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April 11, 2012

Regulators Must Reject Industry "De Maximum" Loophole That Would Allow Dark Markets To Flourish

Better Markets, a nonprofit, nonpartisan group dedicated to promoting the public interest in financial reform, has called on regulators to reject a huge industry loophole that would gut a key part of the Dodd-Frank law to make the more than $700 trillion derivatives market more transparent and less risky to bailouts.

The group wrote to the Securities and Exchange Commission and the Commodity Futures Trading Commission asking them to reject an industry lobbying gambit for a “de minimis” exemption that would allow 50 percent or more of derivatives trading to continue to be done in the dark, without transparency and little regulation.

“Wall Street continues its nonstop attempts to kill financial reform. Its latest loophole gambit is to try to expand a small $100 million ‘de minimis’ exception into a gigantic $3 billion ‘de maximum’ loophole. It wants to continue business as usual: preying on customers, avoiding the most modest regulations, killing transparency so regulators can’t see what they are up to and setting themselves up for more bailouts,” said Dennis Kelleher, president and CEO of Better Markets.

The letters ask the agencies to retain their current proposal that would impose registration requirements on firms that trade more than $100 million of gross notional value. That $100 million threshold would exempt between 12 to 17 percent of the dealers that actively trade security-based swaps, according to newly released SEC data.

“The Data reveals that the currently proposed de minimis threshold of $100 million is actually too high.  More importantly, however, it shows that under no circumstances is there any basis for the Commission to increase the threshold in the final rule,” Mr. Kelleher wrote. “Indeed, based on the lack of any empirical support for a threshold amount above $100 million, it would be arbitrary, capricious, and contrary to the express provisions of the law to make any increase in the currently proposed level.”

Industry has lobbied for a threshold exemption as much as $3 billion. That level would exclude between 34 to 57 percent of dealers from new Dodd-Frank oversight, which was designed to reduce systemic risk to the financial system, prevent future Wall Street bailouts such the $182 billion rescue of AIG, and protect market participants from fraud and abuse.

The letter noted that a $3 billion threshold would be “grossly excessive” and would “likely create an even larger pool of unregistered dealers by incentivizing entities close to the $3 billion mark to scale down or reorganize their operations to qualify for the exemption.”


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