June 13, 2012 / 10:40 PM / 6 years ago

Exclusive: U.S. seen delaying swaps rules for overseas banks

WASHINGTON (Reuters) - The United States is considering giving U.S. and foreign banks more time to comply with costly new reforms related to their overseas swaps operations, according to three people briefed on the matter.

The Commodity Futures Trading Commission has drafted a proposed exemptive order that would delay for these players certain “entity level” swaps rules, including one that will mandate they hold a certain amount of capital to back their trades, these people said.

The delay would provide relief to the foreign banks that execute many trades with U.S. counterparties. It would also cover the foreign operations of major U.S.-based swap players such as JPMorgan Chase & Co (JPM.N) and Goldman Sachs Group Inc (GS.N), according to the people, who were not authorized to speak publicly.

The banking industry has said an overly broad regime from the CFTC might duplicate or conflict with the rules of foreign regulators, or put certain banks at a competitive disadvantage.

To qualify for the delay, foreign firms would need to register with the CFTC and submit to the National Futures Association a plan for complying with CFTC regulations or those of their home country regulator, the people said.

The delay is expected to last at least a year, but the language is still being finalized, the sources said. The CFTC has tentatively scheduled a vote on the measure for June 21, they added.

A CFTC spokesman declined to comment.

Players that get a “swap dealer or “major swap participant” tag will be required to back up their trades with more capital and collateral as mandated by the 2010 Dodd-Frank Act, which seeks to boost transparency and limit risk in the $708 trillion global over-the-counter swaps market.

Rules finalized in April will apply the costly “swap dealer” tag on firms with $8 billion or more in swaps transactions for most asset classes in a 12-month period, though that threshold will eventually drop.

Risky derivatives trading at overseas subsidiaries of firms such as insurer American International Group Inc (AIG.N) severely damaged the U.S. financial system during the 2007-2009 financial crisis and led to multibillion-dollar taxpayer bailouts.

Those bailouts, combined with JPMorgan’s recently announced $2 billion-and-growing loss on a derivatives portfolio run out of London, have prompted some U.S. regulators and lawmakers to push for a swaps regime with broad overseas application.

The CFTC is hoping to put the order up for a vote at the same time as it considers proposed guidance on the international reach of U.S. swaps rules, the people familiar with the matter said.

That guidance will lay out which swaps rules apply to foreign entities and which transactions will be subject to U.S. oversight.

The draft exemptive order on the delay, which CFTC commissioners received last week, would grant relief until a year after the order or the international reach guidance is finalized, whichever comes sooner, the people said.

If passed, the order would also free overseas banks from complying with certain “transaction level” requirements such as margin rules for transactions with foreign counterparties, according to sources.

The foreign firms would still be required to report swaps data to “swaps data repositories,” the people said.

Major Wall Street firms and banks dominate the derivatives market and have been widely expected to fall into the swap dealer category.

JPMorgan, Bank of America Corp (BAC.N), Citigroup Inc (C.N), HSBC Holding Plc (HSBA.L) and Goldman Sachs control 96 percent of cash and derivatives trading for commercial banks and trust companies as of December 31, according to data from the Office of the Comptroller of the Currency.

Large swaps market players are likely to have to register with the CFTC later this year.

Reporting By Alexandra Alper; editing by Andre Grenon

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