European banks forced to review US deals
London, October 27, 2012
Some European banks are ordering their brokers to rein in and even quit trading some derivatives with US-based peers in a protest against tough new American rules.
The Dodd-Frank regulations, which come into force in early 2013, will subject non-US banks to foreign as well as domestic regulatory scrutiny in derivatives trading, imposing a fresh bureaucratic burden.
US regulators want all banks annually trading more than $8 billion of swaps - financial instruments used to bet on movements in interest and currency rates - with US-based companies to register as active participants in the US derivatives market.
They will also have to consent to reforms aimed at making the trading of these instruments easier to regulate, under the Dodd-Frank Act, a reaction to the 2008 financial crisis designed to improve transparency through the use of electronic platforms and clearing houses.
The world's largest swaps trading banks, such as Barclays and Deutsche Bank, are expected to comply with the US demands.
But some mid-sized non-US banks have told their brokers to stop doing trades with US firms, in the hope of avoiding the $8 billion threshold and the burden of becoming a US-regulated dealer.
"Numerous counterparties in Europe and Asia have requested they do not face US-based counterparties so they do not build up any swap volumes towards the threshold," said a senior European swaps broker, who declined to be named in line with client confidentiality constraints.
Because most derivatives are traded "over the counter" in private transactions, trading data is not readily available.
But the broker said "dozens" of his clients had ceased trading interest-rate swaps with US firms this month, citing worries over how they might be impacted by the new rules.
"We are seeing clients in Asia and also down in Latin America looking at alternatives to trading with US entities. It's some of the smaller banks and dealers," said David Lucking, a partner at law firm Allen and Overy in New York.
Such moves come despite pledges by the US authorities to exempt or water down some of the Dodd-Frank requirements for non-US banks, after trade body the International Swaps and Derivatives Association (ISDA) and some European politicians including British finance minister George Osborne objected to their scope.
The US Commodity Futures Trading Commission (CFTC) this month temporarily delayed a number of rules that would have come into force on October 12 in response to requests from the industry for more time. Most of the rules will now kick into force at the start of next year.
"The CFTC could ... recognize some of the problems and start to provide greater clarity over the next couple of months," said Allen and Overy's Lucking.
"Or they could leave us all in suspense and rush at the end of the year to give additional relief, which is less desirable because people need to be able to plan," he said.
Nordea (NDA.ST), a Nordic bank, and DBS Group Holdings (DBSM.SI), southeast Asia's largest bank by assets, have already said they do not want to become a US-regulated dealer.
Kenneth Steengaard, managing director, currency, money markets and commodities trading at Nordea Markets, confirmed to Reuters his bank "did not intend to register as a swap dealer in the United States under Dodd-Frank."
One of the side-effects of Dodd-Frank may therefore be to push more business towards London, already the world's biggest centre for swaps trading.
European-issued swaps account for half the $500 trillion global market, according to the Bank of International Settlements.
But some traders have privately questioned whether non-US firms will cut off US counterparties indefinitely, given they are among the main liquidity providers in the market.
Bank of America, Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley alone handle more than a third of swaps trading, data provided by ISDA shows.
Traders have also stressed that European regulators are set to introduce rules akin to Dodd-Frank, so European traders will likely only gain temporary relief by boycotting US names. – Reuters