Nasdaq working quietly to curb bank control of clearing houses

The revelation that regulators received forged letters denouncing banks’ “cartel-like control” of derivatives trading has exposed the latest front in a yearlong battle over which companies gain entrée into the $583-trillion swaps market.

The letter campaign, orchestrated by a public relations firm, contained the same message that Nasdaq OMX Group Inc has been pushing in Washington as it tries to muscle its way into the derivatives business. The company’s plan: get Congress or the Commodity Futures Trading Commission to limit bank ownership of swaps clearing houses, helping Nasdaq get a bigger piece of the pie.

Nasdaq’s efforts have included hiring the ex-chairman of the House Financial Services Committee to lobby former colleagues, sending the company’s chief executive officer to private meetings with lawmakers and even circulating an anonymous flier on Capitol Hill. The flier, which Nasdaq eventually acknowledged drafting, also denounced Wall Street firms as an “abusive cartel.”

Nasdaq has done much of its lobbying in secret, letting organisations such as the AFL-CIO laboor federation step out in public. The New York-based company declined to say whether it hired the firm responsible for the faked comment letters.

The secrecy may be necessary; In the inter-connected ways of Wall Street, if Nasdaq’s clearing house wants to be successful, it needs to keep the banks as customers.

“It is dangerous to state openly what they feel, because those banks can decide to take their business elsewhere,” said Michael Greenberger, a former CFTC official who is now a University of Maryland law professor.

The skirmish is a vivid illustration of how companies turn to Washington to gain an advantage via the law that they can’t get in the marketplace.

Nasdaq and large derivatives dealers — including JPMorgan Chase & Co, Goldman Sachs Group Inc and Deutsche Bank AG — are still making their case at the CFTC, which will consider the ownership caps in mid-January. The regulatory melee was set off by the Obama administration’s decision to overhaul financial regulation in the wake of the 2008 financial crisis. The Dodd-Frank law, enacted in July, aims to have most derivatives processed through clearing houses and traded on exchanges for the first time.

Nasdaq and its competitors are positioning themselves to take advantage of that move. The banks say clearing houses need owners with enough capital and expertise to weather market disruptions. Allowing companies with fewer resources to have large ownership stakes in clearing houses could increase the risk to the system, they say.

Unions and investor advocates say that banks’ near-monopoly has driven the prices of derivatives higher for everybody. More transparency in those markets will lower the costs for all companies buying derivatives, which in turn will bring down the costs not only of financial products but consumer goods based on agricultural or energy commodities — everything from loaves of bread to gallons of heating oil or gasoline.

“What the progressives are concerned about here is the ongoing control of clearing houses by institutions that are making money by keeping things opaque,” said Heather Slavkin, a lobbyist for the AFL-CIO.

Nasdaq lost the first round of the regulatory battle this year when Congress decided not to set caps on clearing house ownership, passing the decision on to regulators — the CFTC as well as the Securities and Exchange Commission.

Nasdaq didn’t submit a public written response last month when the CFTC proposed the ownership rule. At the same time, the agency did receive letters supporting Nasdaq’s position that were purportedly from Arkansas residents, including a rural county sheriff and a Burger King franchise owner.