Are Banks Evading U.S. Trading Rules?

CFTC is investigating to determine whether changes to derivatives contracts and corporate structures are designed to bypass Dodd-Frank.

The Commodity Futures Trading Commission (CFTC) is reviewing U.S. banks’ steps to restructure overseas swap trading as part of an examination of whether the companies might be evading Dodd-Frank Act rules.

The agency’s staff is gathering information about any changes banks have made to derivatives contracts or their corporate structures seeking to free themselves from the law’s restrictions, Mark P. Wetjen, the agency’s acting chairman, told reporters yesterday after a Senate hearing in Washington.

The CFTC review comes before an “analysis about whether or not there is evasive activity under way” and possibly subject to rules against sidestepping the 2010 law, Wetjen said. “I don’t want to prejudge the facts. What’s going on could be perfectly legal.”

U.S. banks have taken steps in recent months that allow them to trade with each other or with foreign-based banks outside of Dodd-Frank rules. The largest swap dealers have been removing parent guarantees from affiliates or specific transactions so they can trade in the interdealer market without being subject to rules mandating price competition, three people familiar with the transactions said last month.

The wrinkle arises from the rules that Dodd-Frank applies to trades in overseas affiliates that operate with the financial guarantee of their parent. Non-guaranteed affiliates are subject to less scrutiny than overseas branches or guaranteed affiliates, the agency said in July guidance.

The banks’ move is the latest step in Wall Street’s efforts to curb the reach of CFTC rules designed to have most credit-default, interest-rate, and other swaps traded on new platforms called swap-execution facilities (SEFs). The venues are designed to boost competition and transparency in swap prices.

The CFTC set a deadline of today for European swap-trading platforms to demonstrate they have sufficient competition between banks and other firms to remain exempt from direct U.S. oversight. The agency hasn’t publicly announced that any platforms have applied for the relief.

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