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Introducing The Gigantic And Dangerous Wall Street Loophole You’Ve Never Heard Of

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http://libertyblitzkrieg.com/2015/08/21/introducing-the-gigantic-and-dangerous-wall-street-loophole-youve-never-heard-of/

This spring, traders and analysts working deep in the global swaps markets began picking up peculiar readings: Hundreds of billions of dollars of trades by U.S. banks had seemingly vanished.

The vanishing of the trades was little noted outside a circle of specialists. But the implications were big. The missing transactions reflected an effort by some of the largest U.S. banks — including Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Morgan Stanley — to get around new regulations on derivatives enacted in the wake of the financial crisis, say current and former financial regulators.

The trades hadn’t really disappeared. Instead, the major banks had tweaked a few key words in swaps contracts and shifted some other trades to affiliates in London, where regulations are far more lenient. Those affiliates remain largely outside the jurisdiction of U.S. regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission in 2013.

Many of the CFTC employees who were lobbied in these meetings went on to work for banks. Between 2010 and 2013, there were 50 CFTC staffers who met with the top five U.S. banks 10 or more times. Of those 50 staffers, at least 25 now work for the big five or other top swaps-dealing banks, or for law firms and lobbyists representing these banks.

The lobbying blitz helped win a ruling from the CFTC that left U.S. banks’ overseas operations largely outside the jurisdiction of U.S. regulators. After that rule passed, U.S. banks simply shipped more trades overseas. By December of 2014, certain U.S. swaps markets had seen 95 percent of their trading volume disappear in less than two years.

– From the excellent Reuters article: U.S. Banks Moved Billions of Dollars in Trades Beyond Washington’s Reach

The following story is guaranteed to make you sick. Once again, we’re shown that following trillions in taxpayer funded bailouts and backstops, TBTF Wall Street banks immediately went ahead and focused all their attention obtaining loopholes in order to transfer risk and make billions upon billions of dollars in the financial matrix, as opposed to adding any benefit whatsoever to society.

Good to see that light touch regulation doing wonders again. London the most important financial centre on the planet?

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Hundreds of billions of dollars of trades by U.S. banks had seemingly vanished.

The vanishing of the trades was little noted outside a circle of specialists.

Banking is so neat - try doing that with the equivalent cargoes of grain or steel and stuff. They'd notice. They'd be down on you just like that.

Liquid see - it's where it's at.

Edited by billybong

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The swaps didn't disappear, they moved. Dodd Frank imposed new regulations for US domicile banks and their branches. So they simply moved the flows to their affiliates to circumvent the new regs.

Result is a fragmentation of swaps markets with US dollar swaps conducted 'on shore' in U.S and Euro, Yen and Gbp 'off shore ' in Europe (mainly London) where regs don't apply. That is until Mifid 2 comes into effect 2017!and then all swaps will be regulated i.e must be centrally cleared, must be reported to trade repository and must be traded on a platform.

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The trades hadn’t really disappeared. Instead, the major banks had tweaked a few key words in swaps contracts and shifted some other trades to affiliates in London, where regulations are far more lenient. Those affiliates remain largely outside the jurisdiction of U.S. regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission in 2013.

That plus tweaking " a few key words" then to off balance sheets etc and in places "where regulations are far more lenient".

Edited by billybong

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if the affiliate benefited from a U.S. parental guarantee then it would be subject to Dodd-frank provisions so as to not transmit problems back onshore to the U.S.

The tweaking of the words in the contracts was to get all their counter parties to waive the U.S. Parental guarantee when they dealt with the affiliate which they all agreed to as they couldn't afford to lose all the liquidity provided by U.S. Banks. Thus they exploited the loophole provided by Dodd Frank that if there was no transmission mechanism back to US shores then these swaps are outside the scope of regulation.

No such rules for swaps exist in Europe and Asia till 2017 at the earliest.

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The swaps didn't disappear, they moved. Dodd Frank imposed new regulations for US domicile banks and their branches. So they simply moved the flows to their affiliates to circumvent the new regs.

Result is a fragmentation of swaps markets with US dollar swaps conducted 'on shore' in U.S and Euro, Yen and Gbp 'off shore ' in Europe (mainly London) where regs don't apply. That is until Mifid 2 comes into effect 2017!and then all swaps will be regulated i.e must be centrally cleared, must be reported to trade repository and must be traded on a platform.

At least that's how it's supposed to work. In practice there are plenty of loopholes to exploit in dark trading pools (below). The UK govt, naturally - the financial criminal's greatest advocate - is as stridently opposed to the introduction of this new regulatory framework as it was to the current one.

http://www.economist.com/news/finance-and-economics/21601294-bold-new-law-will-reshape-europes-capital-markets-bigger-bang

Its main thrust will be to force trading across all asset classes into open and transparent markets—not just equities, the focus of MiFID 1, or derivatives, the focus of EMIR’s clearing rules. Steps to make equity trading less opaque are especially controversial.

TABB Group, a consultancy, reckons dark trading constitutes 10-11% of the total, with almost 5% in MTF dark pools, where pre-trade prices need not be displayed, and almost 6% in brokers’ crossing networks, in which investment banks match orders in-house. Under MiFID 2, if trading in a particular share in dark pools exceeds certain caps, the pools will be barred from handling it for six months (although the darkness makes it hard to know when caps are hit). More confusingly still, the biggest dark trades need not be counted. ESMA is supposed to make all this workable. A ban on brokers’ crossing networks—which Judith Hardt, director-general of the Federation of European Securities Exchanges, says was her group’s biggest victory—is designed to push trades onto “lit” exchanges. But banks are beavering away on alternatives.

Britain opposed MiFID 1 for fear that it would undermine the City, according to Tim Rowe of the Financial Conduct Authority. When the first draft of MiFID 2 was unveiled Britain opposed curbs on dark pools and brokers’ crossing networks for much the same reason. In fact, he argues, London proved the great winner from MiFID 1, for it was able to adapt to change. The only certainty this time is that there will be even more of that.

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