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August 19, 2015

U.S. banks moved billions in trades beyond CFTC’s reach

“This spring, traders and analysts working deep in the global swaps markets began picking up peculiar readings: Hundreds of billions of dollars of trades by U.S. banks had seemingly vanished.

“We saw strange things in the data,” said Chris Barnes, a former swaps trader now with ClarusFT, a London-based data firm.

“The vanishing of the trades was little noted outside a circle of specialists. But the implications were big. The missing transactions reflected an effort by some of the largest U.S. banks – including Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Morgan Stanley – to get around new regulations on derivatives enacted in the wake of the financial crisis, say current and former financial regulators.”

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“A coalition of 13 global banks banded together to fight the clause. They hired Edward J. Rosen, a derivatives lawyer with Cleary Gottlieb Steen & Hamilton, to lead the effort.

“The debate that ensued became one of the most contentious chapters of the post-crisis regulatory battle. “The industry ran to the ramparts once it became clear how the would apply this provision,” said Dennis Kelleher, president of Better Markets, a Washington D.C.-based advocacy group for tighter financial regulation.”

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“Picking up on that idea, banks fought for a narrower definition of the word “guarantee.” The banks seized on a footnote in the final draft, say people familiar with the debate. That passage declared that only “explicit” promises of financial support would count as a guarantee. So, the banks reasoned that if they stripped out the word “guarantee” and equivalent terms, they could avoid the rules.

“The fight over this provision was one of the biggest policy fights in all of Dodd Frank,” said Kelleher, of the think tank Better Markets. “Once the banks got that loophole, then a lot of that predatory behavior migrated overseas to wherever there was less regulation.”

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Read the full Reuters article by Charles Levinson here.

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