AFR Opposes Proposed Swaps Legislation

February 9th, 2012
in econ_news

Econintersect:  The AFR (Americans for Financial Reform), a non-profit public policy organization with backing from consumer activists, labor unions and derivativesSMALLliberal political action organizations, has taken a position in opposition to HR 3283, the Swap Jurisdiction Certainty Act.  The point of the organization is that the proposal would exempt foreign affiliates of U.S. banks and from all the major protections against derivatives risks contained in Title VII of the Dodd-Frank Act when dealing with non-U.S. persons. The definition of non-U.S. person would include foreign affiliates of United States banks and insurance companies.  AFR argues that U.S. financial institutions would be able engage in otherwise prohibited risky activities by funneling such transactions through foreign affiliates, thus gutting the effectiveness of the Dodd-Frank legislation.

Follow up:

The following is the complete statement issued by AFR which starts with a position letter that they have asked their members and supporters to send to members of Congress:

February 8, 2012

Dear Representative,

On behalf of Americans for Financial Reform, we are writing to express our opposition to HR 3283, the Swap Jurisdiction Certainty Act, which is the legislation being considered in subcommittee today. Americans for Financial Reform is an unprecedented coalition of over 250 national, state and local groups who have come together to reform the financial industry. Members of our coalition include consumer, civil rights, investor, retiree, community, labor, faith based and business groups.

The financial crisis of 2008 cost the U.S. economy trillions of dollars and millions of jobs, and led to millions of families losing their homes. Globally, economists have estimated that the total cost of the financial crisis could exceed $60 trillion. Lack of accountability on Wall Street was a created these enormous costs. According to recent polling data, almost 70 percent of Americans favor stronger regulations and oversight on big Wall Street banks and the financial services industry. A large majority also favor the recently passed Dodd-Frank Wall Street Reform Act.

In light of the clear need to address accountability in the financial sector, there has been little support for any attempt to repeal Dodd-Frank outright. So the big banks lobbying against increased oversight have turned to behind-the-scenes attempts to create complex loopholes in key parts of new regulations. This bill is a good example of a truly significant loophole buried in a seemingly technical piece of legislation.

HR 3283 would exempt foreign affiliates of U.S. banks and from all the major protections against derivatives risks contained in Title VII of the Dodd-Frank Act when dealing with non-U.S. persons. Because the definition of non-U.S. person would also include foreign affiliates of United States banks and insurance companies, large U.S. financial firms would also be able to avoid Title VII requirements simply by dealing through their foreign affiliates.

This is a major exemption. Major Wall Street banks have at minimum hundreds of subsidiaries in dozens of countries, and the largest can have thousands. As of 2007, for example, Citibank had over 2,400 different subsidiaries in 84 countries. A smaller institution, JP Morgan Chase, had over 800 subsidiaries in 36 countries.1 Even more important, major banks manage the cash flow from these entities on a consolidated basis, so that money can flow at the touch of a computer keyboard from any one entity to any other. Professor Richard Herring of the Wharton School has described the situation at Lehmann Brothers2:

But the fundamental problem was that LB [Lehman Brothers] was managed as an integrated entity with minimal regard for the legal entities that would need to be taken through the bankruptcy process. LBHI [Lehman Brothers Holdings, Incorporated] issued the vast majority of unsecured debt and invested the funds in most of its regulated and unregulated subsidiaries. This is a common approach to managing a global corporation, designed to facilitate control over global operations, while reducing funding, capital and tax costs. LBHI, in effect, served as banker for its affiliates, running a zero balance cash management system. LBHI lent to its operating subsidiaries at the beginning of each day and then swept the cash back to LBHI at the end of each day. The bankruptcy petition was filed before most of the subsidiaries had been funded on September 15th and so most of the cash was tied up in court proceedings in the US. Lehman also centralized its information technology so that data for different products and different subsidiaries were comingled.”

