NEW YORK, Feb 14 (IFR) - The Big Five US banks are in the
process of removing parent entity guarantees for their
London-based affiliates for all interdealer swaps trades, in an
effort to sidestep onerous Dodd-Frank provisions set to go into
effect this weekend.
Goldman Sachs, JP Morgan, Morgan Stanley, Bank of America
Merrill Lynch and Citigroup are all taking steps to remove the
parent guarantees, according to high-level legal officials at
two of the five banks and an interdealer broker that services
The officials said these steps are considered legal and
above board by US regulators, which have mandated swaps trading
on electronic exchanges known as swap execution facilities from
The banks are removing the guarantees to ensure their
European affiliates can continue to trade with European dealers
without getting caught by the SEF mandate - a move that could
potentially exacerbate the bifurcation of liquidity in the swaps
"At the moment the push is still for banks to move non-US
activity offshore," said the interdealer broker executive. "The
rationale is they don't like SEFs."
Rates swaps in benchmark maturities across euros, US
dollars, and sterling will be mandated for SEF trading starting
this weekend. The shift comes amid widespread concerns about the
impact on interdealer swaps trading that occurs outside the US.
Recently published agency guidance on the reach of the
Dodd-Frank rules into other legal jurisdictions was helpful for
providing clarity, according to market participants. However,
the guidance stopped short of granting banks the relief they
were hoping for leading up to the mandate regarding foreign
affiliates having permission to trade off-SEF.
None of this will affect credit ratings or the affiliates'
standing with clients, according to one of the bank lawyers, who
confirmed the affiliates will still maintain the parent entity
guarantee when transacting with clients.
In the interdealer market, counterparty creditworthiness
tends to be determined by internal analysis and so the move is
not expected to alter the firms' standing with other dealers in
Europe, according to the lawyer.
The disconnection of the entities from one another will
likely cause further bifurcation in the swaps market, as dealers
assume the SEF mandate will lead to separate euro-centric and
US-centric liquidity pools.
"My guess is we will end up with possibly a London US dollar
interest rate market and a New York US dollar market," said the
broker. "The euro and sterling markets will likely be
London-centric, because there isn't enough liquidity in those
two to have a two-tiered market."
Bifurcation of liquidity as a result of Dodd-Frank has been
a subject of debate in the market for several years, and just
last month ISDA released a report stating that euro and US
dollar interest rate swaps markets were beginning to fragment.
Spokespeople at all five banks declined to comment.