Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  Equities  >  Nyse  >  Goldman Sachs Group Inc    GS

GOLDMAN SACHS GROUP INC

(GS)
  Report  
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
News SummaryMost relevantAll newsOfficial PublicationsSector newsMarketScreener StrategiesAnalyst Recommendations

Wall Street finds a foreign detour around U.S. derivatives rules

share with twitter share with LinkedIn share with facebook
share via e-mail
0
12/02/2012 | 04:12pm EDT

SINGAPORE (Reuters) - Wall Street banks are looking to help offshore clients sidestep new U.S. rules designed to safeguard the world's $640 trillion over-the-counter derivatives market, taking advantage of an exemption that risks undermining U.S. regulators' efforts.

U.S. banks such as Morgan Stanley (>> Morgan Stanley) and Goldman Sachs (>> Goldman Sachs Group, Inc.) have been explaining to their foreign customers that they can for now avoid the new rules, due to take effect next month, by routing trades via the banks' overseas units, according to industry sources and presentation materials obtained by Reuters.

The rules, a result of Washington's Dodd-Frank reforms, aim to prevent financial catastrophes in the over-the-counter (OTC) market - a huge, opaque market which is partly blamed for felling Lehman Bros in 2008 and fuelling a global financial crisis.

They call for U.S. banks dealing in OTC instruments, such as interest-rate swaps and cross-currency options, to effectively set aside capital against the risk of trades turning sour, execute their trades on electronic platforms and report them to U.S. authorities - requirements that worry the banks' offshore clients and threaten to drive business away from Wall Street.

OTC brokers say liquidity has already begun to suffer.

In response, Wall Street has launched a last-minute effort to show foreign counterparties how they can keep doing business together and still keep trades out of the U.S. regulatory net.

The banks' solution is to route trades via their non-U.S. affiliates - subsidiaries with their own separate balance sheets, often in London - rather than the parent banks. It is a detour that could eventually be shut down by foreign regulators, but for now offers shelter from the U.S. regulatory storm.

"What we are seeing now is a gamesmanship dance in which firms do whatever they can to avoid regulation, which is an age-old phenomenon," said Thomas Cooley, a professor of economics at New York University's Stern School of Business.

Financial industry concerns over U.S. regulation of the OTC market focus mainly on trades in swaps, among the most common and flexible financial instruments, used to hedge all kinds of financial risks from interest rates to currency movements.

Under the new rules, any entity that trades more than $8 billion a year of swaps with a "U.S. person" is required to register with the Commodity Futures Trading Commission (CFTC) as "swap dealers", a designation that brings with it capital and margin requirements that could drive up costs.

But the precise definition of a "U.S. person" is unclear.

A presentation given on November 16 by Morgan Stanley to its Asian commodity clients explained how they might want to consider "cutting over trading to a non-U.S. swap dealer". One slide named Morgan Stanley & Co. International Plc, a London-based subsidiary, as an example of a non-U.S. swap dealer.

Morgan Stanley spokesman Mark Lake said the presentation "was an update to clients on Dodd-Frank regulation and clearly states that it was not intended as advice or a specific recommendation from Morgan Stanley".

"While we note that one option for certain non-U.S. clients trading swaps with a U.S. swap dealer may be to switch to a non-U.S. swap dealer, we also point out that all G-20 jurisdictions are expected to adopt similar requirements to the U.S."

Goldman Sachs, too, is sending a similar message. Its bankers are meeting counterparts from regional Asian banks, assuring them they can trade with Goldman's London entity, Goldman Sachs International, and not be subject to the new rules, according to sources familiar with the matter.

Goldman declined to comment on the matter.

"What banks are looking at is: can they put their business with non-U.S. counterparties through a London entity, and will the regulators in the UK accept all the business coming through those entities?" said Mark Austen, chief executive of the Asia Securities Industry & Financial Markets?Association.

Lawyers say the answer may be yes, for now - at least until foreign regulators, also mindful of avoiding another financial crisis, catch up with Washington and impose similar rules.

Gareth Old, a lawyer at Clifford Chance in New York, said the CFTC had made it clear that any swaps traded with the foreign affiliate of a U.S. bank would not count toward the $8 billion "de minimis" threshold for identifying a swap dealer.

"This is a very, very important exclusion. It means that non-U.S. financial institutions can continue to trade with at least a unit of a U.S. bank ... without running the risk of being a U.S. person," Old said.

However, lawyers say U.S. commercial banks like JPMorgan (>> JPMorgan Chase & Co.) and Citigroup (>> Citigroup Inc.) may find it harder to detour their clients around Dodd-Frank, noting that these banks tend to operate overseas through branches, not stand-alone affiliates.

Overseas branches of U.S. banks are expected to still be classed as a "U.S. person" under the new regulation.

It is not clear what JPMorgan and Citigroup are doing, if anything, to address the impact on their offshore clients.

Citigroup spokesman in Hong Kong, Godwin Chellam, declined to comment on the issue. JPMorgan also declined to comment.

FOREIGN BACKLASH

U.S. regulators want their derivative rules to apply to offshore trades by Wall Street banks as well as domestic ones, given that bad trades outside their borders can still rebound on the parent banks, weaken their balance sheets and add to risks that may be building up across the U.S. banking system.

