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Lawmakers sharpen focus on derivatives reform

By Brian Scheid in Washington

October 10, 2011 - Federal regulators are facing a new and redefined wave of pressure from lawmakers to lessen the impact of the mountain of derivatives rules, as the calls for repeal appear dead and legislation mandating delays seem unnecessary, now that deadlines have been missed.

With final votes on clearing requirements and commodity position limits looming, the derivatives portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act is getting a renewed focus on Capitol Hill, from both Democrats and Republicans.

One of the law's namesakes wants the global reach of the final rules limited, Senate and House o Representatives Republicans want smaller energy companies exempt from forthcoming margin requirements and regulators are being pressed to rework how they evaluate the costs of these new rules.

What's clearly not happening is a total repeal of Dodd-Frank, according to Representative Scott Garrett, a New Jersey Republican and chairman of the House Subcommittee on Capital Markets and Government Sponsored Enterprises.

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Any legislation to repeal Dodd-Frank will only be introduced for "symbolic reasons," Garrett said, since it would have no chance of getting passed in the Democrat-controlled Senate.

"We're not trying to dismantle [Dodd-Frank] anymore," Garrett said on the sidelines of a conference in New York October 3. "We're not talking about that. We're saying 'We've got it, now how do we make it so it actually works and not drive [business] overseas?'"

How they plan to do that, Garrett said, is through "slivers" of legislation and oversight, such as a bill he introduced in July that he said will force regulators to finalize rules on new swap execution facilities in a way that allows the best form of execution to evolve over time.

These "slivers," as Garrett describes them, have become prolific recently as lawmakers have pushed for changes to Dodd-Frank rules at a rate perhaps not seen since the bill was originally drafted.

In a letter sent October 4 to regulators, including Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro, Representative Barney Frank and Senator Tim Johnson pushed them to limit the global scope of new derivatives rules.

Frank, a Massachusetts Democrat and the ranking member of the House Financial Services Committee, and Johnson, a South Dakota Democrat and chairman of the Senate Banking Committee, said Congress expressly limited the territorial scope of the new derivatives rules when drafting the law.

"Given the global nature of this market, US regulators should avoid creating opportunities for international regulatory arbitrage that could increase systemic risk and reduce the competitiveness of US firms abroad," Frank and Johnson wrote.

"We are concerned that the proposed imposition of margin requirements, in addition to provisions related to clearing, trading, registration, and the treatment of foreign subsidiaries of US institutions, all raise questions about consistency with Congressional intent regarding [the derivatives portion of Dodd-Frank]."

Next page: Derivatives users unsure when new rules take effect

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