Some overseas branches of U.S. banks such as Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) may win exemptions from Dodd-Frank Act collateral and clearing requirements, according to two people briefed on the matter.
The Commodity Futures Trading Commission on June 21 may propose letting non-U.S. branches with less than 5 percent of a bank’s aggregate notional swap business be free of some requirements, according to the people, who requested anonymity because the guidelines haven’t been proposed. The banks would still face reporting requirements and need to show that risk from the overseas trades isn’t brought back to the U.S., one of the people said.
Dodd-Frank, the U.S. regulatory overhaul enacted in response to the 2008 credit crisis, is designed to increase transparency by having swaps cleared on public exchanges. CFTC Chairman Gary Gensler has said JPMorgan’s loss of at least $2 billion on derivatives trades conducted in London underscores the need for U.S. regulators to ensure that banks’ foreign branches and subsidiaries are covered by the new rules.
“During a default or crisis, risk of overseas’ branches and affiliates inevitably flows back into the United States,” he said during a speech on June 14 at a Institute of International Bankers conference in New York.
Steve Adamske, CFTC spokesman, declined to comment on the branch threshold.
Swaps trading has been a major source of revenue for large U.S. banks, and some of them have conducted roughly half of such trades outside of the U.S., often through branches or other subsidiaries.
Imposing Dodd-Frank margin requirements on non-U.S. swaps would “eviscerate our ability to serve clients overseas and cede the global market to foreign competitors,” JPMorgan Associate General Counsel Don Thompson said at a House hearing Feb. 8. “Although this varies from quarter to quarter, we often derive as much as of our revenues from our global operations as from those in the United States,” he said.
The CFTC also is planning an order giving overseas-based swap dealers as much as a year to comply with all of Dodd-Frank regulations, Gensler said in the speech. The delay may affect compliance with capital and some risk-management regulations, he said.
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