CFTC proposes to exempt affiliate swaps from clearing

WASHINGTON (Reuters) - Swaps between financial firms with a common parent would have no need to be cleared under a measure proposed by the U.S. derivatives regulator on Thursday.

The Commodity Futures Trading Commission voted 3 to 2 to release the proposal, which gives the public 30 days to comment on whether swaps between affiliates are less risky than trades with third parties.

But the rule would still require affiliates to back their trades with collateral, a condition which prompted the CFTC's two Republican commissioners to dissent.

Under the proposal, firms would have to back their trades with variation margin, or collateral calls based on adverse price movements.

"We believe this proposal may have the unintended consequence of imposing substantial costs on the economy and consumers," Republican Commissioners Jill Sommers and Scott O'Malia wrote in a dissenting statement. It is unclear, they added, the margin requirement "will do anything other than create administrative burdens and operational risk while unnecessarily tying up capital that could otherwise be used for investment.

A bipartisan bill that passed the Republican-controlled House in March would go much further than the proposal, exempting affiliate transactions from most swaps rules, including margin and capital requirements.

The swaps rules were mandated by the 2010 Dodd Frank law, which is aimed at boosting transparency and limiting risk in the $650 trillion over-the-counter swaps market. One of its key elements is requiring firms to route most of their swaps trades through clearing houses, which stand in between counterparties and help protect them in the event that one defaults.

Industry players long argued that swaps between affiliates only serve to reduce risk, by allowing firms to net their risk and hedge across businesses.

While the proposal's variation margin requirement may irk some industry players, key groups have said it's not a problem.

In a letter to the Commission dated May 14, the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association said affiliates "routinely" impose variation margin on their transactions and that the requirement "should not be unduly disruptive."

In order to take advantage of the CFTC's relief, firms would have to report their swaps to data warehouses and most would need to be located in the United States, or a country with "comparable and comprehensive" clearing rules.

(Editing by Dale Hudson and Gunna dickson)