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Large U.S. Banks Move Swaps Offshore to Hide From Regulators

“Updated April 27, 2014 4:52 p.m. ET


As regulators tighten rules on the U.S. swaps market, large American banks are maneuvering to take some of the business overseas.

Banks including Bank of America Corp. BAC -2.51% , Citigroup Inc., C -1.20% Goldman Sachs Group Inc., GS -1.62% J.P. Morgan Chase JPM -0.87% & Co. and Morgan Stanley MS -1.16% are changing the terms of some swap agreements made by their offshore units so they don’t get caught by U.S. regulations, according to people with knowledge of the situation.

The changes have generally focused on new trades between the London affiliates of U.S. banks, or between those units and non-U.S. banks, which combined constitute a large portion of swaps trading, the people said.

The moves mean the U.S. parent bank is no longer the guarantor of some swaps issued by its foreign affiliate. Instead, any liability for those swaps lies solely with the offshore operation.

Without that tie to the U.S. parent, those contracts won’t fall under U.S. jurisdiction and so won’t be subject to new, stricter rules that include reporting and a requirement that the historically telephone-traded contracts be traded on U.S. electronic platforms.

Having swaps come under European oversight is more attractive because derivatives trading rules on the Continent aren’t likely to be implemented until 2016 at the earliest, allowing the swaps mostly sold in London to be conducted in relative secrecy. Even then, some bankers anticipate the European rules won’t be as strict.

While a seemingly arcane shift, the unusual step of removing the parent guarantees could shift more of the $700 trillion swaps market to London, Europe’s financial hub.

U.S. regulators are aware that banks are making these changes and so far haven’t raised objections, according to the people. The moves are legal, and some officials have argued that the severing of guarantees could even help reduce the risk to the U.S. parent bank should a counterparty to an offshore contract renege on their agreement, some people said.

The Commodity Futures Trading Commission would become concerned if banks moved a substantial portion of their swaps business offshore, a more blatant attempt the skirt the rules, one official said.

Still, detractors say that the U.S. parent bank may still ultimately choose to bear responsibility for any losses, as some did during the financial crisis.

The changes could “come back to haunt the American taxpayer,” said Dennis Kelleher, president of Better Markets, which describes itself as an advocate for public interest in financial markets. Mr. Kelleher said he and others had warned lawmakers that banks may stop guaranteeing swaps sold by their offshore affiliates…..”

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