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October 28, 2019

Bank Regulators Give Wall Street $40 Billion Deregulatory Gift While Significantly Increasing Derivatives Risks to the Financial System & Taxpayers

Monday, October 28, 2019
Contact: Christopher Elliott, 202-618-6433

Washington, D.C.  –  Dennis M. Kelleher, Chief Executive Officer of Better Markets, issued the following statement with respect to the Office of the Comptroller, Federal Deposit Insurance Corporation, Farm Credit Administration, Federal Housing Finance Agency, and the Board of Governors of the Federal Reserve System’s (collectively, “Bank Regulators”) proposed elimination of a crucial risk management requirement for interaffiliate derivatives:

“Earlier today, the five Bank Regulators proposed to eliminate initial margin requirements on interaffiliate derivatives.  This is a deregulatory gift worth more than $40 billion to Wall Street’s five largest banks who have been lobbying for this because they are also the five largest derivatives dealers, handling about 90% of all U.S. derivatives transactions.  The posting of margin is a critically important buffer against losses and the proposed elimination is shortsighted, violates the express language of the Dodd-Frank Act, and will facilitate evasion of key financial protections. 

“First, the very purpose of interaffiliate derivatives is to transfer risks between legal entities.  However, too often, these derivatives are used to move risks into U.S. banks that have custody of customer deposits and assets, as we detailed in a recent American Banker Op Ed

“Thus, the proposal would eliminate one of the most important derivatives reforms intended to insulate these U.S. customer deposits and assets from the risks of foreign derivatives dealing and to ensure Wall Street’s largest derivatives dealers can manage affiliated defaults without precipitating a crisis.

“Second, the Bank Regulators do not have the authority to eliminate initial margin requirements on interaffiliate derivatives.  In Title VII of the Dodd-Frank Act, Congress clearly mandated the imposition of ‘both initial and variation margin’ on ‘all’ uncleared swaps and security-based swaps:

“Third, much derivatives dealing through foreign affiliates is not subject to regulatory frameworks as comprehensive as the financial reforms implemented in the U.S. after the financial crisis.  The current rules—which Bank Regulators now seek to abolish—help to prevent U.S. derivatives dealers from avoiding U.S. transparency and other requirements by indirectly dealing through foreign affiliates with little more than a key stroke.  In other words, the current rules make it harder for U.S. derivatives dealers to engage in regulatory arbitrage, which will be unleashed by the proposal.

“Finally, the Bank Regulators, in announcing the proposal, were regrettably less than forthcoming about potential risks to U.S. taxpayers and depositors.  They claimed the proposal would ‘facilitate the implementation of prudent risk management strategies’ and suggested that other existing regulations, like Regulation W, would address some of the same risks as the initial margin requirements.  These assertions are inaccurate, incomplete and misleading, as Federal Reserve Board Governor Lael Brainard made painfully clear in her dissent.

“We will detail our objections more fully in an upcoming comment letter in response to the proposal.”


Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more.

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