The five US banking regulators have proposed to eliminate initial margin requirements on interaffiliate derivatives. This is a deregulatory gift worth more than $40 billion to Wall Street’s five largest banks who have been lobbying for this because they are also the five largest derivatives dealers, handling about 90% of all U.S. derivatives transactions. The posting of margin is a critically important buffer against losses and the proposed elimination is shortsighted, violates the express language of the Dodd-Frank Act, and will facilitate evasion of key financial protections.
Interaffiliate derivatives are often used to move risks into U.S. banks that have taxpayer backed customer deposits (as we detailed in a recent American Banker Op Ed). The proposal would eliminate one of the most important derivatives reforms intended to protect U.S. depositors from the risks of foreign derivatives dealing and to ensure Wall Street’s largest derivatives dealers can manage affiliated defaults without precipitating a crisis.
The current rules—which the banking regulators now seek to abolish—also help to prevent U.S. derivatives dealers from avoiding U.S. transparency and other requirements by indirectly dealing through foreign affiliates with little more than a key stroke. In other words, the current rules make it harder for U.S. derivatives dealers to engage in regulatory arbitrage, which will be unleashed by the proposal.
Finally, the banking regulators made inaccurate, incomplete and misleading statements when announcing the proposal, particularly regarding the potential risks to U.S. taxpayers and depositors, as Federal Reserve Board Governor Lael Brainard made painfully clear in her dissent.
We will detail our objections more fully in an upcoming comment letter in response to the proposal.