Swap regulators face Congressional push to curb Dodd-Frank

Capital Charges

A second bill, supported by the Securities Industry and Financial Markets Association, as well as Philadelphia-based chemical company FMC Corp., would require the U.S. Financial Stability Oversight Council to examine the costs of international Basel capital charges for derivatives.

European Union lawmakers insisted on granting exemptions in Basel rules from the credit valuation adjustment, or CVA, to banks’ trades with companies in industries such as energy and chemicals that use swaps to hedge against price swings. The European lawmakers warned that applying the Basel rules as planned would drive up such companies’ costs.

The House measure requires the 10-member council, led by Lew, to determine the costs to U.S. bank competitiveness from the differences in capital regulations and recommend ways to limit the impact.

‘Inbuilt Bias’

The EU’s exemption for non-financial companies was necessary partly to counter “an inbuilt bias” toward the U.S. in this part of the Basel rules, Sharon Bowles, the chairwoman of the European Parliament’s economic and monetary affairs committee, said in an interview.

This bias arises from a requirement that firms calculate the CVA by seeking data from the market on how risky their counterparty is perceived to be.

Under the Basel rule, this is done either by looking at the premium that companies’ have to pay to take out credit default swaps that insure them against losses on the counterparty’s debt, or by examining the price movements of other co-called proxy securities.

The deep liquidity of U.S. bond markets, and consequent high probability that a trader can hedge at an acceptable price, could favor U.S.-based banks in this respect, Bowles said. “It’s not that we want special treatment for Europe, it’s just that the model of using proxies to calculate the risk doesn’t seem to work anywhere else than the U.S.,” said Bowles, who led calls to write the exemption into the EU’s Basel III law. “In Europe, we would have ended up with an artificially high charge.”

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