Dealing on Own Account in Swaps

Abstract

Swaps are financial instruments which aim is to reduce risk to interest rate fluctuations. They come up as a result of market evolution. They are spreading out in an uncontrolled manner. They are not bad or good. Interest rate hedging products can protect against the risk of interest rate movements and be appropriate when properly sold to clients and fit their needs. Though, the facts shows that most of the swaps are complex products, distributed to “non-sophisticated” customers which do not have specific expertise and understanding on in this area. Swaps are hazardous and hard to understand for these clients, considering their complexity and difficult follow up. Its evolution, with multiple forms, went beyond the legal culture. They are high-risk juridical contracts, which include articles imported from the Anglo-Saxon Law as opposed to continental law. Their volume finally affected market stability, resulting in a systemic risk.

This paper describes the characteristics of these products and the poor sales practices during the commercial offer and the execution of the agreement, including the lack of information on the risk involving the products. The paper focus on the appropriateness of include in a catalogue of investment services the negotiation of OTC derivatives and reinforce in these cases information to client and prevention of conflicts of interest, leading to the designation of an independent calculation agent.

As a result of the financial crisis, financial regulation was reviewed, and in particular, control on derivatives. The paper concludes that model of the bank-client relationship moves towards the client as a vulnerable party. The gravity center shifts from the traded product to the quality of the service supplied to the client. But considering other financial supervisors, in Spain, CNMV and Banco de España swimming against the tide, they tend to exclude swaps from the application of the business conduct rules of the securities market with groundless arguments.

Keywords: swaps, dealing on own account, MiFID, client protection, investment advice

JEL Classification: K22, K42, G24