U.S. banking regulator proposes easing post-crisis derivatives rules for big banks
WASHINGTON (Reuters) - A U.S. banking regulator Tuesday proposed easing a post-credit crisis rule on how much cash big banks should set aside to safeguard derivatives trades between affiliates, marking one of the biggest wins for Wall Street lenders under the Trump administration.
The proposal, by the Federal Deposit Insurance Corporation, could potentially free $40 billion across the nation’s largest banks, according to a 2018 survey by the International Swaps and Derivatives Association, which has been lobbying for the rule change for years.
The proposal is subject to consultation and is likely to meet resistance from Democratic lawmakers and consumer groups, who have warned that chipping away at post-crisis derivatives rules could sow the seeds of the next crisis.
At the same meeting, the FDIC also proposed delaying rules that would require managers of smaller funds to post margin for derivatives transactions. The proposal brings the FDIC in line with the Basel Committee of global banking regulators, which decided in July to postpone to September 2021 that requirement for firms whose exposures to non-cleared derivatives exceed 8 billion euros ($8.94 billion).
The regulator also proposed relief for banks transitioning away from the London interbank offered rate (LIBOR), which is set to be phased out after 2021. The proposed rule will allow banks to transition to the new Secured Overnight Financing Rate (SOFR) without having to treat trades as new transactions, a requirement that would have required banks to jump through a series of operational hoops.
Other banking regulators are expected to propose similar measures soon.
For years, banks have complained that the U.S. requirement to post margin for so-called “inter-affiliate” trades puts them on uneven footing with foreign counterparts that do not face the same restriction, as well as with nonbanks. They also say it is redundant to set aside funds to cover transactions made within the same group.
In May, seven of the financial industry’s biggest trade groups sent a letter to regulators urging them to scrap the rule. They argued that the collateral banks must post for interaffiliate trades diverted funds “that would otherwise be available for more productive use in the economy.”
Some Democratic and Republican lawmakers backed the effort but the top Democrats on both the House and Senate banking committees wrote to regulators in August urging them to abandon any plan to ease the rule. They said it could encourage banks to shift risk from overseas affiliates to the United States, where banks are backed by federal deposit insurance.