In other words, at Lehman Brothers, like most sophisticated global corporations, the total cash balances from all countries were moved in and out of the central corporate treasury on a daily basis. Thus, the total resources of the global operation were available to the parent company at all times. The last sentence points out that the organization was so integrated that the lines between the assets held by different subsidiaries were blurred in the company’s data management system.

For such integrated financial companies, losses in foreign subsidiaries can be disastrous to the parent company. Recall that the failure of Barings Bank after over 230 years of operation was due to actions by a single rogue derivatives trader in a Singapore subsidiary of the British bank. Recall also that AIG was exposed to massive derivatives losses through an affiliate located in London, AIG Financial Products. These were obviously extreme cases, but it is clear that large American banks organized on a global basis do routinely rely on cash flows from their foreign subsidiaries, and routinely fund losses at these subsidiaries. For reputational reasons it can be difficult for a parent company to simply refuse to honor debts incurred at a subsidiary, even if the parent has not explicitly guaranteed subsidiary debt (as often occurs).

This means that the stability of the U.S. financial system can certainly be affected by losses at foreign subsidiaries of U.S. banks. The blanket exemption from Title VII requirements would substantially increase the risk of such losses. It would include an exemption from any requirement for the derivatives dealer to hold margin against uncleared derivatives contracts. This means that foreign affiliates of a U.S. bank would be directly exposed to counterparty credit risk from the failure of counterparties who were speculating in the markets. Capital requirements would also be eliminated for non-bank derivatives dealers and likely weakened for bank-affiliated dealers. In addition, this legislation would effectively repeal the Title VII prohibition on Federal government bailouts of derivatives dealers. Any such bailout could be channeled through a foreign affiliate and it would be received by the parent company.

In addition to the broad Title VII exemption, foreign derivatives subsidiaries of U.S. banks would also be permitted to substitute the capital requirements of their local (foreign) regulator instead of their U.S. regulator, so long as they were located in a jurisdiction that had signed the Basel accords. As the world now knows, European banks are systematically undercapitalized, and many European banking regulators are considered to be more lenient than U.S. regulators. Thus this provision could easily result in a weakening of effective capital standards for bank-affiliated derivatives dealers as well.

These radical steps are justified by the supposed need to preserve competitiveness for foreign derivatives subsidiaries of major U.S. banks in overseas derivatives markets. This is precisely the same argument that was used to prevent regulation of the over-the-counter derivatives markets a decade ago, when adoption of tough regulations could have helped prevent the catastrophic damage of the latest financial crisis. While there may be a connection between such competitiveness and the profitability of our largest Wall Street banks, the relationship to American jobs is less clear and may be negative. This legislation would create significant incentives for U.S. banks to channel derivatives business through foreign subsidiaries in order to evade regulation. It is likely that expansion of these operations would mostly create jobs overseas, and might even lead to the relocation of some U.S. jobs to foreign subsidiaries. It is certain it would increase the risk of yet another job-killing financial catastrophe.

Another unfortunate effect of the legislation would be to create incentives for a “race to the bottom” in financial regulatory standards among foreign countries, since countries with lower regulatory standards could attract derivatives dealers seeking lax regulation. This would undermine the process of global harmonization that is currently taking place in world derivatives markets. The U.S. has reached broad agreement with the G-20 on the need for capital, margin, and clearing protections in the world’s major derivatives markets. The U.S. is leading the way globally on implementation of these protections. The blanket exemption proposed in this legislation would actually undermine this process of harmonization by creating a powerful incentive for a country to set itself up as a haven from international regulation. Geographical exemptions from regulation fuel such “race to the bottom” outcomes and weaken incentives to coordinate.

