Over the last few years, certain financial institutions began removing parent company guaranties from offshore derivatives transactions in order to avoid the application of US derivatives rules. After discovering evidence of the practice, the CFTC is now working to plug that loophole.
The top U.S. derivatives regulator took a step toward preventing Wall Street banks from evading the Dodd-Frank Act and shifting some of their trading overseas. The agency decided to act after Wall Street’s biggest dealers stopped backing some of their offshore affiliates or guaranteeing their trades. That meant lenders were freed from parts of Dodd-Frank that were intended to reduce risk and increase transparency in the market. Massad said the agency, which began looking into overseas practices last year, found evidence that banks were removing parent-company guarantees or stopping to grant the guarantees. “Plugging the de-guaranteeing loophole for margin alone is a significant step but it doesn’t take us all the way there,” Marcus Stanley, policy director for Americans for Financial Reform, said in an interview before the proposal was released. “It’s somewhere between a quarter and a half step.”