Derivatives lobbying

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Derivatives lobby links with New Democrats

"...[Freshman congressman Mike] McMahon said Frank agreed it was important to protect so- called end-users, the corporations that rely on derivatives to hedge everyday operational risk, such as fluctuations in foreign currency rates, interest rates and commodity prices. The Obama plan would subject companies to higher collateral requirements whether they trade standardized or customized contracts. It also calls for most trades to be executed on an exchange or an “alternative swap execution facility.”

“He said we’d be working together on this,” said McMahon, who represents a large constituency of Wall Street workers on Staten Island and in southwest Brooklyn. “We never had a philosophical difference.”

It’s not just end-users who won concessions from McMahon and Frank. JPMorgan Chase & Co.,Goldman Sachs Group Inc. and Credit Suisse Group AG lobbied McMahon and fellow New Democrat Coalition member Representative Melissa Bean of Illinois, among others, to expand the ways the legislation allows dealers and major investors to trade the contracts, according to people familiar with the matter.

Bean’s spokesman Jonathan Lipman rejected the notion that the New Democrats made any changes to the bill at the behest of banks...

...The battle over derivatives legislation is a test for the Obama administration’s efforts to tighten financial regulation to prevent a repeat of the financial crisis that shook the global economy -- a crisis exacerbated by derivatives trading.

Frank, a Massachusetts Democrat who rose through the ranks in Congress fighting homelessness and advocating for gay and consumer rights, found his handiwork panned by administration officials after he released draft legislation last week that they criticized as too friendly to business. Frank’s bill allows for no change in how standardized over-the-counter derivatives are traded as long as they are reported to regulators.

Commodity Futures Trading Commission Chairman Gary Gensler and Henry T.C. Hu of the Securities and Exchange Commission said Frank’s “discussion draft” created too many loopholes and had the potential to exclude all hedge funds and corporate end-users from oversight.

“That’s why it’s called a discussion draft, because it brings forth people’s comments,” Frank said in an interview after an Oct. 7 hearing at which Gensler and Hu testified. “It’s an ongoing process.”

Frank told the committee that he agreed to “tighten up” the legislation before it is voted on next week.

With 68 of the Democrats’ 256 votes in the House, the New Democrats have become a growing force within their party. Democrats hold a 38-member voting majority over Republicans and cannot pass financial legislation without coalition support.

“Oh, they were very important,” Frank said. “A couple of them have some experience in this area. They are also an important part of our caucus.”

Derivatives dealers became concerned that Obama’s plan didn’t adequately define “alternative swap execution facility” and that, in the end, regulators would write rules making them similar to exchanges, people familiar with the lobbying effort said. Over the last two months, the banks pressed to have Frank’s draft allow standardized trades to be executed privately via telephone, as they’ve been traded for decades, as long as they are reported to regulators, the people said.

The change could protect billions of dollars in profit for the dealers. When securities or derivatives are traded on exchanges -- where investors can see real-time prices, rather than indicative prices sent by e-mail in the over-the-counter market -- it can shrink the amount that dealers make on each trade, known as the spread.

“Having more discretion for the dealers in the regulations gives an extra benefit to them by staying away from narrower spreads,” said Darrell Duffie, a finance professor at Stanford University in California.

The top five U.S. commercial banks, including JPMorgan, Goldman Sachs and Bank of America Corp., were on track through the second quarter to earn more than $35 billion this year trading unregulated derivative contracts, according to a review of company filings with the Federal Reserve and people familiar with the banks’ income sources.

The banks are arguing that an exchange or trading-system mandate that publicizes large trades could make it too expensive or impossible to execute customer orders and hedge those trades at the same time, according to the people familiar. Publicized large orders may dry up the willingness of dealers and investors to buy or sell contracts, they said.

That argument might not get a sympathetic ear at the Commodity Futures Trading Commission. Its chairman has several times called the regulated platforms “electronic trading systems,” suggesting that U.S. officials may seek to require banks and investors to use them like exchanges with real-time, public pricing.

“People viewed it as tantamount to an exchange,” said Robert Pickel, chief executive officer of the International Swaps and Derivatives Association, a New York-based group that sets standards in OTC derivatives markets..."

Wall Street's lobby defends $35B derivatives revenue

Source: Wall Street Stealth Lobby Defends $35 Billion Derivatives Haul Bloomberg, August 31, 2009

"Wall Street is suiting up for a battle to protect one of its richest fiefdoms, the $592 trillion over-the-counter derivatives market that is facing the biggest overhaul since its creation 30 years ago.

