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ECB says it will stop trading swaps with US counterparties if not exempt from Dodd-Frank

The European Central Bank is threatening to stop using U.S. dealers unless it is granted exemptions from the clearing, execution and reporting rules of the Dodd-Frank Act.

In a letter sent to the Commodity Futures Trading Commission, the ECB warned that it would no longer trade over-the-counter derivatives with U.S. counterparties if it, as well as other European-based central banks, are not exempted from the new rules, Risk.net reports. The letter also expressed the ECB’s desires to be exempt from any rules on margining for uncleared trades.

The U.S. has braced itself for such reactions from foreign sovereign customers as this was the etter from the ECB stating such concerns. The CFTC received letters from the World Bank's International Bank for Reconstruction and Development and the International Finance Corporation earlier this year that had similar messages.

“If regulatory requirements are imposed on foreign central banks, the ECB and other central banks might shift swaps activity away from the US markets or US counterparties,” the ECB letter said, according to Risk.net. “This would reduce the liquidity of the US markets, constrain the competitiveness of US counterparties and reduce the effectiveness of central bank actions.”

THE ECB wants a full exemption from Title VII of the Dodd-Frank Act, which relates to OTC derivatives markets. It is also requesting confirmation that is will not be forced to comply with data reporting requirements. In addition, the ECB stated in the letter that it does not want to be regarded as a financial entity under the proposed margin requirements for non-cleared swaps.

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