The U.S. Commodity Futures Trading Commission is poised to exempt banks with assets of less than $10 billion from Dodd-Frank Act requirements to guarantee swap trades at clearinghouses, two people briefed on the matter said.
The CFTC, the main U.S. derivatives regulator, is scheduled to consider a final rule July 10 allowing those banks and other companies an exception from the 2010 law’s clearing mandate designed to limit risk in trades, the people said on condition of anonymity because the plan hasn’t been made public. The agency’s five commissioners are also scheduled to propose an exemption for farm credit banks and other cooperatives, the people said. The rules could change before the vote.
“We understand and appreciate that the CFTC plans to provide a clearing exemption for banks, but we believe a risk-based measurement is more appropriate because it will better reflect potential risk to the market,” Diana Preston, vice president and senior counsel at the American Bankers Association, said in a telephone interview today.
Banks with as much as $50 billion in assets have urged the CFTC to exempt them from the clearing requirement, saying that their trades don’t pose the financial-system risk the law meant to reduce. Dodd-Frank was enacted after largely unregulated swaps helped fuel the credit crisis and the bailout of companies including insurer American International Group Inc.
Clearinghouses reduce risk in derivatives by accepting collateral from buyers and sellers to guarantee their trades.
Steven Adamske, spokesman for the CFTC, declined to comment on the exceptions yesterday.
Lenders including Los Angeles-based City National Bank, San Antonio-based Frost National Bank and Susquehanna Bancshares Inc. of Lititz, Pennsylvania, have told regulators they should be considered swaps end-users, which rely on the products to hedge or mitigate their commercial risks.
“These small institutions use derivatives in a limited -- but necessary -- fashion,” U.S. Senator Robert Casey told the CFTC in an Aug. 2 letter. “Small institutions do not engage in trades of the size or scope necessary to create systemic risk,” the Pennsylvania Democrat wrote.
JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley controlled 96 percent of cash and derivatives trading for U.S. bank holding companies as of March 31, according to the Office of the Comptroller of the Currency.
Dodd-Frank calls for most derivatives trades to be moved into clearinghouses. The law authorizes the CFTC to consider exempting banks and other financial institutions with assets of $10 billion or less. Congressional lawmakers have told regulators that the asset threshold is flexible.
The CFTC is also scheduled to hold a final vote on July 10 on a joint rule determining which derivatives are considered swaps and are subject to new Dodd-Frank rules.