US Banks May Need $644B in Collateral Under Revised Swaps Rules

The revised rules for non-cleared swaps could require banks to have $644 billion in collateral to offset risks involved in swaps trading among themselves. The Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Federal Reserve adopted a proposal for collateral requirements for swaps traded between firms, manufacturers, banks, and others this week. However, the Securities and Exchange Commission and the Commodity Futures Trading Commission still have to vote on the regulations.

The proposal seeks to lower risk and improve transparency by mandating that swaps be guaranteed at central clearinghouses and are traded on platforms. It also looks to limit the effect on global liquidity and smaller companies, as well as free end-users from requirements.

Ever since the 2008 economic crisis, when unregulated trades played a part in the financial meltdown, regulators have wanted to enhance oversight of the global swaps market. Under the proposed rules, banks would need to finance collateral and hold custody accounts that might not be as profitable as other uses they could engage in instead.

For swaps that aren’t cleared and are traded between sellers and buyers, regulators are proposing standards for mandating that banks and clients trade collateral to keep risks from rising. The OCC, six-foreign-bank branches, and the regulator for nine national banks would supervise approximately 80% of the swaps market that would be affected. These banks would likely have to contend with over $650 million in administrative expenses to get the system ramped up, as well as another $149 million a year to be in compliance.

The proposal regulation also would determine the amount of collateral required to lower market risks for swaps that are traded directly between Goldman Sachs Group Inc. (GS), JPMorgan Chose & Co. (JPM), BP Plc (PB/)—these would not be clearinghouse guaranteed-trades.

To assist end-users, regulators did pull back from an idea that would mandate for banks to compel non-financial firms to post collateral if they went over certain creditworthiness thresholds. Instead, banks will have to collect collateral based on their assessment of clients’ risks.

The revised proposal limits how much in assets can be tied up in collateral. For examples, firms would not be required to post the first $65 million of collateral spurred by trades. The Federal Reserve estimates that U.S. banks and clients would need around $30 billion in initial margin to offset trade risks.

Also under the revised proposal, firms wouldn’t be required to post the first $65 million of collateral that their trades prompt. They would have to broaden the kinds of assets eligible to be considered collateral.

If you suspect that you have been the victim of swaps securities fraud, contact The SSEK Partners Group today. Your initial case consultation is a no obligation, free consultation.

U.S. Regulators Tighten Swaps Collateral Regulations, Bloomberg, September 3, 2014

Swaps Collateral Rule Eases Impact on Nonfinancials
, CFO, September 4, 2014

More Blog Posts:
“Substituted Compliance” Should Regulate Cross-Border Swaps, Says SEC Chairman Elisse Walter, Institutional Investor Securities Blog, April 3, 2013

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“>SEC May Propose New Swaps Margins & Title VII Rules, Institutional Investor Securities Blog, November 11, 2013

Ex-Morgan Stanley Trader to Settle SEC Unauthorized Swaps Trading Claims for $150,000, Stockbroker Fraud Blog, June 13, 2011