Bloomberg News

Banks’ Overseas Swaps Moves Drawing CFTC Attention

April 26, 2014

New York Stock Exchange

The Commodity Futures Trading Commission is watching steps that U.S. banks have taken in recent months that allow them to trade swaps with each other and with foreign-based banks outside of Dodd-Frank Act rules, said a person who spoke on condition of anonymity. Photographer: Daniel Acker/Bloomberg

The main U.S. derivatives regulator has begun monitoring the latest effort by Wall Street banks to avoid U.S. swap-trading restrictions by restructuring their overseas trading divisions, an official at the agency said.

The Commodity Futures Trading Commission is watching steps that U.S. banks have taken in recent months that allow them to trade swaps with each other and with foreign-based banks outside of Dodd-Frank Act rules, said the person, who spoke on condition of anonymity because the matter isn’t public.

The CFTC has previously taken steps to rein in the financial-industry’s efforts to avoid trading rules. The agency published additional guidance last year after the industry relied on a footnote in the CFTC’s overseas policy to keep trades outside the rules.

The latest wrinkle arises from the rules that Dodd-Frank applies to trades in overseas affiliates that operate with the financial guarantee of their parent U.S. firm. Non-guaranteed affiliates are subject to less scrutiny than overseas branches or guaranteed affiliates, the agency said in July guidance.

The largest swap dealers have been removing those guarantees from affiliates or specific transactions so they can trade with each other in the interdealer market without being subject to CFTC rules mandating price competition, according to three other people familiar with the transactions who also asked for anonymity.

Donald Lamson, a lawyer at Shearman & Sterling LLP in Washington, said banks are taking advantage of inconsistent derivatives rules between the U.S. and Europe.

Latest Step

“The risk is just moving across boundaries,” Lamson said. “When one regulator imposes more restrictive rules than another, the effect is like squeezing a balloon.”

The banks’ move is the latest step in Wall Street’s efforts to curb the reach of CFTC rules designed to have most credit-default, interest-rate and other swaps traded on new platforms called swap-execution facilities. The venues are designed to boost competition and transparency in swap prices.

While taking advantage of one provision in the July guidance, Wall Street’s biggest lobbying groups also banded together in December to try to overturn it completely. They filed a lawsuit against the CFTC to limit the overseas application of its rules and rein in a regulatory barrage by Gary Gensler, the agency’s former chairman. The associations represent Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM:US) and other swap dealers.

Justin Perras, a JPMorgan spokesman, Molly Millerwise Meiners, a spokeswoman for Citigroup Inc. (C:US), Tiffany Galvin, spokeswoman for Goldman Sachs, and Zia Ahmed, a Bank of America Corp. (BAC:US) spokesman, declined to comment. A spokesman for Morgan Stanley didn’t immediately respond to an e-mail seeking comment.

Beyond Reach

While the CFTC is reviewing the practice, U.S. banking regulators consider such derivatives activity largely outside of their reach. The companies don’t need to get banking regulators’ approval to remove guarantees from the transactions, said Barbara Hagenbaugh, a Federal Reserve spokeswoman.

The Basel Committee on Banking Supervision this month opted to let firms preserve most derivatives and repurchase agreements among themselves, reversing course on a goal set a year ago to block banks from relying too heavily on each other.

To contact the reporters on this story: Silla Brush in Washington at sbrush@bloomberg.net; Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net Anthony Gnoffo


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