House and Senate Committee Leaders Support Maintaining IM Requirements for Inter-Affiliate Swaps

Commentary by Nihal Patel

House Financial Services Committee Chair Maxine Waters and Senate Banking Committee Ranking Member Sherrod Brown expressed their "strong opposition" to "weakening" initial margin requirements for swaps between banks and their affiliates.

In a letter to Federal Reserve Board Chair Jerome Powell, FDIC Chair Jelena Williams and Office of the Comptroller of the Currency Comptroller Joseph Otting, Ms. Waters and Mr. Brown argued for the importance of margin requirements in addressing risks from affiliates that may be transferred back to the banks. They warned that any reduction of initial margin requirements would pose a risk to financial stability and U.S. taxpayers. Ms. Waters and Mr. Brown also said that banks have seen record profits and appear not to be "economically constrained by current margin requirements."

Further, Ms. Waters and Mr. Brown cautioned that a weakening of inter-affiliate margin requirements would present offshore risks to U.S. affiliates as the UK prepares to leave the EU, suggesting that Brexit could lead not only to market instability, but also a "race-to-the-bottom approach to financial regulation" between UK and EU regulators.

Commentary

Imagine thinking ten years ago that in 2019, the hot topic being pressed by industry lobbyists would be inter-affiliate initial margin requirements for swaps. (You might wonder if you blew your own mind.)

While the Waters/Brown letter is overbaked in its rhetoric (e.g., that Dodd-Frank was meant to ensure that banks would "no longer be able to gamble on risky derivatives, like swaps. . . ."), it does cite commentary from two of the key regulatory figures during the Obama administration - FDIC Vice Chairman Thomas Hoenig and Fed governor Daniel Tarullo - explaining why they thought inter-affiliate initial margin requirements were important to put in place. The letter does not, however, meaningfully address potential contra arguments (e.g., competitive balance vis-á-vis policy of other regulators; cost-benefit analysis). It would be helpful to hear from current bank regulators on the issue.

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