Prof. Greenberger describes in his 2018 paper how Dodd Frank regulations were put in place to protect the global economy from dangerous Swaps trading after 2008 but these rules were sidestepped by U.S banks using an offshore loophole.
The full article can be downloaded for free here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3228783
In this post I will expand on some of the ideas in my post from yesterday and highlight some of the key facts about Swaps regulation avoidance as described in Prof. Greenberger’s paper.
This is an overview of the key ideas of the paper.
Regulatory guidance was put in place in 2013 by the Commodity Futures Trading Commission (CFTC) to clarify that all Swaps transactions by foreign subsidiaries should fall under the regulatory framework set out by Dodd-Frank. This includes increased transparency, as well as clearly defined capital and collateral requirements.
In a key part of the guidance, under a buried 563rd footnote, it was stated that “guaranteed” foreign subsidiaries should fall under the Dodd-Frank regulations. The term “guaranteed” foreign subsidiaries was not considered problematic in any way as all U.S. swaps dealers’ foreign subsidiaries had been guaranteed by their corporate parents since 1992. This piece of wording was all that was required to create a monumental loophole.
In complete surprise to the CFTC the swaps dealer trade association privately circulated the suggestion that if it’s members “deguaranteed” their foreign subsidiaries then these foreign subsidiaries would be exempt from Dodd-Frank regulation. Loophole established.
In the coming months and years there was a substantial shift in the U.S. swaps trading from large U.S. bank holding companies swaps dealers to newly deguaranteed “foreign” subsidiaries. And with that, regulations were out the window and the pre-2008 swaps game was back on at the casino.
The CFTC never intended this loophole to be exploited and penned an amendment that would’ve closed the loopholes completely. However before the new rule was finalised the U.S. administration changed. The new administration seemed to have no interest in implementing the pending rule.
Despite all the swaps being moved offshore and out of the sight of regulators, the liabilities from dangerous offshore swaps bets remain on the books of U.S. banks and, if large enough, will once again fall upon the shoulders of the U.S. tax payers.
Litigation is possible and necessary to end this corrupt swaps loophole. A rule is ready to end the game and we have a new administration since January. Let’s put pressure on the CFTC and the SEC to enforce the Dodd-Frank protections.
Footnote:
Good ol’ GG Gary Gensler was the head of the CFTC as the Dodd-Frank rules were being more heavily enforced in 2013. His team got blindsided by the swaps dealer trade association creating the new loophole. Before the loophole could be fixed a new administration came in and the discussion was over.
GG clearly knows what’s been going on here. I suspect that’s why he was picked for the job. Let’s let him know that we know whats up with Dodd-Frank swaps dodging. Let’s let the CFTC know that we know and demand for their proposed rule to be put in place immediately (if it hasn’t already! So many new rules this year). Once again the big banks are the bad guys. This time they should fail and their executives should end up in jail.
Final note: all this info comes from the brilliant mind of Prof. Greenberger. Let’s get him on for another AMA!!! Once again his full article can be found here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3228783