Extraterritoriality of swaps regulation and regulatory arbitrage
In this paper, we investigate how the extraterritorial applicability of the US over-the-counter derivatives regulation impacts the off-balance sheet positions of foreign branches of US banks. While existing research has focused on the effects of the regulation on swap markets’ liquidity, we contribute to the literature by looking at off-balance sheet exposures, focusing on geographically disaggregated data. Swaps exposures are found to increase in those jurisdictions in which limited extraterritoriality applies due to the substitute compliance framework. Furthermore, we find an increase in futures and forwards exposures in foreign branches located in host countries that fully comply with the extraterritoriality. Our results are consistent with a geographical and cross-product regulatory-induced activities reallocation.
KeywordsUS banks Foreign branches Interest rate swaps OTC derivatives regulation
JEL ClassificationF33 G15 G21
The author would like to thank the editor, Prof. Menahem Spiegel, and two anonymous referees who kindly reviewed the earlier version of this manuscript and provided valuable suggestions and comments.
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