Foreign banks say no on US swaps

Two large banks in Asia and Europe said they won't register with US regulators to trade complex derivatives with US-based financial companies, amid controversy over a proposed rule tied to the Dodd-Frank markets overhaul.

   Non-US banks have been complaining for months about regulations that would force banks to register with US regulators if they trade a set amount of swaps, a type of privately negotiated derivative, with US banks or for US clients.

   Singapore's DBS and Sweden's Nordea Bank are apparently the first major banks to declare that they won't register.

   DBS doesn't see the "immediate commercial benefits" of making the investment necessary to comply with the strengthened US rules, said Tse Chiong Thio, managing director at DBS Bank. The bank wouldn't comment on how the decision would affect its business.

   Kenneth Steengaard, managing director in currency, money markets and commodities trading at Nordea Markets, said in an interview yesterday that the bank "does not intend to register as a swap dealer in the US under Dodd Frank."

   He said the bank is now trading with units of US swap dealers outside the US, including their UK affiliates, taking advantage of a US Commodity Futures Trading Commission waiver granted earlier this month.

   The CFTC said OctOber 12 that foreign banks could avoid the registration requirement by trading with overseas branches of US-based banks for now, so long as the US banks intend to register as swaps dealers with the regulator.

   In recent days, banks including Bank of America, Citigroup and JP Morgan Chase told clients they would register, according to people with knowledge of their letters. Spokespeople for these banks declined to comment.

  Executives at two US banks said that prior to the CFTC's relief, many foreign banks stopped trading swaps both with their headquarters and with their overseas units, aware that transactions after that date would count toward an $8bn threshold in trading volume that would trigger the registration requirement. Trading activity has picked up since then, but is focused on the banks' units outside the US.

   A final version of the rules, which could take effect as soon as next summer, is expected to be completed by the end of this year, or early in 2013. Banks are working to ensure that the waiver for trading with foreign branches of US firms is included.

   The choice to move certain trades to foreign affiliates of US banks shouldn't have a dramatic impact on DBS's and Nordea's business in the short term, bankers said. Each firm may trade up to $8bn of swaps with US-based counterparties without triggering the CFTC registration requirement.

   Still, some bank executives said moving interbank swaps business outside the US could reduce US banks' ability to trade with customers in the long run.

   As counterparties move business abroad, that would reduce the pool of potential trading partners for US firms, potentially affecting their cost of hedging business customer business. Another twist is that the rule could put some swaps, previously overseen by the CFTC because they involved at least one US counterparty, beyond the reach of the regulator as non-US banks move trading abroad.

   "Regional markets are substantially more important to us, and we are working with regulators who are developing a framework across this region," Thio said. His comments came at a meeting yesterday of the International Swaps and Derivatives Association in Singapore.

  Large regional banks in the UK and Germany, as well as in Spain and Taiwan, are also grappling with the CFTC rules, according to bank executives in the US.

   "What we're seeing a lot of in [Asia] is people asking the American banks to use different booking entities" outside the US, Keith Noyes, Asia-Pacific regional director for ISDA, said in an interview.

   The pull back primarily is affecting foreign exchange swaps, interest rate swaps and credit swaps. A CFTC spokesman had no comment.

   US and other global regulators are seeking to rein in swaps, which they blamed for deepening the financial crisis four years ago. US regulators say the rules will help them pinpoint and mitigate risks to the financial system in a world where markets are increasingly connected.

   Industry officials and regulators in other jurisdictions have complained that the US rules could constrict liquidity in the market and, because their reach extends outside US borders, subject banks to overlapping sets of rules.

   Finance chiefs from the European Union, France, United Kingdom and Japan warned CFTC chairman Gary Gensler in a letter last week that the US proposals, if handled wrongly, risk fragmenting the global derivatives market.

   Several larger, internationally focused banks, however, have reached the conclusion they are better off registering with the CFTC.

   Nitin Gulabani, who heads Standard Chartered's foreign exchange, rates and credit desks, said at the same event that the London-based, emerging markets focused bank will register some of its entities while ensuring that that others don't do business with US counterparties.

   "We are looking at making sure that entities are either registered, or do not trade with US persons," he said.