President Clinton sent banks a strong message about derivatives risk Friday when he signed the Riegle Community Development and Regulatory Improvement Act of 1994.
A portion of the act on the documentation of foreign deposits - or sovereign risk - has implications for derivatives traders as well, said Nancy Jacklin, a partner in the New York law firm Clifford Chance.
While the law addresses foreign branch deposits, it does not "address the allocation of similar risks on other payment obligations, such as on foreign exchange contracts, swaps, and derivatives," Ms. Jacklin said.
However, she pointed out that banks typically enter into interbank deposit transactions over the phone or through facsimile, which requires only agreement on the basics of the deal. This is generally true for swaps and derivatives deals too, she said.
"For derivatives deals, people need to pay more attention," Ms. Jacklin said. "It's just one more piece of risk you need to address through documentation."
She noted that counterparties to derivatives deals should be aware of the sovereign risks also, and allocate them clearly in written documentation.