Two Democratic representatives from New York City, Gary L. Ackerman and Michael E. McMahon, are coming to the defense of Wall Street, urging members of the House-Senate conference committee on the financial regulatory bill to reject provisions that would force banks to spin off their lucrative derivatives trading units.

In a letter obtained by DealBook, which is scheduled to be sent to all members of the conference committee on Thursday, Mr. Ackerman and Mr. McMahon say they have “deep concerns” about the derivatives measure championed by Senator Blanche Lincoln, Democrat of Arkansas. (Read the letter after the jump.)

The representatives argue that the restrictions on derivatives trading could increase systemic risk and drive lucrative jobs out of New York City to foreign markets.

Mr. Ackerman and Mr. McMahon contend that the so-called Volcker Rule, which forces banks to separate their proprietary trading from other banking activities, is sufficient to ensure adequate safeguards to keep banks from running into trouble while dealing in derivatives.

About 97 percent of all derivatives contracts are handled by five banks: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley.

Neither Mr. Ackerman nor Mr. McMahon is on the conference committee, which is meeting over the next two weeks to merge the Senate and House versions of the financial regulatory bill. But there are two House Democrats from New York City on the committee, Gregory W. Meeks, who represents parts of Queens, and Carolyn B. Maloney, who represents parts of Manhattan and Queens. Senator Charles E. Schumer of New York is also on the committee.

Mr. Ackerman also represents parts of Queens, and Mr. McMahon represents parts of Brooklyn and Staten Island.

Mr. Ackerman and Mr. McMahon addressed their letter to Representative Nancy Pelosi, the House speaker; Representative Steny H. Hoyer, the House majority leader; Representative Barney Frank, the chairman of the House Financial Services Committee; and Representative Colin C. Peterson, the chairman of the House Agriculture Committee.

– Cyrus Sanati

Letter on the Derivatives Provision:

Dear Speaker Pelosi, Majority Leader Hoyer, Chairman Frank and Chairman Peterson:

As you work to reconcile the recently passed Senate amendments to the House-passed Wall Street Reform and Consumer Protection Act with the bill as originally passed by the House of 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 version of 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 to hedge 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 banking institutions, including the Fed window and the Federal Deposit Insurance Corporation. While we strongly 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 a thoughtful separation of proprietary trading and traditional commercial banking activities. The House-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 effect of the Senate provision would be to force America’s largest banks to spin off their derivatives trading activities, and would increase systemic risk by making it more difficult to regulate the derivatives 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 New York 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 industry moving abroad, where many other sensible mandates and protections contained in the Wall Street Reform and Consumer Protection Act may not apply. The Senate derivatives language may inadvertently undermine the very intent of the legislation.

As supporters of comprehensive but sensible financial regulatory reform, we ask that you strongly advocate for the House-passed derivatives language during the conference with the Senate on H.R. 4173.

Sincerely,

Gary L. Ackerman, member of Congress
Michael E. McMahon, member of Congress

cc: All conferees on H.R. 4173