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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