Wall Street banks may be close to winning one of their biggest lobbying fights this year by beating back U.S. requirements that would have led to billions of dollars of additional costs on derivatives trading.
The Commodity Futures Trading Commission (CFTC) is considering a parallel version of a rule approved by banking regulators last month that governs how much collateral must be posted between divisions of the same bank, according to people with knowledge of the matter who asked not be identified because the rule isn’t public yet. The banking regulators softened the requirements from an earlier proposal, leaving Wall Street looking to the CFTC to endorse that move.
The CFTC’s current draft, which could still change before a final vote slated for next month, wouldn’t require that a swap-dealer division collect collateral from an affiliated unit such as a U.S.-insured bank, the people said. That shift would cement the industry’s win last month when the Federal Reserve, Federal Deposit Insurance Corp. (FDIC), and other regulators said U.S.-insured banks don’t have to post collateral to their affiliates.
Broader regulation governing collateral for a wide range of trades has been in the works since largely unregulated credit-default trades helped fuel the 2008 market meltdown. The decision about trades between a bank’s divisions dominated regulatory debates this year and prompted lobbying by firms such as Goldman Sachs Group Inc. and Citigroup Inc., according to federal records. Lobbying groups argued that the requirement for both sides to post collateral is unnecessary because the internal trades don’t increase risk to lenders.
Timothy Massad, the CFTC’s chairman, told reporters last week that the agency was still deliberating on the collateral question and was trying to coordinate with bank regulators as much as possible. The CFTC oversees dozens of bank affiliates that deal derivatives in the $553 trillion global swaps market.
Steve Adamske, a CFTC spokesman, declined to comment. Spokesmen for Goldman Sachs and Citigroup also declined to comment.
The CFTC move would free affiliates from having to collect initial margin, a type of collateral exchanged at the outset of trades. The units would still be required to exchange variation margin, or collateral exchanged more frequently to offset the risk of incremental price movements during the course of a trade, which is a common industry practice, the people said.
The agency is also considering a requirement for CFTC-overseen units to have systems in place that would oversee risks from inter-affiliate trades, the people said. A separate provision is being weighed as a safeguard against the possibility that swaps dealers might try to evade U.S. rules when affiliates are located in countries without comparable regulations, they said.
The CFTC may draw the ire of Wall Street critics such as Senator Elizabeth Warren, the Massachusetts Democrat, who has said changes to derivatives regulations frequently weaken financial protections for taxpayers.
Warren and Representative Elijah Cummings, a Maryland Democrat, told the CFTC and Securities and Exchange Commission (SEC) this month that the agencies have an opportunity to fill the gaps created by the bank regulators’ failing to require both sides of swaps trades to post collateral.
Other government officials have objected to the easing of requirements—most prominently FDIC Vice Chairman Thomas Hoenig. He said in a statement in October that the financial system would have been best served by demanding collateral from both sides of every internal transaction, but that “much is accomplished with the requirement that the insured bank collect margin.”