It seems that Congress's preoccupation with the nation's financial situation has not proved to be a distraction from financial regulatory reform. Judging from committee announcements and recently introduced legislation, both the House and Senate have fairly aggressive agendas in mind for the 113th Congress. Legislation tweaking swaps regulation, ending too-big-to-fail, and changing SEC rulemaking powers have all been introduced, and the House Financial Services Committee has announced a full schedule of legislative priorities and hearings on a wide range of topics.

Swap Push-out Rule

Bi-partisan legislation to change the swap push-out provision of Dodd-Frank has been proposed in both the House and the Senate.  In the House, Representatives Randy Hultgren (R-IL) and Jim Himes (D-CN), members of the Financial Services Committee, and Reps. Richard Hudson (R-NC) and Sean Patrick Mahoney (D-NY) introduced the Swaps Regulatory Improvement Act. Companion legislation was proposed in the Senate by Banking Committee members Kay Hagen (D-NC) and Patrick Toomey (R-Pa), and co-sponsored by Agriculture Committee members Senators Mike Johanns (R-NB) and Mark Warner (D-VA).

The Swap push-out rule prevents federally insured banks from engaging in certain kinds of swaps trading, including trading of commodity, equity, and credit derivatives. Because of this prohibition, the banks must push out that activity into separately capitalized non-bank affiliates.  Though the provision was intended to move these risky activities outside of federally insured financial institutions, it would effectively force most derivatives activities to be conducted outside of banks and bank holding companies to entities that are not subject to prudential regulation, and could likely increase systemic risk instead of reducing it. This bill seeks to remedy this by bringing swaps activities back to units within banks and financial institutions that are more easily overseen by financial market regulators.

Ending Too-Big-To-Fail

In yet another bi-partisan effort, Senators Sharrod Brown (D-OH) and David Vitter (R-L) are formulating legislation aimed at creating a two-tier scalable regulatory framework for financial institutions intended to the end-too-big-to-fail phenomenon. In statements entered into the Congressional Record on February 28, 2013, the senators took aim at the too-big-to-fail issue, and outlined legislation they plan to propose that would move US banks away from the Basel III standard, which they claim can be gamed too easily. In its place they propose to implement a simpler, more transparent structure that is not reliant on risk-weighted metrics. Their bill, they say, would end too-big-to-fail by placing more protection between the mega-banks and taxpayers. The legislation they plan to propose would also include a two-tier structure, one for large banks, and one for smaller community banks, alleviating some difficulties smaller banks are experiencing with respect to Basel III standards and certain Dodd-Frank reforms.


Reducing Regulatory Burdens

Concerned that the SEC and other regulators have not considered fully the effects of their regulations, Senator Richard Shelby (R-AL) has introduced the Financial Regulatory Responsibility Act of 2013 (S. 450). This bill would require rule making agencies to perform a twelve-step analysis of any new regulation they intend to propose. Among other things, this analysis would include:

• justifying the need for the regulation,
• explaining why local regulation would not be more efficient than federal regulation,
• a fulsome cost-benefit analysis performed by economists,
• an examination of all alternatives to the proposed regulation,
• assessment of whether the proposed regulation is in any way duplicative of existing regulations,
• assessment of how the regulatory burden will be distributed, and
• assessment of what effect the regulation will have on market participants, consumers, and investors.

This bill is clearly intended to slow the pace of regulation, and could impose on regulators an almost insurmountable task of justifying any new rules.  In the past few years, several SEC regulations have been challenged successfully on the quality of the agency's cost-benefit analysis. Given that regulators must under current law perform cost-benefit analyses, assessment of burdens on market efficiency, and other analyses, adding to the hurdles regulators must meet to propose new rules can only make these rules more vulnerable in the courts.

House Financial Services Committee

Observers of the House Financial Service Committee have managed to piece together the Committee's extremely fulsome agenda for this 113th Congress:

• Monitor the effect of the JOBs Act on capital markets, investor protections and oversee the SEC's progress in implementing required regulations under the act.
• Examine the mutual fund industry, with a particular interest in the SEC and FSOC's efforts to reform money market mutual funds.
• Examine the effects of Dodd-Frank Act regulations have had on OTC derivatives markets, and the extent to which the SEC and FTC have been coordinating their rule making activities with their foreign counterparts.  
• Examine the continuing role that credit rating agencies play in the US financial markets, credit rating agency methodologies, and the effect that SEC regulations removing references to NRSROs have had on the markets.
• Oversight of the SEC's regulation broker-dealers and investment advisers. 
• Examine algorithmic trading practices.
• Examine who Dodd-Frank has affected corporate governance.
• Examine the effects of the past decade of Sarbanes-Oxley regulation.
• Monitor the joint risk retention rule-making mandated by Dodd-Frank to ensure that the regulations promote sound underwriting practices while not impeding credit flows or the recovery of the housing market.
• Examine the potential for covered bonds to provide broader asset class financing, increase transparency, and provide a new funding source for financial institutions.  The Committee will examine whether present regulations would allow the gradual development of a US covered bond market, or whether legislations would be required to authorize it.