sign of how, bit by bit, watchdogs appointed by President Donald Trump are loosening the leash put on banks after the 2008 financial crisis. Regulators have already made headway softening stress-testing requirements and overhauling the Volcker Rule, a landmark constraint that restricted banks from making dangerous market bets with their own capital.

Spokesmen for the Fed and OCC declined to comment, and the FDIC didn’t immediately respond to a request for comment.

Swaps trading -- when it was largely unregulated -- amplified the financial crisis. Watchdogs responded by implementing dozens of new rules. The posting of margin is meant to minimize a firm’s losses if a counterparty defaults.

Under President Barack Obama, regulators saw requiring margin for inter-affiliate trades as important in protecting bank subsidiaries that handle customers’ deposits. But current watchdogs argue that the demand is unnecessary, stating that other rules already address any risks posed by such transactions.

Bank Lobbying

The margin demand, implemented in 2015, has tied up $39.4 billion, according to industry estimates. That’s prompted major swap dealers, such as Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc., to make the rule’s elimination a lobbying priority.

It would likely be months before regulators scrap the margin requirement. That’s because once the FDIC and other agencies issue their proposals, the public will have an opportunity to submit comments before a final rule could be put in place.

Republican lawmakers have supported banks on the issue. Some House Democrats have also backed the change, telling regulators in a June letter that they should allow lenders to free up the “large and increasing amount of unusable, locked-up collateral.”

That potentially puts them at odds with House Financial Services Committee Chairwoman Maxine Waters, who has vocally argued that it would be a mistake to drop post-crisis rules that made banks safer.

--With assistance from Ben Bain.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.