In the wake of recent reports that U.S. banks are restructuring overseas derivatives transactions to sidestep critical protections enacted under the Wall Street Reform Act, Congresswoman Maxine Waters (D-CA), Ranking Member of the Financial Services Committee, has called on the top U.S. derivatives regulator to “thoroughly investigate” the removal of U.S. guarantees from arrangements between U.S. banks and their foreign affiliates.

In a letter to new Commodities Futures Trading Commission (CFTC) chair Timothy Massad, Waters expressed concern about this emerging practice and urged an investigation “focusing on the substance, rather than form.” Specifically, the Democrat requested that the CFTC “consider the presence of other non-traditional guarantees and arrangements that, viewed at the entity-level, support the creditworthiness of foreign affiliates.”

“Given that large Wall Street banks routinely transact half of their swaps activities through foreign subsidiaries, it is important that U.S. market regulators both work with each other, and with global regulators, towards the goal of international regulatory convergence.  As that process continues, we must ensure that U.S. banks are not importing unregulated derivatives risk back to the United States via any changes to the guarantee relationship with their foreign affiliates,” she wrote.

Waters points out that regardless of the guarantee, swaps transactions of foreign guaranteed affiliates transfer risk back to the United States – as if transaction were entered into directly by the U.S. bank. 

The text of the letter is below. A signed copy is available here.

The Honorable Timothy G. Massad
Chairman
U.S. Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, D.C.  20581

Dear Chairman Massad:

 As you know, strong derivatives oversight is at the heart of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The goal of the Act and our regulators is to prevent derivatives from presenting a systemic risk to our financial markets and our nation’s economy. However, as we live and operate in a global marketplace, our regulators must ensure that U.S. banks responsibly import derivatives risk from trading that happens overseas.

 Given this fact, I am writing to express my concern about recent reports that the largest U.S. banks are attempting to avoid U.S. swaps regulations by changing the swaps agreements of their foreign guaranteed affiliates to remove explicit references to any guarantee by the U.S. bank.

 As you know, swaps transactions of foreign guaranteed affiliates transfer risk back to the United States to the same degree as if the transaction were entered into directly by the U.S. bank.  This is so regardless of the form of the guarantee.

 Therefore, I request that the CFTC thoroughly investigate any removal of U.S. guarantees, focusing on the substance, rather than form, of the arrangements between the U.S. banks and their foreign affiliates.  In particular, I request that the CFTC consider the presence of other non-traditional guarantees and arrangements that, viewed at the entity-level, support the creditworthiness of foreign affiliates.

 Given that large Wall Street banks routinely transact half of their swaps activities through foreign subsidiaries, it is important that U.S. market regulators both work with each other, and with global regulators, towards the goal of international regulatory convergence.  As that process continues, we must ensure that U.S. banks are not importing unregulated derivatives risk back to the United States via any changes to the guarantee relationship with their foreign affiliates. 

 Thank you for working with me towards this goal, and I look forward to your response to this request.

Sincerely,

MAXINE WATERS
Ranking Member

cc:           The Honorable Thomas Curry
               The Honorable Martin Gruenberg 
               The Honorable Mary Jo White
               The Honorable Janet Yellen

###