CFTC Concerned Over Big Banks Transferring Trading Operations Offshore
The Commodity Futures Trading Commission (CFTC) is wary of banks invoking guarantees on foreign swap deals, and is taking steps to scrutinize such activity.
The Commodity Futures Trading Commission (CFTC) is wary of US banks shifting their trading activities offshore and has urged other regulators to scrutinize banks involved in such activities. CFTC Chairman Timothy Massad expressed concern yesterday that Wall Street companies are bypassing US rules by altering overnight the terms of some of their swap agreements with foreign affiliates.
Major banks like JPMorgan Chase & Co. (JPM), Citigroup Inc (C), Bank of America Corp (BAC) and Goldman Sachs Group Inc (GS) have avoided the tough Dodd-Frank Law by terminating guarantees from certain swaps that were issued by foreign affiliates mostly based in London. What this has done is shift the complete liability associated with such swaps to operations overseas. The American banking giants argue that eliminating ties with the US protects the parent from exposure to foreign risk, while it is alleged that in reality they are dodging the strict US regulations, and the 2010 Dodd-Frank Act in particular.
Swaps are said to be one of the main reasons behind the 2008 financial crisis. American International Group Inc’s (AIG) London operations suffered billions in losses due to exposure to toxic swaps. The losses eventually translated to the US parent, which caused the government to intervene with a bailout.
CFTC head Mr. Massad maintains that any losses made in overseas operations ultimately reach the country where the parent operates. Former head of CFTC, Gary Gensler, also criticized the banks’ behavior, blasting the “London Loophole” by citing events like the AIG tragedy and the “London Whale” trading loss incurred by JPMorgan, which amounted to a whopping $6 billion.
