Asian banks review US ties

Cost will rise when tough new rules on derivatives come into force

SINGAPORE: Asian banks are reviewing relationships with their US counterparts to avoid being caught by tough new American rules on derivatives trading that are about to come into force.

From the start of next year, non-US banks that annually deal in at least US$8bil worth of products such as interest rate swaps with American counterparties are expected to be subject to new derivatives rules in the Dodd-Frank Act.

In practice that means they will need to register as swap dealers with US regulators and abide by their rules on capital requirements and risk management, all of which adds to costs.

“If I have the choice, I just don't want to deal with a US person',” said a treasury manager at a regional Asian bank.

“We're still looking at our compliance situation, but it may mean that in future I need to ask all my US counterparties if there's a way they can change where they book their trades with us.”

A “US person” as defined by the regulation is a relatively broad term, intended by regulators to apply to any person or entity that will have an effect on American commerce.

The Dodd-Frank Act was spurred by the 2008 financial crisis and aims to impose tighter supervision of cross-border derivatives trade following incidents such as the loss-making trades by the socalled “London Whale” at JPMorgan's UK office.

But some lawyers say even entities that deal in a relatively small amount of derivatives could be forced to execute trades on an electronic platform and put them through a central clearing house acceptable to American regulators.

That has prompted a knee-jerk reaction from some Asian institutions to consider cutting all their derivative trading relationships with US counterparties, anxious to avoid higher trading costs and the spotlight of American regulators.

In reality, few banks were likely in the long term to cut all trading with US banks given that they provided a lot of liquidity to the market, and it would be hard to remain active in the global markets without them, he added.

In Hong Kong, Singapore and Japan combined, around US$143.1bil of interest rate derivatives were traded every day in April 2010, according to the most recent figures from the Bank of International Settlements.

While still small compared with the US$1.2 trillion traded in the UK and the US$642bil in the United States, the turnover has almost tripled from the US$50.8bil recorded in 2004.

American banks are big players in global over-the-counter derivatives markets, with JPMorgan Chase & Co, Citigroup Inc, Goldman Sachs Group Inc, Morgan Stanley and Bank of America Corp accounting for about 37% of all outstanding contracts, according to the International Swaps and Derivatives Association.

Asian players have a smaller share, although Singapore banks DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank Ltd account for a large part of the S$282bil of interest rate swaps cleared at the Singapore Exchange since it launched its clearing service in November 2010, analysts estimate.

Lawyers say US banks operating in Asia are now rethinking how they structure themselves and handle their trades.

“US groups that want to remain competitive in the non-US market will need to develop a structure that enables them to trade in a way that does not scare their counterparties away,” said Theodore Paradise, a partner at law firm Davis Polk & Wardwell in Tokyo. - Reuters