The top U.S. derivatives regulator took a step toward preventingWall Street banks from evading the Dodd-Frank Act and shifting someof their trading overseas.

The Commodity Futures Trading Commission (CFTC) votedunanimously Monday to propose a requirement that broadens whenbanks' overseas divisions must meet U.S. collateral standardsdesigned to curb risks in the $700 trillion swaps market.

The agency decided to act after Wall Street's biggest dealersstopped backing some of their offshore affiliates or guaranteeingtheir trades. That meant lenders were freed from parts ofDodd-Frank that were intended to reduce risk and increasetransparency in the market.

“I think the rule today is a proper response to the concern thatoffshore swaps can result in risk flowing back into this countrywhether or not they are guaranteed,” Timothy Massad, the chairmanof the CFTC, told reporters during a conference call on Monday.

The proposal would govern when the collateral standards must bemet by 60 firms, largely divisions of U.S. and foreign-based banks,that trade overseas. The regulation, which would cover the largestnon-U.S. affiliates of Goldman Sachs Group Inc., JPMorgan Chase& Co., Bank of America Corp., Citigroup Inc., and MorganStanley, would still allow firms to comply with foreign rules whenthe agency deems them comparable to Dodd- Frank standards,according to the CFTC.

Spokesmen for Goldman Sachs, JPMorgan, Citigroup and MorganStanley declined to comment. A spokesman for Bank of America had noimmediate comment.

CFTC commissioners Mark Wetjen, a Democrat, and J. ChristopherGiancarlo, a Republican, voted to support the proposal but citeddoubts about whether it's the best approach. Giancarlo said theproposal includes a narrow approach toward determining when foreignrules are comparable.

“In a perfect world, all G-20 countries will adopt comparablemargin requirements, but we cannot let the perfect be the enemy ofthe good,” Giancarlo said in a statement. “We must focus on broadobjectives, not specific requirements.”

Massad said the agency, which began looking into overseaspractices last year, found evidence that banks were removingparent-company guarantees or stopping to grant the guarantees.

In 2014, the CFTC sent letters to affiliates of the five U.S.banks asking them about the guarantees, how the firms had changedtheir operations and whether they had disclosed the changes tocounterparties, according to documents obtained by Bloomberg News.Each of the five banks sought confidential treatment for itsresponses, the documents show.

The proposal released on Monday would allow transactions to beexempt from U.S. rules only when they're between banks and clients,and neither has a guarantee from a U.S firm or has financialresults consolidated with a U.S. parent.

'Significant Step'

Advocates for strict financial regulation have continued to callfor overseas entities to meet U.S. standards for tradingregulations that seek to increase price competition andtransparency in the market.

“Plugging the de-guaranteeing loophole for margin alone is asignificant step, but it doesn't take us all the way there,” MarcusStanley, policy director for Americans for Financial Reform, saidin an interview before the proposal was released. “It's somewherebetween a quarter and a half step.”

Monday's proposal governs only collateral rules for swaps tradeddirectly between two firms and not guaranteed by a third- partyclearinghouse. The proposal is separate from a cross- border policyreleased in recent years that governs rules for trading platforms,market data and other types of Dodd-Frank regulations.

Massad said the agency's proposal about collateral responds torisks that can flow back to the U.S. He said that a differentresponse may be appropriate for rules that govern trading andmarket data.

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