Five U.S. commercial banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., are on track to earn more than $35 billion this year trading unregulated derivatives contracts. At stake is how much of that business they and other dealers will be able to keep.

“Business models of the larger dealers have such a paucity of opportunities for profit that they have to defend the last great frontier for double-digit, even triple-digit returns,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics, which analyzes banks for investors.

The Washington fight, conducted mostly behind closed doors, has been overshadowed by the noisy debate over health care. That’s fine with investment bankers, who for years quietly wielded their financial and lobbying clout on Capitol Hill to kill efforts to regulate derivatives. This time could be different. The reason: widespread public and Congressional anger over the role derivatives such as credit-default swaps played in the worst financial crisis since the Great Depression.

“Public sentiment isn’t very much in their favor,” said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who worked at Bear Stearns Cos. from 1999 to 2006, referring to Wall Street firms. “In some places, they’re not going to have anybody who wants to listen to them.”

JP Morgan deep in the inner circle

Source: In Washington, One Bank Chief Still Holds Sway New York Times, July 18, 2009

"WASHINGTON — Jamie Dimon, the head of JPMorgan Chase, will hold a meeting of his board here in the nation’s capital for the first time on Monday, with a special guest expected: the White House chief of staff, Rahm Emanuel.

Mr. Emanuel’s appearance would underscore the pull of Mr. Dimon, who amid the disgrace of his industry has emerged as President Obama’s favorite banker, and in turn, the envy of his Wall Street rivals. It also reflects a good return on what Mr. Dimon has labeled his company’s “seventh line of business” — government relations...

...But Mr. Dimon and JPMorgan are willing to bear such defeats if it translates into victory on the broader financial regulation fight that is just beginning.

A centerpiece of that effort involves regulating the market for derivatives, which Mr. Dimon’s firm dominates. While JPMorgan favors new reporting requirements for the complex financial instruments, it opposes the administration proposal to force trades onto public exchanges; doing so would likely cut into the firm’s lucrative business of selling clients custom-made instruments. Like other banks, it also opposes a new consumer agency for financial products.

Meanwhile, the company’s reputation could be tarnished by investigations into the crisis. Among them, JPMorgan is under scrutiny from the Justice Department and the Securities and Exchange Commission for possible antitrust and securities law violations, including derivatives deals with local governments."

ISDA names Voldstad as CEO

" Conrad Voldstad, the first head of JPMorgan Chase & Co.’s global swaps group and a member of the team that liquidated Long-Term Capital Management LP, was named head of the body that sets standards for the $605 trillion derivatives market as it faces regulation for the first time.

Voldstad, 59, will start as chief executive officer at the International Swaps and Derivatives Association on Nov. 30, according to a statement yesterday from the New York-based group. Robert Pickel, 51, who has served as executive director and CEO of the association for almost nine years, will move to the new position of executive vice chairman, reporting to Voldstad, ISDA said.

The changes at the 840-member association come as the U.S. Congress debates legislation to regulate the privately negotiated market for the first time, requiring most trading to move to clearinghouses and setting capital requirements for participants. The demands on ISDA have grown as regulators blamed bets made with derivatives for exacerbating the financial crisis that pushed Lehman Brothers Holdings Inc. into bankruptcy and almost toppled insurer American International Group Inc..

“We wanted to augment the senior ranks,” Eraj Shirvani, ISDA’s chairman and Credit Suisse Group AG’s head of fixed income for Europe, the Middle East and Africa, said in an interview yesterday. “There are just so many absolutely key topics facing the derivatives industry, and it’s so multifaceted now that we need more people to focus on the different aspects of what our business is facing.”

Congressional Pressure

Voldstad starts his new position as lawmakers push bills that would require derivatives trades -- now done as bilateral contracts between banks, hedge funds and other asset managers -- be moved to clearinghouses designed to contain the risk to the financial system should a dealer or other major holder of the contracts fail.

ISDA led the creation of new standards for credit-default swaps in April that will allow the most actively traded contracts to be cleared. It acts as secretary to a committee of dealers and investors that governs most of the $26 trillion in outstanding credit swaps contracts. It’s also leading changes to the way derivatives traders settle disputes over collateral.

Pickel will continue to lead many of those efforts, and will serve as the group’s public face before Congress. Pickel, a lawyer, was previously general counsel of ISDA.

