AFR Letter: CFTC and SEC Must Act Against Derivatives “De-Guaranteeing” Ploy

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Americans for Financial Reform is calling on regulators to reject a ploy that Wall Street banks are using to effectively exempt more than half of all derivatives transactions from new market safeguards. At the same time, AFR is asking the watchdog agencies to shed light on the so-far secretive backroom efforts made by major U.S. derivatives dealers in order to avoid regulation.

With trillions of dollars at stake, global derivatives markets played a central role in the financial crisis of 2008. Unless they are properly regulated, those markets are likely to be at the center of a next crisis as well.

The Dodd-Frank Act of 2010 established a system of comprehensive oversight based on risk management and transparency requirements for all derivatives transactions with “a direct and significant connection with activities in, or effect on, commerce in the United States.”

But now, with the swipe of a pen, Wall Street banks are claiming a broad regulatory exemption for derivatives trades executed by their foreign subsidiaries. This could free them to seek out foreign regulatory havens for a large share, possibly over half, of their derivatives trades. Because of the way the regulators have written their rules, it is not just U.S requirements that are at issue: the trades could also be exempt from the duty to comply with equivalent foreign rules.

In a letter to Commodity Futures Trading Commission chair Timothy Massad and Securities and Exchange Commission chair Mary Jo White, AFR argues that despite claims by U.S. banks that they have somehow “de-guaranteed” their major foreign subsidiaries, the practical relationships if the entities involved, and thus the risk to the U.S. economy when things go wrong, remain unaltered. The letter asks regulators to provide the public with a clear account of the size and scope of the regulatory exemptions that Wall Street derivatives traders are claiming, and to put an end to the inappropriate use of these exemptions.