(Bloomberg) — In a victory for banks, global financial regulators revised rules governing how much money must be set aside to cover losses by swaps traders, backing away from guidelines that firms warned would destabilize the $693 trillion derivatives market.
The Basel Committee on Banking Supervision’s final rule, released today, would require swaps dealers to hold less cash to protect against defaults than did a proposal published last year. The plan now applies a minimum 20 percent risk weighting to money deposited at clearinghouses, which are third parties that guarantee the transactions, down from 1,250 percent in the original proposal. The change takes effect on Jan. 1, 2017.
The interim plan had threatened to boost costs as much as 92 times, according to calculations by three banks shared with Bloomberg News. The risk from that original rule, which was last revised in 2013, was the higher costs could have caused market participants to flee rather than take advantage of the clearinghouses, making it more difficult for the third parties to safeguard the swaps market.
“They really had people spending a year thinking about it, and they reversed it. The banks should be very happy,” said Chris Cononico, president of GCSA LLC, a New York-based underwriter that’s seeking to insure derivatives clearinghouses. The proposed rule “seems to have evaporated,” he said.
International regulators are trying to safeguard trades and bring more openness to a market whose secrecy and sheer size overwhelmed regulators in 2008. Where swaps had been one-on-one deals before, now they would be backstopped by third parties in clearinghouses that ensure everyone can pay, with the aim of avoiding emergency bailouts and panic. Basel is made up of regulators from 27 of the world’s largest economies and sets international bank supervisory guidelines.
Swaps are what investors use to help guard against risk. They’re bought by pension plans and retirement funds to protect against fluctuations in interest rates, meaning they affect most people who own annuities. They’re used by the U.S. government to limit exposure in the mortgage market and cut home-loan costs. Investors can also hedge an investment in a company by buying a swap that will pay them if a borrower stops paying its debts.