NEW BANK RULES TOUGHER THAN NEEDED, DEALERS SAY

  U.S. and U.K. bank regulators are asking
  banks to set aside more reserves than is necessary to cushion
  them against the risks posed by the interest rate and currency
  swap transactions they carry, swap dealers said.
      After viewing proposed guidelines released jointly today by
  the Bank of England and the Federal Reserve Board, dealers said
  that in effect, regulators are asking them to set aside
  reserves twice for the same risk.
      Market participants will have 60 days to respond to the
  proposals.
      Adoption of stiffer capital requirements is especially
  significant in the eurobond markets, which saw new issue volume
  of about 183 billion dlrs in 1986 according to figures compiled
  by Euromoney magazine. While no firm figures exist, dealers in
  eurobonds estimate that 80 pct of all new issues are involved
  in some swap arrangement. Separately, the ISDA estimates that
  about 300 billion dlrs worth of swap transactions are
  outstanding. Kenneth McCormick, co-chairman of the
  International Swap Dealers Association (ISDA) and President of
  Kleinwort Benson Cross Financing Inc, said that the Association
  has no comment and will study the proposals.
      "What they are proposing is really double counting," Patrick
  de Saint-Aignan, managing director of swaps for Morgan Stanley
  and Co, said. Instead, he argues, banks should either be
  required to hold a percentage of the face value -- say one pct
  per year to maturity -- or to hold a percentage of the cost of
  replacing the contract in the event of a counterparty default.
      "The potential risk factors are very large relative to what
  we had expected," said a director at one U.K. merchant bank.
  "What they are really doing is asking you to capitalize now --
  to borrow money now -- to cushion you against risk you might
  have 10 years from now," he added.(Adds title first paragraph).
      Dealers also said they believe that banks not covered by
  the agreement, such as those based in Japan, will have a
  competitive advantage because they will not have to pass the
  costs on to customers.
      Indeed, regulators are apparently also concerned about the
  exclusion of other countries from the new requirements. Federal
  Reserve Board Governor Martha Seger, following approval of the
  proposed guidelines by the Fed, said she is concerned that
  Japan was not involved in the U.K.-U.S. effort to draft new
  capital rules.
       Dealers said they were somewhat relieved to see that bank
  regulators recognized the concept of netting, that is,
  offsetting the amounts receiveable from and payable to a single
  counterparty against each other.
      The paper said that regulatory authorities "recognize that
  such arrangements (netting) may in certain circumstances reduce
  credit risk." Furthermore, the paper said, if a netting
  agreement could be reached that would withstand legal tests, it
  might be willing to reduce capital requirements accordingly.
      But dealers said they fear regulators may insist on an
  airtight netting agreement that is impossible to design.
       "One problem is that there has never been a major default
  in the swaps market. So we don't know if any of the swap
  arrangements will really stand up in court," said one bank
  official.
  

