Swaps Among Bank Affiliates Exempt Under CFTC Clearing Rule

Barclays Plc, JPMorgan Chase & Co. and other banks will be exempt from Dodd-Frank Act swap market rules when trading between their own affiliates under a measure completed by the U.S. Commodity Futures Trading Commission.

Commissioners approved a rule excluding inter-affiliate trades from requirements that swaps be guaranteed at clearinghouses that protect buyers and sellers against defaults, the CFTC said yesterday. The rule is part of the CFTC’s mandate to cut risk and expand transparency in the $639 trillion global swaps market.

“The rule requires documentation of such exempted swaps, centralized risk management and reporting requirements for such swaps,” CFTC Chairman Gary Gensler said in a statement.

Lobby groups for banks including New York-based JPMorgan and Goldman Sachs Group Inc. and London-based Barclays urged Gensler’s agency to exclude such trades from Dodd-Frank rules enacted in response to the 2008 credit crisis. Prudential Financial Inc. and a group of so-called end-users -- commercial and manufacturing firms that use swaps to hedge risk -- also sought exemption.

“Interaffiliate swaps do not introduce risks to a corporate group,” Robert Pickel, chief executive officer of the International Swaps and Derivatives Association Inc., and Ken Bentsen, executive vice president at the Securities Industry and Financial Markets Association, said in a Sept. 20 letter to the CFTC. “They allocate and transfer risks among group members.”

Unrelated Counterparties

The exemption is allowed for swaps between majority-owned affiliates of companies that file consolidated financial statements, Gensler said in the statement. Swaps between affiliates and other unrelated counterparties must be cleared.

The CFTC granted a greater exemption than originally proposed in 2012 by not requiring variation margin for interaffiliate swaps.

“The commission was guided by comments expressing concern that a variation margin requirement will limit the ability of U.S. companies to efficiently allocate risk among affiliates and manage risk centrally,” the agency said in the rule.

Variation margin is typically exchanged daily to offset the risk from incremental price movements in a trade.

“This is another demonstration of the industry dominance of the regulatory process,” Marcus Stanley, policy director for Americans for Financial Reform, said in a statement today. “Regulators are willing to accommodate industry even to the extent of dropping requirements that financial entities follow sound business practices.”

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