French banks struggle with swap conflicts

Fri Nov 9, 2012 7:24pm GMT

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NEW YORK, Nov 9 (IFR) - On the heels of an international meeting regarding the international reach of Dodd-Frank, French banks are leading the European charge to sound the alarm that specific disclosures set to hit in 2013 will force them to make certain representations to regulators that could leave them open to regulatory enforcement action.

Beginning January 1, French banks signing up to be swap dealers in the US will be asked to provide disclosures and allowances to the Commodity Futures Trading Commission that violate European privacy laws and French regulatory blocking statutes, either of which could leave the door open for enforcement action.

Lawyers at European banks say the CFTC has acknowledged the issue privately and so they have a degree of confidence the Commission will not overreach. But opinions are wide-ranging considering the CFTC's recent history.

"It's difficult to predict whether the CFTC would be willing to stretch its enforcement arms, if you look to the past they haven't been afraid to do so before," said Felix Shipkevich, partner at derivatives-focused law firm, Shipkevich.

"I think it's premature to say the agency definitely won't penalise foreign banks [for this], I think we're just going to have to wait and see."

ENFORCEMENT INCREASE

As part of a global investigation into Libor fixing allegations, the CFTC recently settled with Barclays for US$200m for manipulating its submissions.

It also began legal proceedings against the Royal Bank of Canada for what it described as "a wash trading scheme of massive proportion" in April this year. The Commission alleges that Canada's largest bank engaged in hundreds of millions of dollars work of futures trades to lock in tax breaks on dividend payments.

Both were considered aggressive moves for an agency with a relatively meek enforcement history.

The issue is not specific to France. Banks in Luxembourg, Switzerland, Singapore, and Korea are having similar issues according to market participants. But French banks are also dealing with a blocking statute put in place by local regulators, which states that the home regulator must first approve the dissemination of certain swaps information before being released to other international regulators.

The CFTC's swap dealer registration form requires international banks to promise to give up any and all information, with no stipulation for dealing with regulatory counterparts across jurisdictions.

"We are intending to be very, very, transparent with both French and US regulators," said a senior counsel at a French bank based in New York. "But we are not intending to agree to do anything that would be in violation of our home local laws. How that ends up coming through in application, I don't know."

INFORMAL SOLUTIONS

The CFTC could apply temporary solutions such as no action letters or even informal understandings, said the general counsel at another French bank, who plans to attach a letter to the registration form explaining the situation if no formal guidance is provided.

But the lack of a guarantee is proving a headache for bank lawyers, who remain sceptical of any form of regulatory guidance that is not formalised, particularly with a regulator that is clearly upping its game on enforcement.

"Even if the CFTC said 'Don't worry just do your best,' I don't think anyone would take a particular comfort from that," said a lawyer at a US industry trade group. "Until you get it in writing, that's not anything a lawyer can rely on."

International law firms such as Clifford Chance are in the process of cataloguing all of these so-called 'conflicts of law' so as to formally present the depth of the issue to the agency and to assist banks in understanding jurisdictional regulatory relationships.

On Wednesday regulators from Japan, Europe, and Hong Kong met with the CFTC to voice concerns about how far the agency plans to stretch its implementation of Dodd-Frank. There is no definite date for the completion of the guidance.

(This story will appear in the Nov 10 issue of the International Financing Review, a Thomson Reuters publication)

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