Banks Take New Tack to Keep Swap Trades Private

Wall Street is interpreting a footnote in July CFTC guidance to mean that swap trades booked by a foreign affiliate of a U.S.-based bank can escape many CFTC rules.

Wall Street, trying to preserve profits from swap trading in the face of tougher scrutiny from Washington, has found a new way to keep some of its overseas deals private. It’s called Footnote 513.

Banking lawyers have seized on the wording of the footnote, contained in an 84-page policy statement issued in July by the main U.S. regulator of derivatives. The largest banks told swap brokers in late September that the language means certain swaps still don’t fall under the agency’s new trading rules, according to three people briefed on the discussions.

The electronic platforms, known as Swap Execution Facilities, or Sefs, were created by the 2010 Dodd-Frank law to make prices more public and reduce risk in the system. They started trading on Oct. 2. ICAP and more than a dozen other firms have registered Sefs with the CFTC, including GFI Group Inc., Tradeweb Markets LLC, MarketAxess Holdings Inc., and Bloomberg LP, parent of Bloomberg News.

Sef trading is off to a slow start as firms test the waters before the new rules become mandatory, according to a Goldman Sachs research report released yesterday. The bank’s analysts estimated that for interest-rate swaps, the biggest part of the overall market, only about one-sixth of the volume has been traded on Sefs.

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