CFTC poised to issue clearing mandate exemptions

Robert Casey

The Commodity Futures Trading Commission is prepared to issue exemptions to banks with less than $10 billion in assets from the 2010 Dodd-Frank Act’s clearing mandate designed to reduce trading risk.

Under the Dodd-Frank clearing mandate, certain participants are required to route all derivatives trades through independent clearinghouses. These clearinghouses provide a transparent trail for trades and reduce risk by accepting collateral from buyers and sellers in order to guarantee the trade. Should one of the deal’s parties go bust, these clearinghouses are backed by default funds to complete the transaction, Reuters reports.

Some banks with as much as $50 billion in assets have requested exemptions through the CFTC from the clearing requirement. Other lenders said that they should be considered swaps end-users, which rely on these trades simply to hedge risk.

“Small institutions do not engage in trades of the size or scope necessary to create systemic risk,” Sen. Robert Casey (D-Penn.) said, according to Bloomberg.

VP and senior counsel of the American Bankers Association Diana Preston suggested another approach.

“We understand and appreciate that the CFTC plans to provide a clearing exemption for banks, but we believe a risk-based measurement is more appropriate because it will better reflect potential risk to the market,” Preston said, according to Bloomberg.

The CFTC could also propose exemptions for farm credit banks and other financial cooperatives, though the rules could change before the regulator votes on the measure on Tuesday.

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