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June 25, 2014

SEC’s Incomplete Rules Today Invite More Wall Street Evasion and Needlessly Expose US Taxpayers to More Bailouts

Washington, D.C., June 25, 2014 – In response to today’s vote by the federal Securities and Exchange Commission (SEC) to adopt the first in a series of rules around the issue of “cross-border” derivatives trading, Better Markets President and CEO Dennis Kelleher issued the following statement:

“The incomplete cross-border rules adopted today by the SEC are a step forward for financial reform, but two steps backwards in failing to protect US taxpayers from Wall Street’s overseas derivatives gambling.  The step forward is the SEC passing any financial reform rules, which it has been too slow to do.  Finally, after almost 6 years since the US taxpayers bailed out AIG with $185 billion for its London swaps business, the SEC has begun the process of regulating overseas risks to the US.

“Unfortunately, the SEC has taken an overly restrictive view of its authority and refused to regulate a recent Wall Street tactic used to evade similar rules recently passed by the CFTC, referred to as ‘de-guaranteeing.’  The SEC now joins the CFTC in regulating only Wall Street’s explicitly guaranteed foreign affiliates, but not de facto guaranteed foreign affiliates.  As Better Markets predicted when the CFTC was considering its rules, Wall Street has just erased the word ‘guaranteed’ in its foreign affiliates swaps dealings and, presto, they have evaded the regulations designed to protect US taxpayers from future bailouts, as has been widely reported by many in the media.

”The SEC had the opportunity to address and correct this known evasion, but chose not to do so.  Leaving de facto guaranteed foreign affiliates outside of US regulation invites Wall Street to game the rules and puts US taxpayers at risk of future bailouts when their foreign derivatives deals blow up, as they have done repeatedly in the past. 

“The other step backwards was the SEC’s failure to define ‘transactions conducted within the United States.’  Only Wall Street’s lobbyists and their allies would not be able to define this term as it has been commonly understood for many years.  All transactions conducted within the US should be governed by US law. Wall Street is pressuring the SEC to define all sorts of swaps activity conducted in the US as really happening overseas.  As if that wasn’t bad enough, Wall Street is then arguing that foreign law be applicable to those supposedly ‘foreign’ swaps transactions even though they are conducted in the US.  This would be a dramatic, unprecedented and unwise change in decades of law that would needlessly expose US taxpayers to much greater risk. 

“This application of foreign law to swaps transactions in the US would arise due to regulators’ creation and use of what is called ‘substituted compliance.’  That, however, is just a regulator-created concept that outsources the protection of US taxpayers to foreign regulators who have repeatedly failed miserably to protect even their own taxpayers.  Putting foreign regulators as the front line of defense for US taxpayers in the US would be an abdication of responsibility.

“US regulators need to get to work protecting the American people directly and completely and reject Wall Street’s unending lobbying to create loopholes that will lead to future taxpayer-funded bailouts.  The American people have already suffered too much from an un-regulated Wall Street, which is, after all, why the financial reform law was passed and why regulators like the SEC have to pass strong and effective rules.  Six years is too long to wait.”

Better Markets released an in-depth fact sheet on “De-guaranteeing” and cross border derivatives on June 19, 2014. 

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