Derivatives Letter

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Letter from New York congress members opposing financial reform provisions for banks to spin off their derivatives business.
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  June XX, 2010The Honorable Nancy Pelosi The Honorable Steny H. Hoyer Office of the SpeakerOffice of the Majority Leader H-232, U.S. CapitolH-107, U.S. CapitolWashington, DC 20515 Washington, DC 20515The Honorable Barney Frank The Honorable Colin C. PetersonChairman ChairmanHouse Financial Services CommitteeHouse Agriculture Committee2129 RHOB1301 LHOBWashington, DC 20515 Washington, DC 20515Dear Speaker Pelosi, Majority Leader Hoyer, Chairman Frank and Chairman Peterson:As you work to reconcile the recently-passed Senate amendments to the House-passedWall Street Reform and Consumer Protection Act with the bill as srcinally passed by the Houseof Representatives, we write to express our deep concerns about the potential implications of the provisions contained in the Senate bill regarding derivatives trading. The Senate-passed versionof H.R. 4173 includes a number of provisions that could have the unintended consequences of actually increasing systemic risks, reducing the ability of legitimate commercial end users tohedge exposures, and making it more expensive and difficult for states, municipalities and pension funds to issue bonds.In particular, we have serious concerns about language contained in the Senate bill that would bar banks involved in derivatives trading from access to several important federal bankinginstitutions, including the Fed window and the Federal Deposit Insurance Corporation. While westrongly believe that more transparency and accountability is needed in our derivatives markets,we believe a better approach would be to address regulating the derivatives markets through athoughtful separation of proprietary trading and traditional commercial banking activities. TheHouse-passed language, requiring the use of exchanges or clearinghouses for derivatives trades,is far more pragmatic than the Senate’s approach and more sensibly addresses one of the major regulatory deficiencies that led to the near-collapse of our financial system in 2008. The effectof the Senate provision would be to force America’s largest banks to spin off their derivativestrading activities, and would increase systemic risk by making it more difficult to regulate thederivatives market through undercapitalized corporate affiliates.We are deeply concerned by the very real possibility that, as a result of the Senate derivatives provision, America’s largest financial institutions will move their $600 trillion derivatives businesses overseas, at the expense of both the U.S. economy, as well as the economy of NewYork State and New York City. Aside from the immediate and long-lasting economic impact of the Senate’s language, we are further concerned by the implications of such a large industrymoving abroad, where many other sensible mandates and protections contained in the WallStreet Reform and Consumer Protection Act may not apply. The Senate derivatives languagemay inadvertently undermine the very intent of the legislation.  As supporters of comprehensive but sensible financial regulatory reform, we ask that youstrongly advocate for the House-passed derivatives language during the conference with theSenate on H.R. 4173.Sincerely,GARY L. ACKERMANMICHAEL E. McMAHONMember of CongressMember of Congresscc: All Conferees on H.R. 4173
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