‘Elevated’ Profile

“They’re seeing that their importance and public profile in the industry has elevated considerably,” Kevin McPartland, a senior analyst in New York at financial-market research and advisory firm Tabb Group, said of ISDA.

Senate Banking Committee Chairman Christopher Dodd this month offered a draft bill in the Senate that would subject market participants to clearing and capital requirements and require the most actively traded contracts to be executed on exchanges or regulated platforms.

The House Agriculture and House Financial Services committees are working to reconcile separate bills.

“ISDA’s mandate is changing,” Voldstad said in an interview yesterday. “I don’t think five years ago public policy or counterparty credit risk were on the front burner. Now it’s making good progress on each of those.”

Voldstad worked at JPMorgan from 1974 to 1988, a period when the banks including JPMorgan developed the market for interest-rate swaps that banks, investors and companies use to hedge against swings in rates. He ran the firm’s global swaps group in the 1980s.

He went to Merrill Lynch & Co. in 1988, serving as co-head of global debt markets in New York and head of European debt markets in London. He left Merrill in 1999 after spending a year helping to unwind Long-Term Capital Management, the hedge fund rescued by Merrill and 13 other financial institutions in September 1998."

ISDA and banks hires Cleary Gottlieb

"Seven major American and foreign banks have hired a prominent financial lawyer to lobby on legislation that would restrict how banks do business in the multitrillion-dollar derivatives market.

Edward Rosen, a partner at Cleary Gottlieb, registered as a lobbyist for the banks at the end of October and received at least $200,000 in the third quarter, according to congressional lobbying records...

...Commercial banks in the United States reported a record $9.2 billion in revenue on derivatives in the first quarter of 2009 and another $5.8 billion in the second quarter, according to the most recent data from the Office of the Comptroller of the Currency.

Neither the Senate Banking Committee nor the Senate Agriculture Committee, the two panels with direct jurisdiction on derivatives issues, has yet to mark up legislation."

"The derivatives market’s trade group retained Edward Rosen, a lobbyist with law firm Cleary Gottlieb Steen & Hamilton LLP, to water down the Obama administration’s plan to regulate over-the-counter securities.

Rosen’s hiring followed a disagreement among members of the International Swaps and Derivatives Association’s board that pitted Zurich-based Credit Suisse Group AG against JPMorgan Chase & Co. of New York and seven of Wall Street’s biggest banks, four people familiar with the matter said.

Credit Suisse, whose representative is chairman of the group, recommended Rosen, who in 2000 lobbied for the Swiss bank in favor of a law that kept derivatives unregulated, said the people, who declined to be identified because the matter is private. The eight banks wanted to deploy lobbyists from the Securities Industry and Financial Markets Association, the individual banks and New York-based law firm Davis Polk & Wardwell LLP, they said.

“We are working with Ed,” Robert Pickel, chief executive officer of ISDA, said in an interview.

Rosen, 56, specializes in “structuring of complex securities and derivatives transactions” and regulation of those markets, Cleary Gottlieb’s Web site says. Based in New York, he “advises a broad range of market participants,” it says. Rosen, who referred questions about his hiring to ISDA, co-wrote “U.S. Regulation of the International Securities and Derivatives Markets, Ninth Edition,” published in 2008."

Nonfinancials firms actively lobby

Source: Big Companies Go to Washington to Fight Regulations on Fancy Derivatives WSJ, July 10, 2009

"Any doubt about how broadly U.S. corporations rely on fancy financial instruments vanishes with a look at who's lobbying Congress to forestall tougher regulation.

Companies from Caterpillar Inc. and Boeing Co. to 3M Co. are pushing back on proposals to regulate the over-the-counter derivatives market, where companies can make private deals to hedge against sudden moves in commodity prices or interest rates.

Many in Congress blame such instruments for exacerbating the financial crisis last fall. To fix the problem, a White House plan unveiled last month calls for more of the trades to take place on exchanges where regulators can monitor them, and requires dealers -- and ultimately companies -- to put more money aside to secure against big losses if trades turn bad.

This naturally has Wall Street in a stir, but it has also sent dozens of big manufacturers and other major corporations scurrying to Washington....

...At least 42 nonfinancial companies and trade associations are lobbying Congress on derivatives, according to a Wall Street Journal analysis of lobbying disclosure forms filed through April.

That's more than triple the 14 nonfinancial companies that lobbied on derivatives in all of 2008 and zero in 2005. The figures include only companies that specifically name derivatives as a lobbying issue."

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