It must have been six or eight weeks ago that I first mentioned the problem of non-US names turning down their US counterparts in the interest rate and forward FX markets. Well, the problem is growing, and it is growing at a time when the US is effectively without leadership, hence it could become a serious, if potentially short term, problem for that nation’s economy.
I have further mentioned the issue twice more in this column, latterly in this column last week when I related how many banks were switching off US banks even in FX swaps and forwards, which is likely to be exempted from Dodd-Frank after the election. The problem is deeper than that however, for speaking to people last week it became clear that they were wary of dealing with US names in any market, even spot.
The rationale is that they don’t want to suddenly become enmeshed in US regulation through some “back door” as one acquaintance put it. It is easier, and less stressful it seems, to merely avoid US names in the market at all costs. This will, of course, have a knock on effect around the entire market because liquidity will dwindle into certain pools but the overall effect is likely to be less money to go around (literally).
The latest development is that some European as well as Asian banks have stopped trading derivatives with US-based peers. My colleagues at Profit & Loss have been told that while most of the world's largest swaps trading banks, such as Deutsche Bank and Barclays, are expected to comply with the US demands, other banks – some of them quite major players in their own right – are refusing to conduct trades with US counterparts in the hope of avoiding the $8 billion threshold and the burden of becoming a US-regulated dealer under Dodd-Frank.
Scandinavia’s Nordea Bank and DBS Group Holdings, Southeast Asia’s largest bank by assets, have already said they do not want to become a US-regulated dealer. Speaking to Reuters, Kenneth Steengaard, managing director, currency, money markets and commodities trading at Nordea Markets, said his bank “did not intend to register as a swap dealer in the United States under Dodd-Frank.”
This is no longer an issue flying under the radar and reported anecdotally by people like me, it is out in the open and something that the authorities need to face up to. The problem is, there is no-one to act – aside from a certain G.Gensler esq who seems oblivious to the damage his headlong rush into regulation is causing.
So you can forget the attack ads on TV, you can forget the half-truths and toothy grins. We need this US election campaign to be over so it can deal with a serious issue and then its financial markets, and those in the rest of world it purports to lead, can settle down and revert to what they are here for – oiling the wheels of the global economy.