With some restrictive financial-reform measures looming, several Wall Street investment banks are making contingency plans to move some of their trading operations to offshore locales such as Switzerland or Bermuda, several industry analysts said.
"Absolutely, banks are exploring moving their derivatives trading businesses offshore – they will have to, if this bill passes," said Dick Bove, a banking sector analyst at Rochdale Securities. "It's not just a possibility, it's a certainty."
The mere possibility that banks would even consider uprooting jobs and tax revenue away from New York City is viewed by financial analysts as a compelling reason why the most drastic trading provisions will, in the end, fall by the wayside.
"This is not just posturing," insisted Kevin McPartland, a senior analyst with the TABB Group, a New York City based financial markets research firm. "We have had conversations to show there is real concern in the banking community. The laws are extreme enough that banks would have little choice but to move some, if not all, of their derivatives business offshore."
Financial reform passed in the Senate last week; a companion version of the bill already passed in the House in December. Merging the two bills via a reconciliation process is expected to take at least a few weeks.
Among the most controversial Senate provisions is one that would force Wall Street banks backed by the Federal Reserve, such as Goldman Sachs, JPMorgan Chase and Morgan Stanley, to cordon off certain derivatives, or "swaps," businesses into separate subsidiaries.
Furthermore, the bill contains a measure that would force the multi-trillion-dollar swaps trading business onto public exchanges or regulated swaps execution platforms, as well as subject it to the involvement of third-party clearinghouses.
Swaps contracts are side bets on the directions of things such as interest rates or commodities prices, bets that banks and large investors, such as hedge funds, enter into with one another. Such swaps bets are underwritten by banks, or dealers, and they are done either to hedge risk or speculate for profit. Swaps instruments can replicate, synthetically, a host of transactional outcomes, such as credit defaults.
By some estimates there are more than $600 trillion worth of derivatives securities on global balance sheets, though this is a "notional" figure reflecting the total amount being theoretically being wagered by financial parties, and not the actual market value of all existing swaps contracts.
The shift in swaps trading proposed in the Senate bill would likely cost banks billions in revenues, as activity moves to more transparent venues, such as exchanges and clearinghouses, and away from private, unregulated "over the counter" transactions which the banks currently control. Banks would also be required, under such a scenario, to outlay much more capital as collateral in the event a trade goes sour and massive losses are incurred, such as the losses on credit default swap trades that brought down AIG.