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M'sian banks may reduce derivative trading with US

Publication Date : 10-09-2012

 

The harsh new derivative rules which will be implemented by the US authorities on non-US banks next year could see Malaysian banks reducing their derivative trading with their US counterparts and instead deal more actively with those that do not have a presence in the United States, according to a bank official.

OCBC Bank (M) Bhd head of global treasury Ng Seow Pang said the tough rules proposed by the US law makers would not only impact Malaysian banks but the global banking system as a whole.

In its present draft form, the rules were intrusive and infringe upon the sovereignty of Malaysia as it was aimed at protecting the US financial system, he told StarBiz.

Malaysian banks may review their relationship with their US counterparts and a possible alternative market could develop to compensate for what the US banks cannot provide due to their regulatory constraints.

“Ultimately it boils down to the returns generated from the additional capital needed to keep the relationship with US banks. If it is deemed too punitive in the present environment where capital is a scarce commodity, then an alternative market comprising banks with non-US presence may be created.

“In the financial line, you have to look at losses from the angle of returns on capital. If unjustified, then the Malaysian banks will have to make hard decisions on whether to continue dealing with US banks," he added.

Reuters had said that Asian banks were reviewing relationships with their US counterparts to avoid being caught by tough new American rules on derivatives trading that would come into force next year.

It said five Asian and Australian regulators had sent a joint open letter to the Commodity Futures Trading Commission (CFTC) to review the proposed rules in view of potential for conflict with domestic rules and the risks of systemic instability. The Australian Securities and Investments Commission, the Hong Kong Monetary Authority, the Monetary Authority of Singapore, the Reserve Bank of Australia and the Securities and Futures Commission in Hong Kong had asked the CFTC to liaise with regulators from other regions before it finalises its guidance on how its derivative rules should be applied overseas.

The wire agency said that beginning next year, non-US banks that annually deal in at least US$8 billion worth of products such as interest rate swaps with American counterparties would be subject to new derivatives rules in the Dodd-Frank Act.

This meant that they would need to register as swap dealers with US regulators and abide by their rules on capital requirements and risk management, all of which would add to costs. The Dodd-Frank Act was spurred by the 2008 financial crisis and aims to impose tighter supervision of cross-border derivatives trade.

A number of Malaysian banks contacted by StarBiz declined to comment on the US derivative rulings and how it would impact them.

Ng said the rules would not only ring-fence the US operations of Malaysian banks but would extend to even the head office of the Malaysian bank.

This would provide competitive advantage to US banks in terms of technology and expertise in the international arena while, domestically, the rules would give rise to several difficulties, he noted.

 

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