Press "Enter" to skip to content

Capital One got a waiver from CFTC after plunging oil prices increased swap exposure

According to two sources with knowledge of the matter, dropping oil prices improved the bank’s derivatives exposure above a key regulatory threshold therefore U.S. investor Capital One Financial Corp got a renunciation from the Commodity Futures Trading Commission (CFTC). Even though growing energy swaps exposure of U.S. bank does require the participation by the end of the next quarter, CFTC said that it would discharged a U.S. bank from a requirement to register as a Major Swap Participant temporarily.

On Friday The CFTC itself did not name the bank. According to the sources it got to know that it was it was Virginia-based Capital One. This Capital One is best known for credit card business and its retail lending. On Wednesday, The Capital One and regulator are refused to say anything and comment on the identity of the bank. According to one of the statements of spokesman for the CFTC, it issued the renunciation to protect the bank and its energy customers from undue trouble.

It further explained the unparalleled market scenario which is caused due to the coronavirus outbreak all over the world over the past months. The spokesman further said that they have actively cheered all market participants to identify regulatory relief.

Also they have encouraged other assistance that may be required to help or support healthy, liquid and orderly markets in order to face this crisis. On Friday CFTC said that the Capital One’s waiver lasts until 30 September. However, it will make business adjustments or register as a swap participant if the bank’s exposure remains above the threshold or energy prices remain low. CFTC spokesman further said that the designation involves a number of expensive and complex compliance obligations and reporting. In addition, he said that it could hurt the capability of institution to keep lending. And the bank is comparatively small player in the financial business and energy lending. Energy loans accounts with nearly 1.4% of its total loan book and its filings show. Capital One comes into commodity swaps as a part of that business. This way capital One is entering with gas clients and commercial oil to help them ease the related borrowing risks and the risk of energy price fluctuations.

Typically, those trades do not bring Capital One’s swaps exposure anywhere close to the CFTC’s registration threshold, according to the CFTC’s Friday notice. However, due to coronavirus outbreak crude oil prices are dropped with 50%. In addition the flood of supply has seen its exposure on those swaps balloon by top producers. And this has put it on course to hit the threshold by the end of this month, said CFTC. In particular, if a bank has $1 billion in daily average aggregate commodity swap exposure, that threshold kicks in. commodity swap exposure is not secured by collateral.

Tyson Slocum, a director at government watchdog group Public Citizen and a member of the CFTC’s Energy and Environmental Markets Advisory Committee said that the priority of the CFTC is not to crutch up an ailing sector. It’s to ensure that the market is protected from risks.