The U.S. Commodity Futures Trading Commission may propose allowing swaps between a financial company's affiliates to be exempt from rules designed to reduce risk in the market, three people briefed on the matter said.
The agency's five commissioners are considering the exemption, which may be proposed in a private vote, according to the people who spoke on condition of anonymity because the process isn't public. The rule would allow so-called interaffiliate trades at banks, insurers and other companies to be exempt from clearing regulations that require buyers and sellers to post collateral to a central clearinghouse to limit the risk of a trade failing.
The rule, which may require affiliates to post so-called variation margin in the trades, is still under debate at the agency and may change before it is proposed, two of the people said. Variation margin is typically exchanged daily to offset the risk from incremental price movements in a trade.
Steve Adamske, CFTC spokesman, declined to comment on the proposal yesterday.
Portions of the 2010 Dodd-Frank Act that overhauled U.S. financial regulations are designed to reduce risk in the $648 trillion private swaps market after largely unregulated trades helped fuel the 2008 credit crisis. The law mandates that most swaps be settled at clearinghouses.
Financial lobbying associations representing JPMorgan Chase & Co., Goldman Sachs Group Inc. and Prudential Financial Inc. have urged regulators to exempt the interaffiliate trades from the clearing regulations, which then determine when swaps must be traded on public exchanges or other platforms.
Industry Letter
The interaffiliate trades "do not create additional counterparty exposure outside of the corporate group and do not increase interconnectedness between third parties," seven groups, including the Securities Industry and Financial Markets Association and International Swaps and Derivatives Association Inc., said in a Sept. 8 letter to the CFTC.
"Competitive execution and centralized clearing are unnecessary in the context of transactions between affiliates, which do not need to be protected against risks of unfair or off-market pricing or direct bilateral credit risk," Richard A. Miller, Prudential Insurance Company of America's vice president and corporate counsel, said in a May 2, 2011 letter to the agency.
