Rep. Waters Writes Letter to CFTC Urging Investigation into U.S. Banks’ Overseas Moves

Representative Maxine Waters (D-CA) wrote a letter to CFTC Chairman Timothy Massad, urging the CFTC to “thoroughly investigate” recent reports that large U.S. banks are attempting to avoid U.S. swap regulations by changing the swaps agreements of their foreign affiliates to remove explicit references to any guarantee by the U.S. bank.  

According to Rep. Waters, swaps transactions of foreign guaranteed affiliates transfer risk back to the United States to the same degree as if the transaction were entered directly by the U.S. bank, regardless of the form of the guarantee.  

Therefore, Rep. Waters requested that the CFTC 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, she requested the CFTC consider the presence of other non-traditional guarantees and arrangements that, viewed at the entity-level, support the creditworthiness of foreign affiliates.

Lofchie Comment:  It is perfectly appropriate for U.S. regulators to discourage U.S. banks from the restructuring of credit arrangements in form, and not substance.  It is reasonable to expect that the Dodd-Frank regulations, and the general regulatory climate, will motivate a significant amount of financial business to move in substance, and not merely in form, outside of the United States. U.S. regulators could arguably discourage U.S. financial institutions from doing business outside of the United States, but that would likely result in the loss of business to non-U.S.competitors.

See: Representative Waters’ Letter.