"Swaps executed offshore by U.S. financial institutions can send risk straight back to our shores," said CFTC chairman Gary Gensler in June. "It was true with the London and Cayman Islands affiliates of AIG, Lehman Brothers, Citigroup and Bear Stearns."

However, Wall Street faces fierce resistance to the reforms from foreign counterparties, especially those trading around the $8 billion threshold which are seen as most likely to take the "affiliate" detour offered by U.S. banks.

Several mid-sized foreign banks, including Singapore's DBS (>> DBS Group Holdings Ltd), have said they do not intend to register with U.S. regulators as swap dealers. Some banks have even stopped trading with U.S. counterparts, brokers said.

In contrast, major foreign banks such as Germany's Deutsche Bank (>> Deutsche Bank AG), whose OTC trade would dwarf the threshold, are simply too big to escape the U.S. regulatory net entirely.

The CFTC is still working on cross-border guidance on the reach of the rules, raising doubts over whether it will close the affiliate exemption or not, but it clearly hopes foreign regulators will adopt most of the Dodd-Frank reforms anyway.

Morgan Stanley itself notes that the detour strategy may be short lived in the UK and other G-20 jurisdictions, saying that they are expected to eventually adopt similar rules.

Morgan Stanley's November 16 presentation in Asia was aimed at clients trading commodity swaps, but the rules will also apply to products such as interest rate swaps and cross-currency options. Foreign exchange forwards and swaps will be exempt, largely because the U.S. Treasury felt this market had been operating well for decades with its own risk-management systems.

(Reporting by Rachel Armstrong; Additional reporting by Douwe Miedema in Washington and David Henry and Lauren Tara LaCapra in New York; Editing by Jonathan Leff, Michael Flaherty and Mark Bendeich)

By Rachel Armstrong

Stocks mentioned in the article
ChangeLast1st jan.
CITIGROUP INC. -0.51% 69.73 Delayed Quote.33.94%
DBS GROUP HOLDINGS LTD -0.12% 25 End-of-day quote.5.22%
GET HOLDINGS LTD 14.29% 0.48 End-of-day quote.20.00%
GOLDMAN SACHS GROUP INC -0.85% 215.23 Delayed Quote.28.84%
MORGAN STANLEY -0.77% 44.02 Delayed Quote.11.02%
ONE STOP SYSTEMS INC 1.87% 2.73 Delayed Quote.40.72%
share with twitter share with LinkedIn share with facebook
share via e-mail
0
Latest news on GOLDMAN SACHS GROUP INC
09/19GOLDMAN SACHS : Thinking about trading options or stock in Blackstone, FedEx, Go..
PR
09/19LSE CEO Schwimmer says feels 'very good' about Refinitiv deal
RE
09/18MARKET SNAPSHOT: U.S. Stocks Close Mixed After Fed Cuts Rates But Casts Doubt..
DJ
09/18GOLDMAN SACHS : Acronis Raises $147 Million in Funding Round Led by Goldman Sach..
DJ
09/18Bank of Korea Has Room to Ease Policy Further, Board Member Says
DJ
09/18AT&T CEO Pushes Back at Activist Fund -- WSJ
DJ
09/17GOLDMAN SACHS : Former Goldman Programmer Argues -- Again -- That His IP-Theft C..
DJ
09/17NEWS HIGHLIGHTS : Top Financial Services News of the Day
DJ
09/17Banks Revive Mortgage-Bond Businesses -- WSJ
DJ
09/17NEWS HIGHLIGHTS : Top Financial Services News of the Day
DJ
More news
Financials (USD)
Sales 2019 35 366 M
EBIT 2019 12 518 M
Net income 2019 8 590 M
Debt 2019 236 B
Yield 2019 1,94%
P/E ratio 2019 9,31x
P/E ratio 2020 8,72x
EV / Sales2019 8,87x
EV / Sales2020 8,76x
Capitalization 77 389 M
Chart GOLDMAN SACHS GROUP INC
Duration : Period :
Goldman Sachs Group Inc Technical Analysis Chart | MarketScreener
Full-screen chart
Technical analysis trends GOLDMAN SACHS GROUP INC
Short TermMid-TermLong Term
TrendsBullishNeutralNeutral
Income Statement Evolution
Consensus
Sell
Buy
Mean consensus OUTPERFORM
Number of Analysts 27
Average target price 234,75  $
Last Close Price 215,23  $
Spread / Highest target 49,1%
Spread / Average Target 9,07%
Spread / Lowest Target -18,7%
EPS Revisions
Managers
NameTitle
David Michael Solomon Chairman & Chief Executive Officer
John E. Waldron President & Chief Operating Officer
Stephen M. Scherr Chief Financial Officer & Executive Vice President
James A. Johnson Independent Director
William W. George Independent Director
Sector and Competitors
1st jan.Capitalization (M$)
GOLDMAN SACHS GROUP INC28.84%77 389
MORGAN STANLEY11.02%73 317
THE CHARLES SCHWAB CORPORATION3.35%56 510
CITIC SECURITIES COMPANY46.97%37 077
HUATAI SECURITIES22.22%23 122
CHINA SECURITIES CO LTD177.27%22 742