WASHINGTON Aug 13 (Reuters) - Swaps between financial firms with a common parent will likely be exempt from clearing requirements by the U.S. derivatives regulator, but may still need to be backed by collateral, two sources told Reuters.
The Commodity Futures Trading Commission is expected to propose the measure in a closed-door meeting later this month, the people briefed on the matter said. The clearing exemption would make it easier for firms to hedge risk across businesses and net their exposure.
The industry will have 30 days to comment on it before the Commission can take a final vote, they added.
CFTC spokesman Steve Adamske was not immediately available for comment.
The clearing exemption will likely come as welcome news to an industry, which has lobbied hard for relief on such swaps. They argue that applying tough new rules would only increase cost and hurt firms' internal efforts to limit risk in the financial system.
But the industry may criticize the requirement that sister firms must face "variation margin," or collateral calls based on adverse price movements, to be eligible for the clearing exemption, the sources said.
A bipartisan bill that passed the Republican-controlled House in March would go much further, exempting the transactions from most swaps rules, including margin and capital requirements.
"Applying swap rules to inter-affiliate transactions could have the unintended and counterproductive effect of lessening market transparency, increasing costs generally, and increasing risk both within individual institutions as well as to the overall market," Keith Bailey, a mana g ing dire c tor at Barclays Bank said at an October hearing before the House Financial Services Committee, where he voiced support for the broader bill.
The legislation faces an uncertain future in the Democratically-controlled Senate.
BOOSTED OVERSIGHT OR RISK BOOSTER?
The CFTC's swaps rules were mandated by the 2010 Dodd-Frank Financial Reform, which seeks to boost transparency and limit risk in the $650 trillion, over-the-counter swaps market.
One crucial element of the regime is requiring firms to route most of their swaps trades through clearinghouses, which stand in between counterparties and help protect them in the event one defaults.
Another cornerstone requires most trades to be backed by collateral, which aim to give counterparties additional safeguards.
But industry players have been explicit in their view that inter-affiliate swaps decrease risk to the financial system and should not have to be cleared.
"Forced clearing of inter-affiliate swaps will destroy such risk reduction opportunities, without offsetting benefits," the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association said in a May letter to the CFTC.
The CFTC's proposed exemption for swaps between affiliates would be available to firms that meet seven conditions including: reporting trades to swaps data warehouses, and being located in the United State or a country that has comparable clearing rules.
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