Due to an exemption in the Dodd-Frank Act, offshore bank clients may not be held to the same regulatory requirements for over-the-counter (OTC) derivatives market trading. By routing client’s trades through a bank’s overseas subsidiaries, offshore clients may still trade without having to register with the U.S. Commodity Futures Trading Commission and subscribe the regulatory capital and margin requirements that could potentially make it very costly to trade.
Dodd-Frank reforms were enacted to regulate the OTC market by requiring banks to set aside capital against trading risks, execute trades on electronic platforms, and report them to regulatory authorities. Opponents of such regulation argue that these additional measures may increase costs and cause offshore clients to cease doing business with U.S. banks. However, the Dodd-Frank requirements only require a “U.S. person” to comply. The definition of a “U.S. person” currently remains unclear. Therefore, banks may be using this ambiguity to allow offshore clients to continue to trade in the OTC market by routing their trades through subsidiary banks not operating within the United States, which are not subject to Dodd-Frank regulations. Until foreign regulators adopt similar trading and reporting requirements, non-United States financial institutions can continue to trade with an ancillary division of a United States bank without a risk of being considered a U.S. person. However, this exemption may disappear shortly if foreign jurisdictions begin to adopt rules similar to those in the Dodd-Frank Act. (“Wall Street Finds a Foreign Detour around U.S. Derivatives Rules,” Reuters, December 2, 2012).