JPMorgan Chase & Co., Goldman Sachs Group Inc. and Barclays Plc are among the first banks to register swap-dealer divisions under the Dodd-Frank Act, which requires higher capital, collateral and trading standards.
The 65 trading units that have registered include the biggest banks in the U.S., U.K., France, Germany, Switzerland and Japan, according to the Commodity Futures Trading Commission. The list, which is expected to grow, reflects companies that had at least $8 billion in swap-dealing business in October and had to register by the end of last year.
“This is at the heart of financial reform: dealers registering and coming under common-sense rules of business practice, reporting, capital and margin and that the public gets to see the actual transactions,” CFTC Chairman Gary Gensler said in a telephone interview yesterday.
The Dodd-Frank rules, more than two years in the making, seek to improve oversight of a market that for three decades largely escaped federal regulation. The law was enacted after swap trades helped fuel the 2008 credit crisis and led to the U.S. rescue of American International Group Inc.
Swap dealers will eventually face the highest requirements for capital and collateral to back their trades and will have the stiffest reporting and trading standards. The financial firms that dominate swap dealing generate more than $30 billion in annual profit, according to an estimate from consulting firm Oliver Wyman, a unit of Marsh & McLennan Cos.
Swap dealers won’t immediately face the full force of Dodd-Frank regulations, with capital and margin rules yet to be completed by U.S. or international authorities. A requirement to guarantee trades at central clearinghouses doesn’t take effect in the U.S. until mid-March at the earliest for interest-rate and credit trades. Rules governing swap-trading platforms have yet to be completed. The CFTC also is still debating when Dodd-Frank rules will apply to overseas trades.
With their registration, swap dealers will begin reporting interest-rate and credit trades to databases. “This is changed market behavior,” Gensler said. “As of Monday, there was the public seeing the transaction price and volume. We had never had that before.”
The list of 65 entities includes the biggest U.S. swaps dealers, according to the Office of the Comptroller of the Currency. JPMorgan leads the list with $72 trillion in derivatives contracts outstanding at the end of September, according to the Office of the Comptroller of the Currency. Bank of America Corp. follows with $64 trillion and Citigroup Inc. is third-largest with $55 trillion. There’s no comparable ranking for banks globally.
The list also includes six Goldman Sachs divisions, including commodities trading arm J. Aron & Co. that was once managed by Lloyd C. Blankfein, the bank’s CEO. Morgan Stanley registered six entities, including London-based unit Morgan Stanley & Co. International Plc.
The CFTC had estimated that there would be about 125 entities registering as dealers. “I think it’s an initial list and that there will be others,” Gensler said.
Energy companies that lobbied on the swap dealer definition including BP Plc, Shell Energy North America LP and Vitol Inc. weren’t on the initial list. The CFTC in October delayed a requirement to count energy trades guaranteed at clearinghouses to determine if a company crossed the $8 billion threshold. “I would anticipate over time that we would see some particularly if people are transacting or dealing over $8 billion of swaps in the bilateral world,” Gensler said.
John Parsons, a professor at the Massachusetts Institute of Technology, said he was surprised that Shell and BP weren’t on the initial list because of the size of their derivatives-trading businesses. “Presumably that will happen” as the list grows, he said in a telephone interview yesterday. “If it doesn’t that will be very telling about the regulations.”
Gensler said last March when the agency was preparing to complete the rule defining swap dealers that it was “very clear” the intent was to apply to financial and non-financial firms.
“In the past some entities were left out of regulation just because of what they called themselves,” Gensler said on March 2. “I think it would be a mistake to end up with this era’s Enron loophole, and something that might be a loophole for others.”
In 2000, certain electronic markets were excluded from commission oversight under the so-called Enron loophole, named for the energy company that collapsed in late 2001. “I think it would be a mistake to end up with what would be sort of this era’s BP loophole,” Gensler said.
Deutsche Bank AG registered energy trading unit DB Energy Trading LLC, while JPMorgan registered J.P. Morgan Ventures Energy Corp.
CFTC list of provisionally registered swap dealers:
Bank of America NA Bank of Montreal Bank of New York Mellon Bank of Nova Scotia Bank of Tokyo Mitsubishi UFJ Ltd. Barclays Bank Plc BNP Paribas Canadian Imperial Bank of Commerce Citibank NA Citigroup Energy Inc. Citigroup Global Markets Inc. Commerzbank AG Commonwealth Bank of Australia Credit Agricole Corporate and Investment Bank Credit Suisse International DB Energy Trading LLC Deutsche Bank AG Goldman Sachs & Co. Goldman Sachs Bank USA Goldman Sachs Financial Markets LP Goldman Sachs International Goldman Sachs Mitsui Marine Derivative Products LP Hongkong & Shanghai Banking Corp. Ltd. HSBC Bank Plc HSBC Bank USA NA ING Capital Markets LLC Intl Hanley LLC J Aron & Co. JPMorgan Securities LLC JPMorgan Ventures Energy Corp. JPMorgan Chase Bank Macquarie Bank Ltd. Macquarie Energy LLC Merrill Lynch Capital Services Inc. Merrill Lynch Commodities Inc. Merrill Lynch Financial Markets Inc. Merrill Lynch International Merrill Lynch International Bank Ltd. Mitsubishi UFJ Securities International Plc Mizuho Capital Markets Corp. Mizuho Securities USA Inc. Morgan Stanley & Co. International Plc Morgan Stanley & Co. LLC Morgan Stanley Bank NA Morgan Stanley Capital Group Inc. Morgan Stanley Capital Services LLC Morgan Stanley Derivative Products Inc. National Australia Bank Ltd. Natixis Newedge UK Financial Ltd. Newedge USA LLC Nomura Derivative Products Inc. Nomura Global Financial Products Inc. Nomura International Plc Royal Bank of Canada SMBC Capital Markets Inc. Societe Generale SA Standard Chartered Bank State Street Bank And Trust Co. The Royal Bank Of Scotland Plc Toronto Dominion Bank UBS AG US Bank NA Wells Fargo Bank NA Westpac Banking Corp.