CFTC Approves Rule Giving Wall Street Break on Billions in Swaps

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  • Bank units won't have to post initial margin to affiliates
  • Regulator backs parallel version of FED, FDIC swaps rule

Wall Street can breathe easier after a key regulator signed off on a rule Wednesday that will free the industry’s U.S. banking units from having to post billions of dollars of collateral for certain derivatives trades.

The Commodity Futures Trading Commission’s rule endorses the move by banking regulators to soften requirements from an earlier proposal despite the objections by one commissioner and prominent supporters of tougher standards including senators Elizabeth Warren and Sherrod Brown. The result of the CFTC measure, approved with a 2-1 vote, is a one-sided posting of margin when a swaps-trading division of a company trades with its banking unit, instead of making both sides collect collateral from each other.

After largely unregulated credit-default trades helped fuel the 2008 market meltdown, regulators have been working for years on how to handle collateral for a wide range of trades. The decision about non-cleared swaps between a bank’s own divisions dominated regulatory debates this year and prompted lobbying by firms such as Goldman Sachs Group Inc. and Citigroup Inc., according to federal records.

The CFTC move ensures that bank affiliates such as U.K. brokerages aren’t required to exchange initial margin -- a type of collateral exchanged at the onset of trading -- when trading with other affiliates at their company, though they must post margin to a deposit-taking bank unit overseen by U.S. banking regulators. The affiliates would still have to exchange variation margin, or collateral exchanged daily to offset the risk of incremental price movements during the course of a trade, which is a common industry practice.

The agency’s new rule is meant to match what the banking regulators already did, CFTC Chairman Timothy Massad said on Wednesday. He called the outcome “strong and sensible,” since it lets financial firms manage their affiliates’ risks in one hub without putting excessive costs on their internal transactions.

Bowen Dissent

Sharon Y. Bowen, a Democrat commissioner, voted against the rule because it represents a “considerable retreat” in regulatory efforts to curb risk after the financial crisis. The rule will put firms under the CFTC’s watch at greater risk in times of stress, she said.

“This decision seems to reflect a forgetfulness about how we, as a country, allowed the last financial crisis to happen,” Bowen said. “This action today seems to be a return to blindly trusting in large financial institutions’ ability and willpower to manage their risks adequately.”

Wall Street critic Warren, a Massachusetts Democrat, has said that not requiring the tougher margin demand between affiliates would be “the nail in the coffin for Dodd-Frank’s effort to regulate risky derivatives.” Senator Brown, the ranking Democrat on the Senate Banking Committee, said in a letter this week to Massad that the margin requirement should “apply equally to all types of swaps dealers” to cut down on excess risk-taking.


The Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and other regulators already agreed on their version of the final rule in October, which doesn’t require U.S.-insured banks to post collateral to their affiliates. Their joint rule and the parallel version from the CFTC -- which oversees dozens of bank affiliates that deal derivatives in the $553 trillion global swaps market -- will take effect for initial-margin requirements on Sept. 1, 2016, and be phased in over four years.

“The CFTC had an opportunity to mitigate the financial risks to the American taxpayers, but it failed,” Representative Elijah Cummings, the ranking Democrat on the House Committee on Oversight and Government Reform, said in a statement. “As a result, banks will continue to move their risky trades onto the books of their subsidiaries -- which are insured with federal tax dollars -- and the American people may have to bail them out if their trades go south.”

Firms have routinely done transactions between affiliates to transfer risk from swaps-trading units to their deposit-backed banks. The weaker final version will still mean new costs for the industry since current practice doesn’t call for as much collateral to be set aside.

The CFTC’s rule also establishes collateral demands for trading among swaps entities of different companies. The Securities and Exchange Commission is still drafting a final version of similar requirements to be imposed on separate parts of banks.

The CFTC also proposed on Wednesday a cybersecurity rule establishing mandatory testing of safeguards at derivatives firms. The agency will accept public comments on the measure for 60 days.