The Treasury Department is monitoring Wall Street efforts toescape U.S. swap-trading restrictions for overseas derivatives,according to a department official.

Treasury is watching steps banks have taken to removeparent-company guarantees from their overseas affiliates andwhether those steps eliminate the U.S. banks' exposure, theofficial said yesterday. Banks have been changing operations totrade derivatives with other dealers in the $700 trillion globalmarket in a way that avoids curbs imposed by the Dodd-FrankAct.

Treasury joins the Commodity Futures Trading Commission (CFTC)and the Federal Deposit Insurance Corp. in reviewing the practice.The Dodd-Frank restrictions were intended to reduce risk and boosttransparency in the market by having most swaps guaranteed atclearinghouses and traded on exchanges or swap-executionfacilities.

“The financial industry is very good at morphing, at structuringthings around regulation,” CFTC Chairman Timothy Massad said in aSept. 5 interview, responding to a question about de-guaranteeing.“Even if it's well within the rules, it may still mean thatactivity abroad poses a risk to the U.S. banking corporations whichown these swap dealers.”

Massad's agency is consulting on the issue with the FederalReserve, FDIC, Office of the Comptroller of the Currency, andSecurities and Exchange Commission, he said.

2013 Guidance

The wrinkle arises from the rules that Dodd-Frank applies totrades in overseas affiliates that operate with the financialguarantee of their parent. Non-guaranteed affiliates are subject toless scrutiny than overseas branches or guaranteed affiliates, theagency said in guidance in 2013.

The CFTC sent letters in July to JPMorgan Chase & Co.,Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc.,and Morgan Stanley seeking further information about the practiceof removing guarantees.

Without curbs on swaps trading overseas, critics warn, U.S.taxpayers could face a repeat of 2008, when they had to rescueAmerican International Group Inc. from billions of dollars inlosses attributed to a London unit.

The Securities Industry and Financial Markets Association, thebanking industry's main lobbying group in Washington, has defendedthe banks' recent steps. In private talking points drafted by theassociation and obtained by Bloomberg News in July, the industrysays the de-guaranteeing practice is lawful and allows U.S. banksto compete on a level playing field with their foreign-basedcounterparts.

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