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In addition to making contributions to federal candidates, CME Group also spent heavily on lobbying activities during the 2012 election cycle.

CME Group is seeing red in its battle against Dodd-Frank

by Isabel Zhong
May 15, 2013


Isabel Zhong/MEDILL


Nearly two-thirds of CME Group's PAC contributions for the 2012 election cycle went to Republican candidates.


Isabel Zhong/MEDILL

House Speaker John Boehner (R-Oh.) was the top recipient of political contributions from CME Group for the 2012 election cycle.

With its 2,300 pages of tough new rules and regulations, the Dodd-Frank Wall Street Reform and Consumer Protection Act dealt a heavy blow to the U.S. finance sector when it was signed into federal law in 2010. The sector is hitting back by opening its coffers to politicians who oppose the controversial act.

During the 2012 election cycle, finance-sector firms collectively spent more than $500 million on political contributions to federal candidates. Among the major players was Chicago-based CME Group, which donated nearly $1 million to candidates through individual contributions and those of its political action committee.

Interestingly, more than two-thirds of CME Group's PAC contributions for the 2012 election cycle went to Republican candidates. That was a dramatic departure from the exchange operator's practices during the previous two election cycles when the majority of contributions by CME PAC went to Democrats. However, CME PAC’s shifting strategy was hardly surprising in light of the two major parties’ diverging stances on Dodd-Frank.

“The Democrats are very supportive of it,” said David Almasi, executive director of the National Center for Public Policy Research. “The Republicans want Dodd-Frank to have more leeway and be more business friendly.”

David Ruder, professor emeritus of law at Northwestern University, agreed: “Dodd-Frank was essentially a Democratic bill, and conservative Republicans have introduced a number of bills to repeal Dodd-Frank or portions of it.”

Brought forward in the aftermath of the global financial crisis to “promote the financial stability of the United States”, Dodd-Frank called for sweeping changes to compliance requirements and regulatory oversight in the nation’s financial system. According to Allan Horwich, a partner at Schiff Hardin LLP in Chicago, “Derivatives trading was targeted very heavily by Dodd-Frank” because it was “a very significant component in the financial crisis of 2007 and 2008.” Data from the Center for Responsive Politics shows that almost one-quarter of the 398 rules that have been mandated are targeted at derivatives.

On one hand, CME Group stands to benefit from Dodd-Frank’s clearing mandate, which aims to mitigate counterparty risk in derivatives markets by requiring that over-the-counter contracts clear through centralized exchanges. According to Alex Kramm, an analyst at UBS, the clearing mandate could generate as much as $500 million in new revenues for CME’s clearinghouse business.

On the other hand, a number of Dodd-Frank’s new rules and regulations look to be antagonistic, either directly or indirectly, to CME Group’s business. Under the act’s new transparency rules, CME Group will be required to report non-public data about swap transactions to external data repositories. The exchange operator, which has filed a lawsuit against the measure, argues the rules would impose “costly, cumbersome and duplicative requirements" on clearinghouses.

Moreover, CME Group’s top line likely will be negatively affected by Dodd-Frank’s clamp down on speculative trading. In addition to the Commodities Futures Trading Commission’s new size limits for speculative positions in commodities futures contracts, proprietary trading by commercial banks will come to a complete stop with the implementation of the controversial Volcker Rule.

According to a 2012 report by KMPG, “The general sentiment is that the Volcker Rule would likely have a harmful effect on market liquidity.” That’s bad news for CME Group, which derives a hefty chunk of its revenues from transaction fees.

In commentary about the exchange operator’s financial results last year, Zacks Investment Research wrote, “Low trading volumes across asset classes substantially reduced clearing-transaction fees, which constricted top-line growth.”

In all four quarters of 2012, both total revenue and net income for CME Group shrunk by double-digit percentage points compared with the same quarter in 2011. Zacks subsequently downgraded CME Group to underperform in February “based on its weak top-line growth over the last several quarters.”

For now, both rules are currently on the shelf. The CFTC’s position-size rule was “sent back for further proceedings” last year after it was struck down by U.S. District Court Judge Robert Wilkins, while the Volcker Rule has yet to take effect. The Volcker’s Rule implementation date was pushed back from July 2012 to a yet-to-be-determined date in 2014 amid aggressive lobbying by the finance sector and differences of opinions among regulatory agencies.

In fact, according to Horwich, “A substantial part of Dodd-Frank is still work-in-progress and there’s a great deal of uncertainty about how much of it will actually materialize in the way that it was envisioned back in 2010.”

He added, “There is a great deal of opportunity” for CME Group and its peers to influence the capacity of Dodd-Frank. And the exchange operator hasn’t been holding back on using its financial clout on Capitol Hill.

CME Group’s top beneficiary for the 2012 election cycle was House Speaker John Boehner (R-Ohio.). Boehner, who presides over the House, voted against the passage of Dodd-Frank in 2009 and has openly called for an overhaul of the act. In a 2012 interview with ABC, he said, “There are big problems with this law, and it needs some big changes.”

Boehner received a total of $79,000 in political contributions from CME Group. This amount consisted entirely of individual contributions from CME Group employees, according to Viveca Novak, a spokeswoman for the Center for Responsive Politics.

Another top-ranking beneficiary was Chicago politician Robert Dold, the former Republican representative for Illinois’s 10th congressional district. In addition to pocketing $10,050 in individual contributions from CME Group employees, Dold also received $10,000, the maximum permissible PAC contribution, from CME PAC.

One of Dodd-Frank’s most prolific critics, Dold sponsored a bill that would narrow the scope of the term “municipal advisor”, relieving many finance-sector firms of the fiduciary responsibilities prescribed by section 975 of Dodd-Frank.

"As a small-business owner, I believe that it is important to correct a problem when it becomes apparent,” Dold said in a speech. “There is no reason for duplicative burdens that only further add delay and costs to an already regulated industry."

Like Dold, U.S. Rep. Spencer Bachus of Alaska also was among the 15 Republican candidates who received the maximum permissible contribution from CME PAC. Bachus, who is the chairman of the House Financial Services Committee, has been spearheading a Financial Services Committee review of the act to “look extensively at Dodd-Frank’s economic costs” and “propose legislation to fix provisions that threaten the creation of jobs.” In addition, he has repeatedly pushed for the delayed enactment of the Volcker Rule.

"The Volcker Rule doesn’t make the financial system any safer, but it does impose significant costs on consumers, workers, savers, taxpayers and businesses,” Bachus said in a Financial Services Committee hearing last year. “It is a self-inflicted wound that should be repealed.”

Whether or not the Volcker Rule should be repealed is a pressing issue that will continue to rattle Capitol Hill during the lead-up to the rule’s expected implementation next year. Likewise, this and other issues concerning Dodd-Frank look to remain on the CME Group’s agenda as the exchange operator gears up to disburse political contributions for the current 2014 election cycle.