The International Swaps and Derivatives Association is pitching membership to regional banks that are burdened by the legal fees associated with derivatives contracts.
At issue is the ability of these companies to "net" their derivatives contracts with another institution - rather than account for the contracts individually - and thus lower the amount of capital they must hold.
The association can provide the legal opinions needed for netting inexpensively and has noted a strong demand in the marketplace, said Gay H. Evans, managing director of Bankers Trust International and chairman of the association.
"We have heard from several of our nonmembers (about membership) because of the ability to net for capital adequacy purposes," Ms. Evans said. "For them to purchase legal opinions on their own is an expensive prospect."
The association's attorneys formulate netting opinions annually for 23 different jurisdictions, including the United States. For nonmembers who hire lawyers, the cost of getting these opinions independently could be a significant drain on profits.
"$10,000 is a chunk of money, but it's trivial compared to either the legal fees or the capital costs if you aren't the beneficiary of netting arrangements," said John P.C. Duncan, a partner in the Chicago office of Jones, Day, Reavis & Pogue.
Netting provides banks and regulators with a better measure of individual financial exposure in the event of a derivatives player's bankruptcy.
Netting also allows banks to hold capital against the amount of exposure to specific counterparties, rather than against the total amount of derivatives.
If, for instance, a bank holds one contract that benefits from higher interest rates, and one that benefits from falling rates, the bank's capital only has to cover the difference between the contracts, which can be substantially lower than the nonadjusted 8% capital requirement.
"It may well be worth it for us and others to have access to legal opinions, rather than pay for in-house counsel," said John W. Logan, executive vice president at First American National Bank in Nashville.
Netting alone, however, may not be sufficient to encourage new members to pay the $10,000 annual membership fee.
"For some institutions, derivatives positions are small," said said Warren Heller, research director at Veribanc Inc. in Wakefield, Mass. The Southtrust Bank of Alabama, for instance, has only a $750,000 position at the end of the first quarter, he said.
"If netting is all ISDA is offering, it would not incite a lot of banks to join," said Mr. Logan.
The ISDA, however, said that the netting benefit is not the only privilege available to members. Additionally, others say regional banks ought to join the ISDA because the increase in their use of derivatives has increased the need for educated employees.
"There are a lot more regional banks using swaps and option-based products to manage interest rate positions than previously," said Alistair Fyfe, a vice president in the derivatives operation at Keycorp. "I would like to know how banks operate without derivatives at this point," said Mr. Fyfe.
Education is the key to building derivatives operations successfully, said Mr. Fyfe, and it's much easier to train derivatives staff through ISDA lectures than independently.
Keycorp is considering membership for the educational and other benefits at the association.
In general, industry experts readily acknowledge the benefits of joining the association, even for regional banks.
"Forty percent of the regional banks (with over $10 billion in assets) are dealers and the balance are end users," said Tanya Stylbo Beder, a partner in Capital Market Risk Advisors Inc.
"ISDA has done a bigger push into the end user community," Ms. Stylbo said, "so it makes sense that they are creating that category."
