The Treasury Department is monitoring Wall Street efforts to escape U.S. swap-trading restrictions for overseas derivatives, according to a department official.
Treasury is watching steps banks have taken to remove parent-company guarantees from their overseas affiliates and whether those steps eliminate the U.S. banks' exposure, the official said yesterday. Banks have been changing operations to trade derivatives with other dealers in the $700 trillion global market in a way that avoids curbs imposed by the Dodd-Frank Act.
Treasury joins the Commodity Futures Trading Commission and the Federal Deposit Insurance Corp. in reviewing the practice. The Dodd-Frank restrictions were intended to reduce risk and boost transparency in the market by having most swaps guaranteed at clearinghouses and traded on exchanges or swap-execution facilities.
"The financial industry is very good at morphing, at structuring things around regulation," CFTC Chairman Timothy Massad said in a Sept. 5 interview, responding to a question about de-guaranteeing. "Even if it's well within the rules, it may still mean that activity abroad poses a risk to the U.S. banking corporations which own these swap dealers."
Massad's agency is consulting on the issue with the Federal Reserve, FDIC, Office of the Comptroller of the Currency and Securities and Exchange Commission, he said.
The wrinkle arises from the rules that Dodd-Frank applies to trades in overseas affiliates that operate with the financial guarantee of their parent. Non-guaranteed affiliates are subject to less scrutiny than overseas branches or guaranteed affiliates, the agency said in guidance in 2013.
The CFTC sent letters in July to JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley seeking further information about the practice of removing guarantees.
Without curbs on swaps trading overseas, critics warn, U.S. taxpayers could face a repeat of 2008, when they had to rescue American International Group Inc. from billions of dollars in losses attributed to a London unit.
The Securities Industry and Financial Markets Association, the banking industry's main lobbying group in Washington, has defended the banks' recent steps. In private talking points drafted by the association and obtained by Bloomberg News in July, the industry says the de-guaranteeing practice is lawful and allows U.S. banks to compete on a level playing field with their foreign-based counterparts.