Under the 2010 Dodd-Frank Act, non-U.S. banks that deal with at least $8 billion in products with American counterparties are required to register as swap dealers. Registration as a swap dealer will bring about increased regulatory oversight, as well as extra costs associated with new capital and risk management requirements.
“If I have the choice, I just don’t want to deal with a ‘U.S. person,’” a treasury manager at a regional Asian bank said, according to GMA News Online. “We’re still looking at our compliance situation, but it may mean that in [the] future I need to ask all my U.S. counterparties if there’s a way they can change where they book their trades with us.”
Some lawyers say that even entities that deal with a small amount of derivatives products could be subject to new clearing requirements. In response, some Asian financial institutions have severed trading relationships with American counterparties to avoid rising costs and increased oversight.
“U.S. groups that want to remain competitive in the non-U.S. market will need to develop a structure that enables them to trade in a way that does not scare their counterparties away,” Theodore Paradise, partner at Tokyo-based law firm Davis Polk & Wardwell, said, GMA News Online reports. “So the central booking model, where the home office in the U.S. is the counterparty to the trade with the Hong Kong or Singapore hedge fund or bank may be less viable.”
U.S. regulators have indicated that foreign banks may be granted an exemption from some of the new rules if the regulatory regime in their country is comparable to the U.S. — a principle dubbed “substituted compliance.”
“In some ways the general rule is it’s bad to do business with U.S. firms, even U.S. firms located outside of the United States, because once an Asian firm does business with a U.S. firm, the Asian firm runs the risk of being subject to U.S. regulation,” Steven Lofchie, partner at New York-based law firm Cadwalader, said, according to GMA News Online.