The U.S. Commodity Futures Trading Commission proposed exemptingtrades between units of the same company from Dodd-Frank Actclearinghouse rules designed to limit risk in the $648 trillionswaps market.

In a 3-2 private vote, CFTC commissioners proposed freeingso-called interaffiliate trades from requirements that swaps beguaranteed at central clearinghouses that protect buyers andsellers against defaults. The proposal would require collateral tobe exchanged between affiliates to reduce trade risks.

“Though transactions between affiliates pose risk, much of therisk relates to their affiliates rather than external parties,”CFTC Chairman Gary Gensler said in a statement yesterday.

Lobby groups representing banks such as Barclays Plc, JPMorganChase & Co. and Goldman Sachs Group Inc. have urged the CFTC toexempt the trades from Dodd-Frank rules enacted in response to the2008 credit crisis. Prudential Financial Inc. and a coalition ofend-users — commercial and manufacturing firms that use swaps tohedge risk — also sought exemption.

“The devil is in the details here because there are lots ofpotential risks in an overly broad exemption for interaffiliateswaps,” Marcus Stanley, policy director for Americans for FinancialReform, a coalition including the AFL-CIO labor federation, saidyesterday in a telephone interview.

The proposal, which will be open to public comment before theagency considers a final vote, would require centralized riskmanagement and reporting requirements for the trades. The rulewould also compel affiliates of financial entities to exchangeso-called variation margin to limit risk.

“This process prevents uncollateralized exposures fromaccumulating over time and thereby reduces the size of any lossresulting from a default,” the agency said in the rule.

Republican commissioners Jill E. Sommers and Scott O'Maliaopposed the measure, citing the variation margin requirement.

“It is not clear that this requirement will do anything otherthan create administrative burdens and operational risk whileunnecessarily tying up capital that could otherwise be used forinvestment,” Sommers and O'Malia said in a dissent.

The proposal also includes an exception from the marginrequirement for affiliates that are entirely commonly owned andcommonly guaranteed.

“As part of the consideration of this rule proposal, it will benecessary for financial-entity affiliates to consider otherregulatory regimes that would apply,” Andrew P. Cross, partner atlaw firm Reed Smith LLP, said yesterday in a telephone interview.“While the market will be digesting this rule, at an initial levelthis seems like the type of issue that could cause the exception tohave limited usefulness.”

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