Democrats Back Wall Street Push to Free Up $40 Billion in Margin

(Bloomberg) -- A group of House Democrats is pressing bank regulators to roll back a rule that forces the biggest Wall Street firms to set aside as much as $40 billion as a safety net in derivatives trading.

Freeing those billions in collateral has been a longtime aim of the industry and has regularly drawn support from Republicans in Congress. Now 17 Democrats -- including seven from the House Financial Services Committee -- have joined in, calling for an overhaul of requirements tied to internal swaps transactions between a bank’s affiliates.

“Due to the large and increasing amount of unusable, locked-up collateral, quick action should be taken,” the Democrats wrote in a June 26 letter to Federal Reserve Chairman Jerome Powell, Federal Deposit Insurance Corp. Chairman Jelena McWilliams and Comptroller of the Currency Joseph Otting.

The lawmakers, including Representatives Josh Gottheimer of New Jersey, David Scott of Georgia and Gregory Meeks of New York, said current U.S. rules exceed international standards and easing the requirement won’t increase risk in the financial system.

The new push from the House Democrats could put them at odds with Financial Services Committee Chairwoman Maxine Waters, who has repeatedly argued against weakening post-crisis bank regulations. The margin rule, prompted by the Dodd-Frank Act, aimed to tighten oversight after derivatives trades amplified the 2008 financial meltdown. When it was approved in 2015, regulators said the requirement would promote soundness and “strong risk management.”

The International Swaps and Derivatives Association, an industry group, estimated that $39.4 billion in collateral had been set aside to meet margin requirements as of the end of 2018. The issue is particularly important to major swaps dealers, such as Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. The Financial Services Forum, a trade group representing eight of the largest banks, spearheaded the lobbying effort on the Democrats’ letter.

Consumer groups such as Americans for Financial Reform have argued that the margin requirement is critical for protecting the bank subsidiaries and affiliates that handle customers’ deposits.

To contact the reporters on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net;Robert Schmidt in Washington at rschmidt5@bloomberg.net

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

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