U.S. regulators released letters telling JPMorgan Chase & Co. (JPM), Bank of America Corp. and other banks to safely shed derivatives, granting them two more years to wall off such trades from units that get federal backing.
The Office of the Comptroller of the Currency sent the approval letters yesterday to the banks, also including Citigroup Inc. (C), Wells Fargo & Co. (WFC), Morgan Stanley (MS), HSBC Holdings Plc (HSBA) and U.S. Bancorp. (USB) Each bank now has until July 2015 to come up with “orderly” ways to comply with Dodd-Frank Act rules meant to limit taxpayer vulnerability to riskier bank trading.
“The OCC has found that the potential impact of granting a 24-month transition period is less adverse than the potential impact of denying the transition period or providing a significantly shorter transition period.,” according to the letters, signed by Martin Pfinsgraff, acting senior deputy comptroller supervising large banks. Waiting two years lessens the risk of “operational problems and market disruption.”
Dodd-Frank overhauled swaps-trading in an effort to make the industry less vulnerable to a crisis such as the one that struck in 2008. The law required equity, some commodity and non-cleared credit derivatives be pushed out of bank units that are backed by government deposit insurance or the Federal Reserve discount window.
The OCC letters said banks must figure out whether to kill the swaps activity or move them out to affiliates, which must be properly capitalized. Interest-rate and some credit swaps can still be traded inside the banks.
Last week, the Fed granted foreign-based U.S. banks the same leeway under the 2010 law, inviting them to request the 24-month transition. The move avoided a July 16 deadline that could have forced the foreign-based banks to cut off their swaps activities next month.
The OCC had invited the requests in guidance sent to banks in January and is also now informing the uninsured branches of foreign banks that it regulates that they can also request the delay.
To contact the reporter on this story: Jesse Hamilton in Washington at firstname.lastname@example.org.