Warren Davis, a partner with Washington-based law firm
Sutherland, said the consequences of fragmenting the swap
market had not been thought through, even if they pass during a
final Congressional vote next week.
"The problem is, when you force derivatives into different
clearing houses, you're creating problems," he argued.
"There’s more fragmentation from an end user point
of view. If anything, you're getting more systemic risk,
because you're losing the benefit of netting."
He said the bill’s provision for a new Consumer
Financial Protection Bureau would be ineffectual in monitoring
the build up of such risks, since its focus would not be on the
Davis also suggested there would be many winners out of the
reform act, however, in particular those in the clearing space.
"I think we’re going to see a lot of new players,"
he said. "Look at BNY."
This week, the New York-based bank formed a new clearing
company, BNY Mellon Clearing LLC, to clear futures and
derivatives trades for institutional clients. The firm says it
plans to become a clearing member on major exchanges and
central clearinghouses on a global basis.
Asked if he thought there were any provisions remaining in
the bill which might catch Wall Street unawares, Davis said new
margining requirements for derivatives were of primary concern.
"I think people are going to be shocked by how much collateral
they’ll have to post," Davis said, "especially the
"The big question is," Davis concluded, "how is this going
to impact banks in the US, as versus UBS, Barclay etc. Will
they be playing under the same rules?" He said it was still
unclear, even at this stage, how wide-reaching the application
of the bill would be for banks not headquartered in the US.
"I’ve got foreign clients whose recourse would
simply be to use non-US headquartered financial institutions,"
Of still greater concern was the potential retroactive
application of new margining requirements to existing
derivatives contracts, Davis said. "No one [in Congress] wants
to touch it. They want to leave it to the regulators. I think
it’s outrageous. They [would be] retroactively
applying new rules – effectively rewriting people's
contracts," he argued. "I’ve talked to a lot of
people on the Hill and they agree it’s a huge
problem, but no one wants to do anything about it."
Tom Osborn +44 207 779 8361 firstname.lastname@example.org