Non-banks notch a win in long-running derivatives battle

Wed Apr 9, 2014 12:14am EDT
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By Lauren Tara LaCapra

NEW YORK (Reuters) - A group of small brokerages and large commodities companies convinced lawmakers to tweak a rule that they say would have made derivatives trading more expensive for them and sent more business to Wall Street banks that already dominate the market.

Companies including INTL FCStone Inc, Nomura Holdings Inc, Cargill Inc and Royal Dutch Shell Plc lobbied a congressional committee to change a rule proposed by the U.S. Commodities Futures Trading Commission on how much capital they must hold against derivatives trades as dealers. Cargill and Shell have derivatives trading arms.

Under proposed CFTC rules, these companies would be required to hold more capital against certain derivatives trades - also known as "swaps" trades - than banks. That is because the CFTC rules, created as part of the 2010 Dodd-Frank financial reform law, allow banks to calculate capital needs using their own proprietary models but force non-bank swaps dealers to use standardized models.

By using their own models, big Wall Street banks can, for instance, minimize their capital requirements by combining the potential risk of two trading positions that offset one another, rather than holding capital against the risk of each one going sour. Non-bank dealers complained that the CFTC's proposal did not allow them to perform such "netting" of offsetting trades.

The brokerages and commodities companies lobbied the House Agriculture Committee after they failed to gain traction with the CFTC.

The committee has drafted a bill that will provide funding for the CFTC and has inserted the tweak requested by these companies in legislation. The bill still needs to go through the rest of the legislative process before it is passed, but if successful it will allow non-bank dealers to also use proprietary capital models.

"The provision would simply level the playing field between bank and non-bank swap dealers," said Mark Klein, a spokesman for Cargill.

In announcing the proposed legislation, the committee said the change "corrects an illogical and unworkable capital requirement" that would have pushed non-bank dealers out of the derivatives market, making it less competitive for banks. Of the 84 registered swap dealers, less than a quarter are non-bank entities.   Continued...

A logo is pictured on the building of Cargill International SA in Geneva August 4, 2009. REUTERS/Denis Balibouse