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February 22, 2010

Clearinghouse Debates Rage in Congress

By Editorial Staff

Congress was going back and forth on whether swaps houses can own significant stakes in clearinghouses as CQ&D went to press.

The Goldman Sachs, JPMorgans and Morgan Stanleys--some of the big players in the clearing of over-the-counter derivatives--would be hurt by a measure that would have required them to give up their clearing operations.

The House Financial Services Committee recently moved toward barring OTC swaps dealers from owning more than 20 percent of a clearinghouse.

The no-clearinghouse ownership amendment is sponsored by Rep. Stephen Lynch, D-Mass., a member of the committee. He was quoted in published reports as saying it was needed to prevent "conflicts of interest."

But Lynch's spokeswoman was not able to respond to repeated calls from CQ&D requesting a comment on why he took this position. In the meantime, the Financial Services Committee (FSC) seemingly changed its mind on the amendment.

"House Legislative counsel determined the portion of Mr. Lynch's amendment limiting dealer control of clearinghouses would not execute-that is, the provision it sought to amend was no longer in the bill," said Steve Adamske, a spokesman for the committee. "The result is that there is no limitation on ownership under the FSC bill."

However, committee chairman Barney Frank apparently changed his mind. In a published report in the Wall Street Journal in November he said he supports Rep. Lynch's amendment. "I believe it is important to reduce the stake in the clearinghouses of these firms," Frank told the Journal.

That would be a problem for the securities industry, an official of its biggest trade organization told CQ&D.

"Excluding the companies with the most experience and expertise with derivatives may lead to inefficiency and raise costs," Cory Strupp, managing director of SIFMA, told CQ&D.

Clearing industry spokesmen at the biggest firms wouldn't publicly respond, but privately said that owning clearing firms as well as swaps dealers is good practice.

"This ensures that we have every incentive to make and clear good trades," said an official at one of the big firms. "After all, we have big stakes in these clearinghouses." Another official at a swaps dealer was more candid: "Ownership means it is far less likely that anyone is going to dump toxic assets into the clearinghouse."

Toxic is also how the securities industry has always viewed a securities transaction tax, which once again came up in this session of Congress (see STT Idea item).


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