U.S. Banks Face Crackdown on Overseas Trades That Dodge Law

  • CFTC approves measure to plug loophole on swaps transactions
  • Regulation extends Dodd-Frank Act’s collateral requirements

The top U.S. derivatives regulator is cracking down on Wall Street banks’ ability to evade Dodd-Frank Act restrictions by moving some of their swaps trades overseas.

The Commodity Futures Trading Commission in a 2-to-1 vote gave final approval to a rule that broadens the circumstances in which banks’ foreign units must adhere to U.S. collateral requirements, according to a statement released Tuesday. The CFTC took action after some of Wall Street’s biggest swaps dealers had stopped guaranteeing some trades booked overseas, meaning they didn’t have to fully comply with Dodd-Frank.

“The interconnected nature of the global swaps market means that risks created across the globe have the potential to flow back into the United States,” CFTC Chairman Timothy Massad said in a call with reporters. The new rule clarifies how earlier requirements approved by the CFTC and bank regulators will add protections to cross-border trades.  

Massad said the rule governs trading even when a bank’s subsidiary isn’t explicitly guaranteed by its U.S. parent. It also clears the way for another jurisdiction’s margin rules to act as a substitute if they’re found sufficiently similar -- not only for non-U.S. swap dealers but also when U.S. dealers post margin to non-U.S. entities.

Commissioner Sharon Bowen joined fellow Democrat Massad in backing the rule, while Republican J. Christopher Giancarlo voted against it, the CFTC said. The industry must comply by Sept. 1.

The CFTC is trying to close a loophole that has allowed banks to dodge restrictions put in place after the 2008 financial crisis. Those wide-ranging rules were part of an effort to curb risks posed by trades that threw Wall Street and the broader economy into crisis eight years ago.

Though Massad said the margin requirements for uncleared swaps are “one of the most important pieces” of post-crisis regulation, Commissioner Bowen warned that it leaves out other key parts of derivatives oversight. It’s a “major drawback” that the rule wasn’t done in conjunction with future agency measures on capital, she said in a statement.

“We put the interests of our investors at risk when we view regulation in a piecemeal and non-comprehensive fashion, because we are not seeing the whole picture,” Bowen said.

Giancarlo, in his dissent, said the CFTC is establishing an “overly complex, unduly narrow and operationally impractical” approach when allowing other countries’ rules to serve as substitutes.

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