The Federal Reserve proposed collateral requirements for swaps traded between banks, manufacturers, and other firms. The proposal, also scheduled to be adopted today by the Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency (OCC), seeks to free so-called end users—commercial manufacturers and other non-financial firms that use swaps to hedge business risks—from government collateral requirements.
The regulation determines how much collateral is necessary to reduce risk in the market for swaps traded directly between JPMorgan Chase & Co., Goldman Sachs Group Inc., BP Plc, and others, instead of those guaranteed at a clearinghouse. The re-proposal is open for public comment before it's completed.
The revised proposal seeks to limit the impact on global liquidity and smaller companies by freeing firms from having to post the first $65 million worth of collateral. To help end users, the regulators backed off an idea that would have required banks to force non-financial firms to post collateral if they crossed specific thresholds of creditworthiness. Banks will instead be required to collect collateral according to their own assessment of their clients' risks.
The rule would also expand the types of assets that are eligible to meet the new requirements to include U.S. debt, gold, and certain corporate debt and equities. The rules would be phased in between December 2015 and 2019.
U.S. regulators are rewriting their rules, first proposed in 2011, to follow a plan laid out last year by a group of global authorities that sought to align standards and keep banks from exploiting differences between countries. The international plan was softened to respond to banks' concerns that the requirements would force them to set aside the bulk of their high-quality assets and hurt market liquidity.
The regulations, which also must be voted on in the U.S. by the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), seek to reduce risk in the market after largely unregulated credit-default swaps exacerbated the 2008 financial crisis and the downfall of American International Group Inc.
The proposal is part of global policymakers' efforts “to reduce systemic risk in derivatives markets,” Federal Reserve Chair Janet Yellen said in a statement before the vote.
Regulators have argued that had the rules been in place in 2008, financial firms would not have amassed large derivatives positions without the necessary collateral.
'First Line of Defense'
“Margin is really the first line of defense against a breakdown,” Marcus Stanley, policy director for Americans for Financial Reform, a coalition including the AFL-CIO labor federation, said in a phone interview yesterday.
Airlines, utilities, and manufacturers that use derivatives to hedge risks have lobbied for four years for an explicit exemption from having to post margin, arguing that such a requirement would divert funds from hiring workers or investing in their business. The 2010 Dodd-Frank Act left it to regulators to determine whether end users would need to post margin on swaps that aren't settled by a central clearinghouse.
The Coalition for Derivatives End-Users, including brewer MillerCoors and technology company Honeywell International, have testified to Congress and met with regulators to press for an exemption.
“These swaps between non-financial end users who are hedging commercial risk and their counterparties don't create risk to the system,” Jess Sharp, managing director at the U.S. Chamber of Commerce's capital markets group, said in a phone interview yesterday. “These things didn't fail during the financial crisis.”
Copyright 2018 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.
Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
- Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
