Political pressure will come to bear on US margin rules – Risk.net poll

More than half of respondents expect regulators to back down over extraterritoriality application of margin rules

Political pressure will force US regulators to amend draft rules on margining uncleared derivatives in order to prevent US banks being put at a competitive disadvantage overseas, say a majority of respondents to an online poll conducted by Risk.net.

Fifty-six per cent of respondents think the pressure being exerted by political heavyweights in Washington, DC will compel regulators to remove the extraterritorial application provision of the rules.

That pressure has already begun to be applied - last month, congressman Darrell Issa, chair of the Oversight and Government Reform Committee in Washington, DC, told Risk the rules would damage US banks.

"A US bank should be able to compete with foreign banks operating in other jurisdictions, and be able to operate under the rules of that jurisdiction - when in Rome, do as the Romans do. So if we want to shoot ourselves in the foot, let's at least only shoot ourselves in the foot here in the US, rather than doing so in other jurisdictions," he said.

Issa's criticism follows an August 2 letter sent to US Treasury secretary Timothy Geithner by congressman Spencer Bachus, chair of the House Committee on Financial Services, complaining there is no evidence that international regulators or policy-makers will adopt rules that mirror those proposed in the US.

Obviously the US wants everyone to implement the same rules but it all depends on what is relevant for our market

"Despite numerous assurances from you and other regulators that the international community will follow the US's lead on derivatives reforms, there is no indication that is happening," the letter states.

Only a quarter of poll respondents believe Europe will follow the lead of the US and propose similar rules, while 18% think US regulators will refuse to back down and uphold the extraterritorial application of the rules - a decision that would put US banks at a disadvantage unless foreign jurisdictions introduce equivalent rules.

The draft rules, published on April 12 by the Federal Reserve and four other regulators, would require US banks to collect collateral on uncleared over-the-counter derivatives trades from a range of clients - including sovereigns - that currently don't post margin.

Some European regulators tell Risk they expect to impose similar requirements, albeit with some differences, but other foreign regulators have privately voiced a number of concerns about the US proposals.

"Many jurisdictions haven't even thought about uncleared swap margins because they have followed the recommendations from the Group of 20 nations, which only mandated that capital requirements be applied to uncleared swaps, not margining requirements. We initially thought that capital requirements were sufficient for uncleared trades, so we will need to look at the situation and study it, and see what international consensus develops. Obviously, the US wants everyone to implement the same rules but it all depends on what is relevant for our market," says one Asian regulator.

The US margin proposals apply to all covered swaps entities, which essentially means all bank swap dealers and big swap users as defined by the Commodity Futures Trading Commission. The only exemption is for foreign covered swap entities transacting foreign derivatives transactions.

A foreign covered swap entity is defined as a covered swap entity that is not a company organised under the laws of the US, is not a branch or office of a company organised under US law, is not a US branch, agency or subsidiary of a foreign bank, and is not controlled directly or indirectly by a company that is organised under the laws of the US.

Meanwhile, a transaction would only be classed as foreign if the counterparty is not a US company, branch of a US company or US person, and the obligations have not been guaranteed by an affiliate of the counterparty that is a US company, branch of a US company or US person.

The upshot is that an uncleared swap will only be exempt from the US draft margin rules if it involves two foreign entities, extending the reach of the Dodd-Frank Act into other jurisdictions.

Read an in-depth article on the US proposal - and the response from overseas regulators by clicking here.