The CFTC is poised to consider a “end-user rule,” which may come up for a final vote next month, that may require smaller banks to clear swaps and comply with high collateral standards under the Dodd-Frank Act.
Banks with as much as $50 billion in assets are pushing for exemption from the clearing requirement, arguing that their trades don’t pose a risk to the financial system and should be considered end-users of swaps. Lenders such as City National Bank, Frost National Bank, and Susquehanna Bank are included in the urge for exemption.
U.S. Senator Robert Casey told the CFTC in August that “These small institutions use derivatives in a limited — but necessary — fashion.” He said that small institutions do not engage in trades large enough to risk unbalancing the system.
The Dodd-Frank Act calls for most derivatives trades to be moved into clearinghouses. The law allows the CFTC to consider exempting banks with assets of $10 billion or less, and Congressional lawmakers have told regulators that the threshold is flexible.
The European Commission’s director general for financial services sees the prospect of small-bank exemption as a potential concern. “This would lead to a significant increase in systematic risk, a potential for unlevel playing-fields between US and EU banks, and scope for regulatory arbitrage,” he said.