WASHINGTON—U.S. swaps regulators sought to close a legal
loophole that allowed American banks to shift some of their
business overseas to avoid tough U.S. rules.
The Commodity Futures Trading Commission on Monday voted 4-0 to
propose tighter restrictions on certain swaps booked by overseas
branches of U.S. firms, requiring the offshore units adhere to CFTC
rules even in cases where the units' American parents aren't
explicitly on the hook for the trades.
The rules aim to eliminate the risk of a repeat of the financial
crisis when risky bets placed by American International Group
Inc.'s offshore unit nearly destroyed its U.S. parent. They also
target concerns among regulators and some lawmakers that banks are
shifting business overseas to avoid U.S. requirements. Banks
including Bank of America Corp. and Citigroup Inc. have stopped
guaranteeing some swaps issued by foreign affiliates, primarily in
London, eliminating ties to their U.S. parent.
Under the CFTC's approach, even "de-guaranteed" transactions, as
they are known, would be forced to comply with U.S. rules if the
offshore units' results are consolidated in the financial
statements of the parent firm.
"Risk created offshore can flow back into the U.S.," CFTC
Chairman Timothy Massad said in a written statement. "The proposal
draws a line as to when we should take this offshore risk into
account that is both reasonable and clear."
CFTC officials said the plan primarily affects the largest U.S.
banks, which consolidate their offshore units into their parent
firms' financial statements. U.S. accounting rules generally
require consolidation of entities in which the parent has a
"controlling financial interest."
The CFTC would have to collect comments on the proposal and vote
on it a second time before it would go into effect.
Monday's proposal, which Mr. Massad previewed in a speech in
early June, is an add to a related proposal the agency floated last
year that applies to a relatively small pocket of the
multi-trillion swaps market that isn't backed by central
clearinghouses. Clearinghouses are entities designed to help
prevent a market-wide collapse by ensuring either party in a
derivatives transaction would get paid if the other side
falters.
The rules would set collateral known as margin on trades between
an overseas swaps dealer and another firm.
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 swaps market to hedge risks or make bets in areas such as
fuel prices or interest rates.
Banks have tried to circumvent the CFTC's rules by shifting
swaps trading to overseas affiliates, primarily those in London,
that are no longer guaranteed by their U.S. parent or that have
revoked guarantees on specific transactions. Those moves, while
legal, have stoked concerns from regulators over whether a U.S.
bank's foreign losses could ultimately find their way to U.S.
shores, potentially destabilizing the parent firm.
Mr. Massad's approach could generate criticism from banks and
their trade groups, which have said the current practices benefit
the U.S. because they shift potentially risky trading overseas. The
International Swaps and Derivatives Association, which represents
large banks involved in the swaps market, said it was studying the
proposal.
J. Christopher Giancarlo, the lone Republican member of the
CFTC, called Monday's proposal is a "highly complicated labyrinth."
His support for floating the proposal for comment "should not
signal...my agreement with it," he said in a written statement.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
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