Daily Management Review

Wall Street Presents A Set Of Derivatives Rules For Swap Transactions


New derivatives rules to set guidelines in swap transactions between banks and its affiliates, said Wall Street.

Following a “debate among regulators” that took place over the discussion regarding the shifting of tough provisioning “in banks’ favour”, the Wall Street goes closer to the ridge of cutting “billions of dollars from the cost of a derivatives rule”.
Morgan Stanley, JPMorgan Chase & Co. and other such firms need not put aside “as much money” while trading “between their own divisions” as the finalised version of the U.S regulatory rules is likely to release in the next month. The “Federal Deposit Insurance Corp. and Federal Reserve” agreed upon easing the “demands” regarding an earlier version of the same proposal.
The issue of collateral authorization, by a bank and as well as an affiliate, has been the subject of hard fight among the industry members. Consequently, the various versions were laid out as a rule that came into the proposition in last September and was strongly supported by the FDIC. Moreover, a report states that:
“In a compromise, banking regulators now agree that the final measure should only demand collateral from an affiliate trading with a U.S. bank unit, said the people, who requested anonymity because the rule hasn’t been released publicly”.
Therefore, the biggest “swaps dealer” of the banking divisions in the U.S will not require to “pledge collateral” in fear of offsetting risks “from non-cleared swaps with their overseas affiliates”. Nevertheless, Bloomberg informs that:
“It’s difficult to estimate how much is at stake for the banks given the complexity of the market. Under last year’s proposal, banks and their affiliates would have had to set aside tens of billions in collateral. That’s a slice of about $644 billion in collateral that would be held by banks in all non-cleared swap trades, according to preliminary estimates from the Office of the Comptroller of the Currency”.
Moreover, among the supporters who are more stringent in dealing are of the opinion that assets demand from the either sides during any transaction would be a shielding machismo for the parent companies whereby the latter will be out of “risky trading at affiliates”. However, as per the arguments presented by the bankers practicing “swaps transactions with their own divisions” will carve the way to “hedge risks”.
Seven years ago, the swap trading used to run “unregulated”, as a result of which the financial crisis that took place then was amplified. In the FDIC’s Vice Chairman, Thomas Hoenig opinion the riskier bank trades require insulation so that taxpayers do not need to show them as failure. The said traders are usually performed to “transfer” the risks hovering on the affiliates to the banks that are backed by deposits. However:
“Current practice doesn’t call for as much collateral in these transactions”.
As per the decision made by the agencies the units of U.S banks will have to maintain a record “of what they would have posted if they had to set aside collateral”. Likewise, people who were in favour of keeping a “margin by both sides” may welcome the same.


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