Swaps Rule Requires $644 Billion in Collateral, Regulator Says

U.S. banks would need $644 billion in collateral to offset risks in swaps traded among themselves, according to an analysis of rules re-proposed by regulators.

The Office of the Comptroller of the Currency released an estimate yesterday laying out costs for companies including JPMorgan Chase & Co. (JPM), Bank of America Corp. and Citigroup Inc. (C) to support trades that won’t be guaranteed by clearinghouses.

Under revised rules for non-cleared swaps issued by the OCC, Federal Reserve and Federal Deposit Insurance Corp., banks would have to finance collateral and hold it in custody accounts that may be less profitable than other uses. As a result, OCC economists estimate the requirement will cost the banking industry between $2.9 billion and $6.4 billion annually once the rules are fully in place in 2019.

U.S. and overseas regulators have sought to increase oversight of the $710 trillion global swaps market since largely unregulated trades helped fuel the 2008 credit crisis and forced a bailout of American International Group Inc. (AIG) The regulations are designed to reduce risk and boost transparency by having most swaps guaranteed at central clearinghouses and traded on exchanges or other platforms.

For swaps that remain non-cleared and traded directly between buyers and sellers, regulators have proposed standards for requiring banks and their clients to exchange collateral to prevent risks from building up in the market.

Global Efforts

The U.S. proposal is part of global policy-makers’ efforts “to reduce systemic risk in derivatives markets,” Fed Chair Janet Yellen said before the Sept. 3 vote on the rules.

The OCC, the regulator for nine national banks and six foreign-bank branches affected by the proposal, would supervise about 80 percent of the affected swaps market. Those banks would face about $659 million in administrative costs to get the system up and running, and another $149 million a year to comply with the rule, according to the estimate.

The agency said its $644 billion initial-margin estimate could be reduced as Dodd-Frank Act requirements push certain swaps activities out of the banks included in that figure.

The swaps market is concentrated in Wall Street’s biggest dealer banks. JPMorgan, Bank of America, Citigroup, Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) executed 95 percent of the $297 trillion of derivatives trades by the top 25 U.S. bank-holding companies as of March 31, according to a separate OCC report.

When the agencies first proposed a margin rule in 2011, a similar analysis had put the potential initial margin at $2 trillion. The much lower level of the new estimate reflects the fact that it doesn’t include foreign-exchange swaps, uses updated data on non-cleared transactions and uses a formula that allowed netting, according to the agency.

The level is still considerably higher than some estimates. U.S. banks and their clients would need to have about $300 billion in initial margin -- collateral exchanged at the beginning of a transaction -- to offset risks in the trades, according to industry and regulator estimates cited by the Fed.

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: Gregory Mott at gmott1@bloomberg.net Jesse Westbrook

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