Historically, the U.S. financial sector gained its international reputation due to our global leadership in creating stable and transparent markets. Indeed, it was over 150 years ago that the U.S. pioneered the derivatives clearinghouse. This was a major positive innovation in establishing robust and valuable marketplaces for commodities as well as key financial markets. The US economy will benefit from having transparent, sound and reliable capital markets, and global industry will participate in our capital markets to the extent that they are transparent, sound and reliable. Although permitting regulatory loopholes may create short-term profits, in the long run the greater threat to the U.S. competitive edge is a repetition of the deregulation that led to the disastrous financial crisis of 2008. HR 3283 should be rejected.


Americans for Financial Reform

1 Cumming, Christine and Eisenbeis, Robert A., Resolving Troubled Systemically Important Cross-Border Financial Institutions: Is a New Corporate Organizational Form Required? (July 1, 2010). FRB of New York Staff Report No. 457.

2 Herring, Richard and Jacopo Carmassi, "The Corporate Structure of International Financial conglomerates: Complexity and Its Implications for Safety and Soundness," in The Oxford handbook of Banking, ed. by Allen Berger, 2010

Following are the partners of Americans for Financial Reform.

All the organizations support the overall principles of AFR and are working for an accountable, fair and secure financial system. Not all of these organizations work on all of the issues covered by the coalition or have signed on to every statement.

A New Way Forward



Alliance For Justice

Americans for Democratic Action, Inc

American Income Life Insurance

Americans United for Change

Campaign for America’s Future

Campaign Money

Center for Digital Democracy

Center for Economic and Policy Research

Center for Economic Progress

Center for Media and Democracy

Center for Responsible Lending

Center for Justice and Democracy

Center of Concern

Change to Win

Clean Yield Asset Management

Coastal Enterprises Inc.

Color of Change

Common Cause

Communications Workers of America

Community Development Transportation Lending Services

Consumer Action

Consumer Association Council

Consumers for Auto Safety and Reliability

Consumer Federation of America

Consumer Watchdog

Consumers Union

Corporation for Enterprise Development

CREDO Mobile

CTW Investment Group


Economic Policy Institute

Essential Action

Greenlining Institute

Good Business International

HNMA Funding Company

Home Actions

Housing Counseling Services

Information Press

Institute for Global Communications

Institute for Policy Studies: Global Economy Project

International Brotherhood of Teamsters

Institute of Women’s Policy Research

Krull & Company

Laborers’ International Union of North America

Lake Research Partners

Lawyers' Committee for Civil Rights Under Law

Move On


National Association of Consumer Advocates

National Association of Neighborhoods

National Community Reinvestment Coalition

National Consumer Law Center (on behalf of its low-income clients)

National Consumers League

National Council of La Raza

National Fair Housing Alliance

National Federation of Community Development Credit Unions

National Housing Trust

National Housing Trust Community Development Fund

National NeighborWorks Association

National Nurses United

National People’s Action

National Council of Women’s Organizations

Next Step

OMB Watch

Opportunity Finance Network

Partners for the Common Good

PICO National Network

Progress Now Action

Progressive States Network

Poverty and Race Research Action Council

Public Citizen

Sargent Shriver Center on Poverty Law


State Voices

Taxpayer’s for Common Sense

The Association for Housing and Neighborhood Development

The Fuel Savers Club

The Leadership Conference on Civil and Human Rights

The Seminal


U.S. Public Interest Research Group


United Food and Commercial Workers

United States Student Association


Veris Wealth Partners

Western States Center

We the People Now

Woodstock Institute

World Privacy Forum


Union Plus

Unitarian Universalist for a Just Economic Community

List of State and Local Signers

Alaska PIRG

Arizona PIRG

Arizona Advocacy Network

Arizonans For Responsible Lending

Association for Neighborhood and Housing Development NY

Audubon Partnership for Economic Development LDC, New York NY

BAC Funding Consortium Inc., Miami FL

Beech Capital Venture Corporation, Philadelphia PA

California PIRG

California Reinvestment Coalition

Century Housing Corporation, Culver City CA


Chautauqua Home Rehabilitation and Improvement Corporation (NY)

