The legislation will force non-US banks that annually handling products such as interest rate swaps with American counterparties valued at more than $8 billion to register as swap dealers. This will subject banks to American capital requirements and risk management rules, forcing them to incur additional trading costs.

Knee-jerk reaction

Asian Legal Business this week cites several leading lawyers warning of a possible knee-jerk reaction that could see Asian banks refusing to engage in American transactions. Steven Lofchie, a partner at New York’s Cadwalader, said that ‘in some ways, the general rule is it’s bad to do business with US firms, even US firms located outside the United States, because once an Asian firm does business with a US firm, the Asian firm runs the risk of being subject to US regulation’.

Paget Dare Bryan, a partner at Clifford Chance’s Hong Kong office, cautioned that the legislation could prevent some Asian institutions from engaging in any derivative trading relationships with US counterparties. Although he conceded that because US trading is so crucial to market liquidity, the rules were unlikely to have a significant effect in practice. He observed that ‘for some players the approach now is “do we just bring up the drawbridge to US institutions?”.’

Rethinking strategies

As Asian institutions reconsider their strategy, American banks operating in the region are also being advised to rethink structures. Theodore Paradise, a Tokyo partner at US law global law firm Davis Polk & Wardwell, commented that ‘the central booking model where the home office in the US is the counterparty to the trade with the Hong Kong or Singapore hedge fund or bank may be less viable’ as American banks try not to ‘scare their counterparties away.’