Wall Street banks have a special loathing for a new and arcane rule, and they have gone to extraordinary lengths â€" like helping to write a bill that is currently in Congress â€" to try and neuter it.
But in recent weeks, the banks have started to eagerly embrace exactly the sort of changes that the hated regulation demands of them. And, as you may have guessed, it’s not because the banks have suddenly come to believe in the rule.
The regulation in question is something called the swaps push-out rule, a part of the Dodd Frank Act, which Congress passed in 2010 to overhaul the financial system after the 2008 crisis. Banks make huge amounts of money from trading in derivative, financial contracts that can be used to bet on things like interest rates, stock prices and the creditworthiness of corporations. Swaps are a type of derivative.
Even though derivatives trading is a quintessential Wall Street business, banks have been able to do virtually all of it in their traditional banking subsidiaries that benefit from deposit insurance and other forms of federal support. Citigroup, for instance, had $63.5 trillion of derivatives on its books at the end of 2013, $62.3 trillion of which were inside its insured banking subsidiary.
Banks can make more money from derivatives trading by locating it in their insured subsidiaries. These subsidiaries usually have higher credit ratings than other parts of the bank, in part because of their implied government support. And these higher ratings enable the banks to get better terms in the derivatives bets they do with their trading partners, bolstering the banks’ profits.
Dodd Frank’s swaps push-out rule seeks to reduce those effective government subsidies on Wall Street trading. It required certain types of derivatives to be “pushed out†of insured banks into another part of the bank that doesn’t benefit from federal backing.
In the end, the rule only applied to a small selection of derivatives. And the banks were given a long time to comply with the rule; they have until July next year.
Even so, the banks have not stopped pressing for changes to the rule. Citigroup even helped write a piece of legislation in the House that would exempt still more types of derivatives from the rule. (Citigroup declined to comment.) The banks opposed the push-out rule because they said it would make their trading less efficient. They also contended that pushing out swaps would make the system more risky because the moved swaps would end up in less regulated entities that the authorities could not support in times of crisis, a view that some prominent regulators shared.
Though the banks have long had a strong aversion to the idea of pushing out derivatives, something appears to be changing. In recent days, there have been news reports that say the banks have started to shift substantial amounts of derivatives trades into offshore affiliates that the parent banks do not guarantee. In other words, Wall Street is now actively pushing out swaps. It’s not clear whether these moved swaps would originally have been done within the banks’ insured subsidiaries. But the banks are moving swaps into affiliates that have less support, which is exactly the sort of shift that the push-out rule envisioned.
So why are the banks doing this? In short, they are trying to avoid other derivatives regulations that are unrelated to the push-out rule.
Specifically, the banks want to lessen the impact of new rules, also part of Dodd Frank, that aim to improve pricing transparency in the derivatives markets. Trades done through the banks’ offshore nonguaranteed affiliates are more likely to be beyond the reach of the American transparency overhaul.
One interpretation of all this is that Wall Street dislikes the transparency rules more than the idea of pushing out swaps.
Another reading is that big banks will opportunistically say anything to weaken regulation â€" even when they contradict themselves.
