CFTC Reviews Possibility of Banks "De-Guaranteeing" (with Lofchie Comment)
According to CFTC Chair Timothy Massad, the CFTC is reviewing information it received about financial firms cutting ties with foreign affiliates, or "de-guaranteeing," in order to avoid Dodd-Frank derivatives regulations.
Chair Massad stated that "[d]isclosures have been made, and we'll see what we get from that and decide what actions to take." He pointed to the 2008 bailout of American International Group as evidence of why "de-guaranteeing" must be scrutinized.
Lofchie Comment: Regulators should understand that it is perfectly appropriate for market participants to adjust their behavior in response to regulatory developments. Inevitably, burdensome regulations cause a reduction in the level of regulated activity, which may manifest as a change in the absolute level of the activity (market participants going unhedged), a change in its form (market participants moving from swaps to futures) or a change in its location. Rather than focusing entirely on business activities moving outside the United States, the CFTC might find it worthwhile to consider whether a drop in swaps activity reflects a decision by market participants to go unhedged, which would also result in an indirect increase in risk to the U.S. economy. Query: if it is improper for firms to move their activities in response to regulatory changes, then, by the same logic, would it be improper for a firm to reduce its swaps activity, or to cease hedging through swaps, in response to regulatory changes?