By Andrew Ackerman And Victoria McGrane 

WASHINGTON--The Treasury Department is monitoring U.S. banks that are shifting some trading operations overseas to avoid tough U.S. swaps rules, according to a department official.

Banks, including Citigroup Inc., Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. have revoked their policy of guaranteeing some swaps issued by foreign affiliates, primarily in London, eliminating ties to their U.S. parent.

Treasury is monitoring the practices to determine if they pose potential risks to parent companies in the U.S., the official said. Treasury Secretary Jacob Lew heads the Financial Stability Oversight Council, which has authority to address activities that pose a systemic risk to financial markets.

The moves by banks to revoke guarantees means any liability for those swaps lies solely with the offshore operation, which the banks have said will protect the U.S. parent from contagion. Yet without that tie, the swaps don't fall under U.S. jurisdiction and aren't subject to strict rules set by the 2010 Dodd-Frank financial law which aims to bring transparency to the multitrillion-dollar swaps market.

Timothy Massad, the new chairman of the Commodity Futures Trading Commission, told The Wall Street Journal last week his agency is scrutinizing the trading shifts and will share its work with banking regulators and other federal policy makers. Mr. Massad said there is a concern that a U.S. bank's foreign losses ultimately would find their way to U.S. shores, infecting the parent company in possibly destabilizing ways. At the same time, there are limits to the CFTC's authority in regulating the swaps market, he said.

The Federal Reserve, Federal Deposit Insurance Corporation and other regulators raised concerns last week about the potential for U.S. contagion in a reproposed Dodd-Frank rule imposing margin requirements on swaps participants. The regulators solicited comment on whether they should take steps "to better ensure that those swaps that pose risks to U.S. insured depository institutions would be included within the scope of the rule."

Swaps are contracts in which two parties agree to exchange payments based on fluctuations in interest rates or other benchmarks. They played a central role in the financial crisis.

Write to Andrew Ackerman at andrew.ackerman@wsj.com and Victoria McGrane at victoria.mcgrane@wsj.com

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