Chicago Community Loan Fund, Chicago IL

Chicago Community Ventures, Chicago IL

Chicago Consumer Coalition

Citizen Potawatomi CDC, Shawnee OK

Colorado PIRG

Coalition on Homeless Housing in Ohio

Community Capital Fund, Bridgeport CT

Community Capital of Maryland, Baltimore MD

Community Development Financial Institution of the Tohono O'odham Nation, Sells AZ

Community Redevelopment Loan and Investment Fund, Atlanta GA

Community Reinvestment Association of North Carolina

Community Resource Group, Fayetteville A

Connecticut PIRG

Consumer Assistance Council

Cooper Square Committee (NYC)

Cooperative Fund of New England, Wilmington NC

Corporacion de Desarrollo Economico de Ceiba, Ceiba PR

Delta Foundation, Inc., Greenville MS

Economic Opportunity Fund (EOF), Philadelphia PA

Empire Justice Center NY

Empowering and Strengthening Ohio’s People (ESOP), Cleveland OH

Enterprises, Inc., Berea KY

Fair Housing Contact Service OH

Federation of Appalachian Housing

Fitness and Praise Youth Development, Inc., Baton Rouge LA

Florida Consumer Action Network

Florida PIRG

Funding Partners for Housing Solutions, Ft. Collins CO

Georgia PIRG

Grow Iowa Foundation, Greenfield IA

Homewise, Inc., Santa Fe NM

Idaho Nevada CDFI, Pocatello ID

Idaho Chapter, National Association of Social Workers

Illinois PIRG

Impact Capital, Seattle WA

Indiana PIRG


Iowa Citizens for Community Improvement

JobStart Chautauqua, Inc., Mayville NY

La Casa Federal Credit Union, Newark NJ

Low Income Investment Fund, San Francisco CA

Long Island Housing Services NY

MaineStream Finance, Bangor ME

Maryland PIRG

Massachusetts Consumers' Coalition


Massachusetts Fair Housing Center

Michigan PIRG

Midland Community Development Corporation, Midland TX

Midwest Minnesota Community Development Corporation, Detroit Lakes MN

Mile High Community Loan Fund, Denver CO

Missouri PIRG

Mortgage Recovery Service Center of L.A.

Montana Community Development Corporation, Missoula MT

Montana PIRG

Neighborhood Economic Development Advocacy Project

New Hampshire PIRG

New Jersey Community Capital, Trenton NJ

New Jersey Citizen Action

New Jersey PIRG

New Mexico PIRG

New York PIRG

New York City Aids Housing Network

New Yorkers for Responsible Lending

NOAH Community Development Fund, Inc., Boston MA

Nonprofit Finance Fund, New York NY

Nonprofits Assistance Fund, Minneapolis M

North Carolina PIRG

Northside Community Development Fund, Pittsburgh PA

Ohio Capital Corporation for Housing, Columbus OH



Oregon State PIRG

Our Oregon


Piedmont Housing Alliance, Charlottesville VA

Michigan PIRG

Rocky Mountain Peace and Justice Center, CO

Rhode Island PIRG

Rural Community Assistance Corporation, West Sacramento CA

Rural Organizing Project OR

San Francisco Municipal Transportation Authority

Seattle Economic Development Fund

Community Capital Development


The Fair Housing Council of Central New York

The Loan Fund, Albuquerque NM

Third Reconstruction Institute NC

Vermont PIRG

Village Capital Corporation, Cleveland OH

Virginia Citizens Consumer Council

Virginia Poverty Law Center

War on Poverty - Florida


Westchester Residential Opportunities Inc.

Wigamig Owners Loan Fund, Inc., Lac du Flambeau WI


Small Businesses


Bowden-Gill Environmental

Community MedPAC

Diversified Environmental Planning

Hayden & Craig, PLLC

Mid City Animal Hospital, Pheonix AZ

The Holographic Repatterning Institute at Austin


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