Thomas Hoenig, vice chairman of the Federal Deposit InsuranceCorp. (FDIC), is fighting congressional efforts that have madeprogress in freeing large banks from having to hold collateralagainst derivatives used internally.

Hoenig has cautioned lawmakers in meetings and in a letter lastweek about the risks of giving the firms a pass from postingcollateral in trades with their own affiliates. In the July 16letter addressed to members of the House and Senate on the banking,appropriations, and agricultural committees, he said requiring thiskind of collateral could have shielded JPMorgan Chase & Co.'smain bank from the London Whale trading losses that totaled morethan US$6 billion.

“Withoutmargin exchanged for these trades, affiliates often enter intouncleared swaps transactions with the banks,” Hoenig wrote. “Theseaffiliates can often operate with less capital and liquidityreserves than the market would otherwise require, as marketparticipants treat these affiliates as if they were an extension ofthe bank.”

Earlier this month, House appropriators passed an amendment thatwould urge the Commodity Futures Trading Commission (CFTC), one ofseveral agencies trying to write rules governing collateral fortrading uncleared swaps, to recognize that such internal riskmanagement transactions benefit customers. Last week, topRepublican and Democratic lawmakers on a House panel that overseesthe CFTC sent a letter to regulators asking them to reconsider thedemand for collateral.

Clients of Wall Street firms could face higher costs as a resultof last year's proposed rule calling for lenders to post marginwhen trading swaps with their own affiliates, Representatives K.Michael Conaway and Collin Peterson wrote in a July 17 letter tosix regulators including CFTC Chairman Timothy Massad.

“Internal risk management transactions are necessary for globalfinancial institutions to manage their risk profile and enablebanks to provide cost-effective services to their clients,” saidConaway, the Texas Republican who leads the House AgricultureCommittee, and Peterson of Minnesota, the top Democrat on thepanel. The current proposal—which isn't yet a final rule—could harmmarkets without reducing risk, the lawmakers said.

The rulemaking effort, which has dragged on for years, couldlead to firms including JPMorgan and Morgan Stanley having to setaside tens of billions of dollars in collateral. Bank lobbyistshave pushed some regulators to second-guess how strict they shouldbe, and the agencies have been mired in disagreements, Bloombergreported last month.

JPMorgan was fined more than $1 billion by U.S. and U.K.regulators in 2013 for management failings after Bruno Iksil, knownas the London Whale because of his large bets, incurred $6.2billion in losses in 2012. The scandal erased as much as $51billion of shareholder value and led to the departure of foursenior managers, including Chief Investment Officer Ina Drew.

Financial companies have argued they shouldn't be forced to putup collateral in swaps transactions with their own divisions. Thefirms typically do these trades to transfer risk from theiraffiliates to their deposit-taking banks, where they enjoy betterborrowing rates. Current practice doesn't include the samecollateral demand.

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