Source: Reuters/Simon Newman
Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), listens during an interview with Reuters in London
Asian banks have reluctantly started to do the math to see if they are considered swap dealers under the Dodd-Frank Act. The results are important as swaps dealers have to report counterparty data to the US derivatives regulator, a requirement that could violate local Asian securities laws.
The US law stipulates that, effective October 12, financial institutions that conduct swaps business with US entities should begin calculating the notional value of swaps they transact annually with those parties. If the volume reaches US$8bn or more, a bank will be considered a “swaps dealer” by Commodity Futures Trading Commission.
For Asian banks, in particular, that designation comes with strings attached. A CFTC-certified swaps dealer has to register as such and report counterparty data to the regulator. Revealing that data falls foul of laws in certain Asian jurisdictions and, more basically, is an onerous requirement for financial institutions – even if the law is intended to help stave off another credit crisis.
The high volume threshold – increased 80-fold over initial proposals – and recently introduced exceptions mean that several Asian institutions that engage in derivatives will avoid CFTC registration. Many others, however, will not be so fortunate. As a result, they plan to try to conduct swaps business outside the CFTC’s orbit.
Reporting swaps data in Asia comes with logistical – and cultural – challenges, especially in a region where financial clients put a premium on confidentiality.
Thio Tse Chiong, managing director of treasury and markets for DBS, said Singapore’s largest institution did not plan to register with the CFTC. At a conference of the International Swaps and Derivatives Association in Singapore on Monday, he said the bank did not see “immediate commercial benefits” of registering as a swaps dealer with the CFTC.
Japan complexity
Japanese investment banks are unhappy about the Dodd-Frank burden as well. Nomura and Daiwa indicated that the two investment banks might be able to conduct swaps business more or less as usual and avoid some of the burden the new law entails.
“We want to avoid registering with the CFTC,” said a person close to Daiwa.
The situation is more complicated for Japan’s commercial banks. Lawyers at the ISDA conference said that, because Japanese lenders did a lot of business with US subsidiaries of Japanese companies, they might qualify as swaps dealers and would have to register with the CFTC and comply with Dodd-Frank.
One complaint about the law is that it is time consuming – whether an institution qualifies as a swaps dealer or not.
“The main issue is that a non-US bank must actually go through the pain and trouble of performing the de minimis calculations for swaps dealers and major swap participant, so that they are then able to determine, upon a solid basis, whether they must register or they are exempt from registering,” said Jeff Chen, a partner at Cadwalader, Wickersham & Taft in Hong Kong.
In addition, deciding if an institution completed the required volume of transactions is not exactly straightforward, and risks are potentially high.
“The consequences of being wrong in its calculations are serious,” Chen said. “If the bank is over-inclusive (and thinks it hits the US$8bn mark), then it would register as a swaps dealer, but would incur huge expense and burdens going forward. On the other hand, if the bank is under-inclusive (and thinks it is below the US$8bn mark), but the bank is wrong about that, then it could be subject to regulatory enforcement actions and penalties and, possibly, even to civil actions because it is not registered when it should be registered.”
Not unheeded
Bankers’ complaints that the regulation was too strict have been heeded. US regulation recently exempted any dealing with foreign subsidiaries of US companies and institutions from the accounting of the US$8bn total. Foreign exchange swaps and forwards were also excluded.
Still, the exclusions notwithstanding, many banks in Asia are likely to be considered swaps dealers under the regulation.
South Korean lenders are expected to breach the US$8bn threshold easily, in part because they do a lot of business with US subsidiaries of Korean companies.
However, CFTC registration is particularly daunting in the jurisdiction. Under the South Korean Real Name Financial Transactions Act, banks cannot disclose information on clients’ transactions without client approval.
This means, in practice, that Korean banks will have to consult with their clients regularly to comply with Dodd-Frank.
The only group at this stage that seem to be a sure shot to register with the CFTC are Australian lenders. Lawyers said that those institutions have extensive dealings with US pension funds, which qualify as special entities.
