WASHINGTON – A private derivatives regulatory group led by the New York Federal Reserve may weaken rules required by the Dodd-Frank Act, two associations representing large corporate pension plans said.
The panel of international banking supervisors fosters a kind of shadow regulation by dealing only with a “discrete group” of members, the pension plans said in a March 25 letter to New York Fed President William Dudley. The regulators meet at least once a year with buyers and sellers of derivatives including Goldman Sachs Group Inc. and BlackRock Inc.
“We are concerned about a secondary regulatory process that could undermine the public regulatory process,” wrote the pension trade groups, the American Benefits Council and the Committee on Investment of Employee Benefit Assets, in the letter obtained by Bloomberg News.
A “process that is closed to most market participants needs to be examined very closely,” said the associations, which represent pension plans from dozens of companies including 3M Co., Target Corp., Chrysler Group LLC, U.S. Steel Corp. and Textron Inc.
The New York Fed has drawn criticism from lawmakers and others for being too close to the large banks it supervises, which had to be bailed out in the financial crisis. The institution came under particular fire for its rescue of American International Group Inc. and the decision to pay off the insurer’s derivatives counterparties such as Goldman Sachs and Deutsche Bank AG with taxpayers’ money.
Crafting Rules
Under the Dodd-Frank regulatory overhaul, the Commodity Futures Trading Commission and the Securities and Exchange Commission are leading U.S. efforts to increase oversight of the $583 trillion over-the-counter derivatives market. The agencies are crafting rules that would, for the first time, require most derivatives to trade openly and be guaranteed by clearinghouses.
The law requires the CFTC and SEC to implement most of the rules by mid-July.
The OTC Derivatives Supervisors Group, of which Dudley is chairman, was formed in 2005 when then-New York Fed chief Timothy F. Geithner assembled the 14 largest derivatives dealers and regulators. Invitees to its most recent meeting in January included regulators from the U.K., Japan and Germany as well as Bank of America Corp., Morgan Stanley, Pacific Investment Management Co., Citadel LLC and D.E. Shaw Group, according to the New York Fed’s website.
The derivatives group commits to written goals aimed at making markets more transparent after its meetings.
Conflicting Rules
In their letter, the corporate pension plans said a draft they had seen of the latest goals raised concerns. They said that one commitment to the New York Fed regarding trading derivatives via electronic markets may diverge from rules the CFTC is drafting. The commitment could require the pension plans to confirm trades electronically even if the CFTC didn’t require it, the letter said.
“This is just one example of the potential conflict between the commitment letter and regulations being developed,” the pension groups wrote.
Jeffrey Smith, a spokesman for the New York Fed, declined to comment. Jason Hammersla, a spokesman for the American Benefits Council, didn’t comment beyond confirming that the group sent the letter.
After its last meeting in January, Dudley said that the regulatory group will “continue to play a key role” in helping firms work “cooperatively and proactively to drive structural improvements, monitor emerging risks and support consistent supervisory approaches across jurisdictions.”
Dodd-Frank Timeline
The new goals being drafted by the banks and hedge funds may be released as early as today. They focus mainly on setting a timeline to meet requirements from the Dodd-Frank law, according to a copy obtained by Bloomberg News.
The firms believe that completing such a massive undertaking hinges in part on whether U.S. and foreign regulators can cooperate, both on detailed rules and on broader objectives, according to the draft. “International coordination is essential,” they wrote in the letter.
The draft said that by September the financial firms could identify the first set of derivatives that could comply with the mandatory clearing requirement under Dodd-Frank.
The timeline would also establish a voluntary phase-in process for simpler derivatives to be cleared by next March and more complicated products, including credit derivatives, by July 2012, according to the draft letter.
Legal and risk management concerns are “significant barriers to widespread use of clearing by” purchasers of derivatives, the draft said.
