Hedge Funds Win Collateral Reprieve in SEC Dodd-Frank Shift

Banks have six months to design new trading models; EU urges U.S. to change course on swaps rules; and watchdog says SEC is better at cost-benefit analysis.

Hedge funds and asset managers won relief from Dodd-Frank Act collateral requirements for credit-default swaps under a policy shift disclosed June 7 in letters posted on the U.S. Securities and Exchange Commission’s (SEC's) website.

The letters to banks, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., revised a measure released in March that called for some clients to put up double the collateral that dealers post for portfolio margin accounts at Atlanta-based IntercontinentalExchange Inc. (ICE). The banks instead will be able collect collateral from clients according to clearinghouse rules for six months.

During the six-month period, banks must design their own models for trading with clients that will then need SEC approval, the agency said in the letters dated today. The SEC suggested guidelines, including requiring enough margin to handle a 10-day liquidation with 99 percent confidence. The policy affects portfolio accounts with credit swaps tied to single securities offsetting those tied to indexes.

The change from the March policy may help encourage clearing of trades under Dodd-Frank, the 2010 regulatory law that called for most swaps to be guaranteed at clearinghouses as a way to reduce risk in the financial system. Mandatory clearing of trades began in March.


EU Fights July Deadline

The European Union is urging the U.S. to change course on planned swaps rules that it says would leave banks saddled with extra costs and incompatible legal obligations.

EU regulators are concerned that time is running out for the U.S. Commodity Futures Trading Commission (CFTC) to amend or delay requirements that stretch beyond U.S. borders, ahead of a July 12 deadline, an EU official said.

The international reach of CFTC swap-trading requirements has been one of the most controversial elements of the U.S. Dodd-Frank Act rules, prompting opposition from financial companies including Goldman Sachs Group Inc. and Barclays Plc, as well as EU, Asian, and South American regulators.

The EU is concerned that banks might face overlapping reporting requirements and incompatible restrictions on where to clear derivatives trades in the $633 trillion global market, according to the official, who can’t be named in line with official policy.

Jonathan Faull, the commission official responsible for financial-services rules, wrote last month to CTFC Chairman Gary Gensler urging him to allow more time for international talks.


SEC Doing Better at Assessing Cost of Regulations

The SEC has improved how it justifies new regulations after at least five recent court defeats faulted its use of economic analysis, according to an audit by the agency’s inspector general.

The agency specified the reason for regulations, considered alternatives to rules and integrated economic analysis into the rule-writing process, SEC Inspector General Carl W. Hoecker wrote in an analysis of 12 rules proposed or finished during 2012. The analysis was requested by Representatives Darrell E. Issa and Patrick T. McHenry, Republican lawmakers who have been critical of the SEC’s rulemaking procedures.

The audit shows how the SEC has made progress using cost-benefit analysis since having a rule on board of directors nominations overturned by the U.S. Court of Appeals for the District of Columbia in July 2011. That decision said the SEC failed to study the cost to companies of fighting shareholders over a nominee and how it would affect capital markets.

Issa and McHenry requested the analysis after the decision by the appeals court and a critical report on SEC cost-benefit analysis by former Inspector General David Kotz. A spokesman for McHenry declined to comment and a spokesmen for Issa didn’t immediately respond to requests for comment.

The report by outside consultant HDR Engineering Inc. says the SEC could improve how it describes alternatives to regulation and why it can’t always calculate the benefits of new rules.

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