April 25 (Bloomberg) -- The U.S. Commodity Futures Trading Commission is poised to consider a rule that could require smaller banks to clear swaps and comply with higher collateral standards under the Dodd-Frank Act, according to two people briefed on the measure.
The so-called end-user rule, which may come up for a final vote next month, will determine when companies must use clearinghouses to reduce risk in trades. Dodd-Frank, the 2010 regulatory overhaul, requires the CFTC to consider a small-bank exemption that isn’t currently in the measure, according to the people, who requested anonymity because the process isn’t public. The agency is debating whether to include an exemption, according to a third person.
Banks with as much as $50 billion in assets are urging the CFTC to exempt them from the clearing requirement, arguing that their trades don’t pose the financial-system risk the law is meant to rein in. Lenders including Los Angeles-based City National Bank, San Antonio-based Frost National Bank and Susquehanna Bank of Lititz, Pennsylvania, have told regulators they should be considered end-users of swaps.
“These small institutions use derivatives in a limited -- but necessary -- fashion,” U.S. Senator Robert Casey told the CFTC in an Aug. 2 letter. “Small institutions do not engage in trades of the size or scope necessary to create systemic risk,” the Pennsylvania Democrat wrote.
Derivatives, including swaps, are financial instruments used to hedge risks or for speculation. They’re based on stocks, bonds, loans, currencies and commodities, or linked to specific events such as interest-rate changes.
The CFTC is working to complete Dodd-Frank rules to reduce risk and boost transparency in the $708 trillion swaps market after unregulated trades helped fuel the 2008 credit crisis.
Dodd-Frank calls for most derivatives trades to be moved into clearinghouses, though Congress asked regulators for some exemptions, notably for end users. The law authorizes the CFTC to consider exempting banks with assets of $10 billion or less.
Congressional lawmakers have told regulators that the threshold is flexible, and banks have urged that it be raised to as much as $50 billion.
The CFTC proposed an end-user exception in December 2010 without seeking comment on a specific exemption for small banks.
“At the end of the day there are going to be rules that come out on this small bank, small farm credit, small credit union provision,” CFTC chairman Gary Gensler said at a Dec. 9, 2010 meeting. “I don’t think we should necessarily delay.”
The CFTC hasn’t proposed an exemption since that meeting, and smaller banks have continued to lobby regulators.
The prospect of a U.S. small-bank exemption has prompted objections from Jonathan Faull, the European Commission’s director general for financial services.
“The adoption of a small-bank exemption would cause serious concern,” Faull wrote in a March 16 letter to Gensler. “This would lead to a significant increase in systemic risk, a potential for unlevel playing-fields between US and EU banks, and scope for regulatory arbitrage.”
--Editors: Gregory Mott, Maura Reynolds