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May 1, 2014

Big U.S. Banks Make Swaps a Foreign Affair

“As regulators tighten rules on the U.S. swaps market, large American banks are maneuvering to take some of the business overseas.

“Banks including Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley are changing the terms of some swap agreements made by their offshore units so they don’t get caught by U.S. regulations, according to people with knowledge of the situation.

“The changes have generally focused on new trades between the London affiliates of U.S. banks, or between those units and non-U.S. banks, which combined constitute a large portion of swaps trading, the people said.

“The moves mean the U.S. parent bank is no longer the guarantor of some swaps issued by its foreign affiliate. Instead, any liability for those swaps lies solely with the offshore operation.

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“Still, detractors say that the U.S. parent bank may still ultimately choose to bear responsibility for any losses, as some did during the financial crisis.

“The changes could “come back to haunt the American taxpayer,” said Dennis Kelleher, president of Better Markets, which describes itself as an advocate for public interest in financial markets. Mr. Kelleher said he and others had warned lawmakers that banks may stop guaranteeing swaps sold by their offshore affiliates.

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Read full Wall Street Journal article here

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