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Wall Street Is United in Its Disdain for Dodd-Frank, but Split on the Details

While the biggest rivals on Wall Street share a common disdain for new constraints on financial risk-taking, they’re fighting over exactly how to tame the sprawling regulatory overhaul.

Gary Gensler
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Gary Gensler

Major industry lobbyists like the Chamber of Commerce and the American Bankers Association are split on crucial rules stemming from the Dodd-Frank Act, including restrictions on lending and the $600 trillion derivatives market, two areas at the center of the financial crisis. As federal officials flesh out some 300 new regulations, top companies and trade groups are squabbling over the fine print, each cheerleading for policies that suit their own businesses.

“On almost every issue, competitors are fighting over the outcome of regulations,” said Mark D. Young, a former regulator who is now a lawyer at Skadden, Arps, Slate, Meagher & Flom.

Some level of discord is expected. The Dodd-Frank law, which spans some 2,300 pages, is as huge and disparate as the industry it polices.

But a few industry debates have grown hostile. Firms are taking aim at competitors, and regulators are stuck in the awkward position of picking winners and losers — all of which has delayed new rules.

“Our charge as regulators is to ensure market integrity and an open and competitive marketplace for all market participants,” said Gary Gensler, chairman of the Commodity Futures Trading Commission.

The nation’s biggest banks, at odds with their smaller brethren, are pushing Mr. Gensler to soften proposed rules that would create broader competition in the derivatives industry, according to several people close to the agency who spoke on the condition of anonymity because the rules are not yet finished. The banks, including Morgan Stanley , worry that smaller players may not have the financial fortitude to take on potential risks, concerns echoed earlier this year by a European regulator.

But some peripheral firms want to break the stranglehold. A new Dodd-Frank rule unveiled earlier this year to “permit fair and open access” to the business drew rare compliments from State Street, a financial firm that is looking to grab a share of Wall Street’s profits.

State Street dashed off a glowing letter in March, saying it “strongly supports” the proposal and proclaiming that the rules “would effectively implement Congress’s intent.” At the same time, it warned against offering “unfair advantages to established” banks in the derivatives world.

The Dodd-Frank rule-making has also pitted two stalwarts in derivatives trading — the CME Group and the IntercontinentalExchange — against each other. While the two companies, which offer clearinghouses and trading platforms, agree on many new rules, they are fighting over one of the law’s most contentious issues, the so-called position limits plan. The rule would place hard caps on speculative trading in commodities like oil, wheat and gold.

The Commodity Futures Trading Commission has proposed relaxing position limits for certain trades, those settled with cash payments rather than by exchanging the actual commodity. ICE specializes in cash settlements.

Now CME is crying foul, accusing regulators of encouraging customers to flock to its competitor. The plan, CME said in an August letter to the agency, “defies sound regulatory policy.”

“We do not believe the commission intends to increase the threat of commodity price manipulation, yet its proposal would do so.”

ICE hit back with its own hostile missive that portrayed CME, in essence, as a sore loser. “The only party advocating for a change in the well-functioning status quo is CME, who is clearly biased regarding the issue,” ICE said in letter to the commodity commission.

Scott O’Malia, a Republican commissioner at the agency, recently returned from a family vacation and remarked to colleagues that his school-age children were better behaved, or at least more civil, than ICE and CME. This summer, another high-ranking regulator encouraged the companies’ executives to call off the public feud, according to a person with knowledge of the matter.

Later, Mr. Gensler met separately on the same day in August with Craig S. Donohue, CME’s chief executive, and Jeffrey Sprecher, the head of ICE. No compromise was reached.

Regulators are also looking to find common ground at the new Consumer Financial Protection Bureau, another creation of Dodd-Frank.

As it prepared to open its doors in July, the bureau summoned consumer advocates and financial industry lobbyists to its Washington headquarters, soliciting their feedback on plans to regulate shadowy corners of the lending industry. At one afternoon meeting, nearly 20 officials from such varied groups as the NAACP and the Financial Services Roundtable gathered in a conference room to discuss the limits of the bureau’s power.

While the American Bankers Association and other industry groups advocated broad authority over large debt collectors and the like, the Chamber of Commerce was notably silent at the meeting. Jess Sharp, an executive from the chamber, which represents both the banking industry and a wide cross section of nonbank financial firms, declined to share his opinion or drop hints about the group’s position.

“My sense was that it was a tactical silence,” said Travis Plunkett, legislative director for the Consumer Federation of America, who attended the meeting.

A month later, the chamber split with its friends in the financial world. In a letter to regulators, two top chamber executives suggested the consumer bureau “cease all development” of the rule until Congress approved a director to lead the agency. The letter also urged the bureau to “tread carefully” when spelling out which financial markets it would supervise. Officials at the consumer bureau have since met privately with the chamber, which has not retreated from its position, a person with knowledge of the matter said.

Despite the split, Mr. Sharp of the chamber says the financial industry largely speaks with one voice on Dodd-Frank.

“I have not seen serious substantive disagreements,” he said in an interview. “If anything, there is strong unity on the legislative reforms to Dodd-Frank.”

While they may agree on the broad strokes, the disagreements can be in the details. And with Dodd-Frank, the details are plenty.

“These types of differences happen all the time,” said Scott Talbott, a top lobbyist for the Financial Services Roundtable. “The financial services industry is broad and diverse and segments are often in competition with each other.”