dChan - Q Origins Project Archive

CFTC Quietly Bails Out capital one

Last Friday, around the time of the quad-witching collapse which sent the S&P to levels not seen since Trump's inauguration, amid the flurry of headlines bombarding shell-shocked traders, was one that was particularly ominous if bizarrely incomplete. Shortly after the close, Bloomberg blasted the following headline:

CFTC PROVIDING RELIEF TO LARGE U.S. BANK ACTIVE IN OIL, GAS

There was little additional information to go with the report, aside from the CFTC saying it would temporarily exempt a U.S. bank from a requirement to register as a "Major Swap Participant" even though its growing energy swaps exposure would technically require it to do so by the end of the next quarter, and since the bank was not named, traders' attention quickly shifted to whatever the next crisis du jour, or rather du minute was.

However, late last week, Reuters reported citing two sources, that the bank in question was Virginia-based capital one, best known for questionable retail lending and cheesy credit card commercials with Samuel L Jackson.

So what exactly happened? According to a spokesman for the CFTC, the commodities regulator issued a waiver to protect the bank and its energy clients from "undue disruption," given the unprecedented market conditions over the past month amid the coronavirus outbreak.

"We have actively encouraged all market participants to identify regulatory relief or other assistance that may be needed to help support robust, orderly and liquid markets in the face of this pandemic," the spokesman said, implicitly admitting that the CFTC intervention amounted to what was an effective bailout of the bank.

At the core of the issue were plunging oil prices, which ended up having a margin call effect on the bank's swaps exposure; and since capital one's waiver lasts until Sept. 30, if energy prices remain low or the bank's exposure remains above the threshold, it will register as a swap participant or make business adjustments, the CFTC said on Friday.

And here is why anyone who currently has a deposit account at CapitalOne may consider quietly moving the money elsewhere: according to Reuters, the CFTC designation entails a number of complex and costly reporting and compliance obligations, which the CFTC spokesman said could hurt the institution's ability to keep lending.

In short, CapitalOne made a terrible trade, betting via derivatives that oil would not plunge to where it is now - at 17 year lows - and only CFTC intervention prevented a margin call of unknown magnitude from being sent to capital one's corner office. Which is surprising considering that the bank is a relatively small player in the energy lending and financing business, with energy loans accounting for just 1.4% of its total loan book, according to its filings.

As part of that business, capital one enters into commodity swaps with its commercial oil and gas clients to help them mitigate the risk of energy price swings and the related borrowing risks. 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.

But the 50% plunge in crude oil prices caused by the coronavirus and a flood of supply by top producers has seen its exposure on those swaps balloon, putting it on course to hit the threshold by the end of this month, the CFTC said.Following the 2007-2009 financial crisis during which several major institutions were toppled by their derivatives exposure, Congress created a slew of swap trading laws to reduce systemic risk and increase the visibility of the market. However, the ad hoc decision to grant a waiver in this case has sparked worries that regulators are going too easy on banks in a bid to prop up lending, exposing them to more risk down the road if energy prices do not rebound.

In effect, the CFTC allowed CapitalOne to incur even greater ongoing losses, while buying it a quarter's worth of time, in hopes that oil rebounds. But what happens if instead of rebounding, oil keeps grinding lower and, as we warned earlier today, actually goes negative!? The cumulative exposure facing CapitalOne would be many billions, and could potentially render the bank insolvent.

That said, COF is not the only one: across the board, regulators have scrambled to grant regulatory relief, worried banks will pull back from lending and exacerbate corporate liquidity stress.

https://internationalfreepress.com/2020/03/30/cftc-quietly-bails-out-capital-one/