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U.S. banks moved billions of dollars in trades beyond Washington’s reach
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.

The banks say these huge numbers — $157tn is more than twice global GDP — do not tell the whole story. And they are right: headline figures say nothing about the counterparties, the collateral, the offsetting positions, or whether the trades are centrally cleared. (Bear’s actual credit exposure — or its “net replacement cost of derivatives contracts in a gain position”, in the jargon — was much smaller, at $12.5bn.)

It is true, too, that big banks now have much more cash and cash-like instruments on hand to meet margin calls. Citi, for example, had a total of $446bn at the end of December: enough to meet the increased collateral requirements triggered by a one-notch downgrade about 370 times over.

Danielle Romero-Apsilos, a Citi spokesperson, says: “We have seen gradual, risk-managed increases in interest rate derivatives activity over the last several years as a result of client demand and this has brought us in line with our competitors.”

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Author: H. A. Goodman