Wall Street banks will escape billions of dollars in additionalcollateral costs after U.S. regulators softened a rule that wouldhave made their derivatives activities much more expensive.

Two agencies approved a final rule on Thursday that will governhow much money financial firms must set aside in derivatives deals.A key change from recent draft versions of the rule—and the focusof months of debate among regulators—cut in half what the companiesmust post in transactions between their own divisions.

A version proposed last year called for both sides to postcollateral when two affiliates of the same firm deal with oneanother, such as a U.S.-insured bank trading swaps with a U.K.brokerage. The final rule requires that only the brokerage post,cutting collateral demands by tens of billions of dollars acrossthe banking industry. Those costs would still be significantlyhigher than the collateral they currently set aside.

“Establishing margin requirements for non-cleared swaps is oneof the most important reforms of the Dodd-Frank Act,” FederalDeposit Insurance Corp. (FDIC) Chairman Martin Gruenberg saidbefore his agency's vote, noting that changes were made in responseto objections raised by the industry.

CFTC Writing Parallel Rule

While the bank regulators' approach is good news for WallStreet, all eyes now turn to the Commodity Futures TradingCommission (CFTC), which is writing a parallel rule. Firms alsowould need that rule to be softened before claiming a clearvictory. Like the CFTC, the Securities and Exchange Commission(SEC) is also drafting a final version of similar requirements tobe imposed on separate parts of banks.

CFTC Chairman Timothy Massad said on Wednesday that his agencymay have different goals in the rule than the bank regulatorsoverseeing firms that have federal deposit insurance.

“It is important to remember that the entities they regulate aredifferent than ours,” Massad said. “There's a safety and soundnessconcern there. And that difference is something we're thinkingabout.”

Senator Elizabeth Warren, a frequent critic of Wall Street,urged the CFTC to follow the lead of the bank regulators and warnedagainst a more lenient rule.

“If the CFTC's rule is weaker than those issued by other federalregulators, it will create opportunities for big banks to game therules,” Warren, a Massachusetts Democrat, said in a statementbefore the bank regulators' version was released.

Thursday's approval by the FDIC and the Office of theComptroller of the Currency also needs to be backed by the FederalReserve—which hasn't yet announced a meeting date—and othergovernment agencies.

It's difficult to estimate how much is at stake for banks suchas JPMorgan Chase & Co. and Morgan Stanley, given thecomplexity of the market. Even tens of billions in collateralbetween affiliates is just a slice of about US$315 billion incollateral that would be posted by U.S. firms in all non-clearedswap trades, according to estimates released by the agencies. Thatestimate is less than half of an earlier figure released by theOCC.

The Clearing House Association, a lobbying group for big banks,said regulators shouldn't have required collateral for the internaltrades because the transactions don't increase risk to lenders.Still, the group said the final rule was an improvement from pastdrafts.

“While one-way posting of margin between affiliates is clearlybetter than two-way, this rule increases the cost of servingclients and hedging risk while doing nothing to enhance the safetyand soundness of the organization,” Greg Baer, president of theClearing House Association, said in a statement after the rule wasapproved.

The rule is one of the last major requirements stemming fromU.S. regulators' swaps-market overhaul, which began after largelyunregulated credit-default trades helped fuel the 2008 marketmeltdown. The 2010 Dodd-Frank Act sought to increase the amount ofcollateral backing swaps in an effort to reduce broader systemicrisks stemming from a default. The law called for most swaps to beguaranteed at third-party clearinghouses that stand between buyersand sellers. Still, many trades in the multi-trillion global swapmarket remain uncleared.

In other ways the rule has been eased from the earlier proposal,the new requirement will be phased in over four years, startingSept. 1, 2016, for the biggest firms—with no retroactive demand. Italso expands what type of assets may be used for collateral.

A related rule, also conditionally completed on Thursday,exempts commercial energy and agricultural firms from thecollateral requirements.

Other government officials have objected to easing the earlierdraft—most prominently FDIC Vice Chairman Thomas Hoenig. He said ina statement that the financial system would have been “best served”by demanding collateral from both sides of every internaltransaction, but that “much is accomplished with the requirementthat the insured bank collect margin.”

–With assistance from Cheyenne Hopkins in Washington.

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.