The overseas units of large U.S. banks would face tougher restrictions on their swaps trading under steps proposed by a top U.S. regulator.
Commodity Futures Trading Commission Chairman Timothy Massad, in a speech, proposed requiring offshore units of large American banks to adhere to CFTC rules even in cases where the units' U.S. parents aren't explicitly on the hook for the trades.
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The steps come in response to moves by banks like Bank of America Corp. and Citigroup Inc. to revoke their policy of guaranteeing some swaps issued by foreign affiliates, primarily in London, eliminating ties to their U.S. parent to avoid requirements of the 2010 Dodd-Frank financial overhaul.
Under Mr. Massad's approach, even "de-guaranteed" transactions would be forced to comply with CFTC rules if the offshore units' results are consolidated in the financial statements of the U.S. parent firm.
That approach, Mr. Massad said, "recognizes that there can be risk to a U.S. entity from a foreign affiliate even if there is no explicit guarantee, and it would draw a line as to when we should take that risk into account that is both reasonable and very bright."
Mr. Massad was speaking at a derivatives conference in London. He stressed his approach was still being discussed internally as well as with bank regulators "so you will have to wait a bit longer for anything further." He said the CFTC would likely seek public comment on such an approach before it can go into effect.
It wasn't immediately clear how many large banks' offshore units are consolidated onto their parents' financial statements and Mr. Massad didn't give an estimate in his prepared remarks. A CFTC spokesman didn't immediately respond to requests for comment. U.S. accounting rules generally require consolidation of entities in which the parent has a "controlling financial interest."
Swaps, contracts in which two parties agree to exchange payments based on fluctuations in interest rates or other benchmarks, were targeted by U.S. lawmakers for greater oversight and transparency after they played a central role in the financial crisis. Companies use the multitrillion-dollar swaps market to hedge risks or make bets in areas such as fuel prices or interest rates.
Regulators and lawmakers, concerned the opacity of the swaps markets allowed bad bets to build up outside the eyes of overseers, have moved since the financial crisis to ensure the wagers are traded publicly and reported to U.S. authorities.
U.S. regulators, including the CFTC, originally opened the door to the practice of "de-guaranteeing" trades by stipulating that swaps involving firms with no financial links to the U.S. could skirt the rules. Regulators saw that stipulation as erecting a barrier around the U.S. financial system.
Under Mr. Massad, however, the CFTC has become concerned the stipulation has opened a legal loophole that banks can exploit simply to avoid U.S. oversight and trade swaps in less-regulated jurisdictions, such as London.
Mr. Massad's approach could generate pushback from banks and their trade groups, which have said the current practices are good for the U.S. because they shift potentially risky trading overseas.