Regulators may keep Bank of America from shifting derivatives from its Merrill Lynch unit to its consumer retail division, Bloomberg reports.

The Federal Reserve and Federal Deposit Insurance Corporation are discussing whether to allow further transfers between the two units. Bank of America Corp., the holding company of BofA's retail and institutional services units, had moved the derivatives to take advantage of a higher debt rating in its consumer division, which allowed it to post lower collateral levels.

In a 460 page SEC filing made after it reported earnings this October, Bank of America noted that these derivative moves could be limited by regulators, without naming either agency.

"Our ability to substitute or make changes to these agreements to meet counterparties' requests may be subject to certain limitations, including counter party willingness, regulatory limitations on naming [Bank of America NA] as the new counter party, and the type or amount of collateral required," it wrote. "It is possible that such limitations on our ability to substitute or make changes to these agreements, including naming [Bank of America NA] as the new counterparty, could adversely affect our results of operations."

FDIC officials have objected to the move as it increase the potential risk of collapse, forcing the agency to pay depositors. The Fed, however, believes the additional capital requirements would cripple the bank at a difficult time.

Bank of America held nearly $75 trillion in notional derivative contracts in June. The transfers it has already completed have allowed it to avoid nearly $5 billion in collateral postings. A reversal, or additional downgrade, would add to the banks woes. The bank said it could be forced to post an extra $1.7 billion if it was hit by a second incremental downgrade, based of derivatives held on September 30.

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