Treasuries Not Good Enough as Swaps Collateral

Rule under consideration by CFTC would require Treasuries to be covered by lines of credit when used as collateral for swaps and futures trades.

Rules under consideration by federal regulators could require clearinghouses to back up Treasuries pledged as collateral in the $693 trillion over-the-counter (OTC) derivatives market with credit lines, according to industry executives.

The Commodity Futures Trading Commission (CFTC), moving to toughen safeguards in a market blamed for worsening the credit crisis, is weighing a regulation that would mandate Treasury collateral be subject to a “prearranged and highly reliable funding arrangement,” according to documents on its website. Federal Reserve officials told banks and exchanges that the language means bonds must be covered by credit lines, according to three industry executives briefed on the matter.

The Futures Industry Association, a trade and lobbying group for the banks that act as brokers in the industry, asked the CFTC to allow Treasuries to be pledged without any financial backing, according to a Sept. 20 comment letter to the CFTC.

“U.S. Treasury securities are generally deemed to be ‘high quality liquid assets,’ as defined by the Basel Committee on Banking Supervision—i.e., unencumbered cash or assets that can be converted into cash at little or no loss of value in private markets,” the FIA said in the letter.

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