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London Loses Out as Banks Consider Booking Trades Overseas

Banks in Europe are exploring ways to cut costs by routing more of their trades and other business through overseas subsidiaries, a plan that may shift tax revenue away from London and loosen European regulators’ influence over the lenders.

Nomura Holdings Inc. (8604), HSBC Holdings Plc (HSBA) and UBS AG (UBSN) are among lenders preparing plans to book as much business as possible through legal entities in jurisdictions where tax rates are lower and rules on capital and liquidity are less onerous, the banks and lawyers and accountants working with them say.

“Every bank is trying to work out the best way to be structured under the new rules,” Chris Matten, a partner at PricewaterhouseCoopers LLP in Singapore, said in a telephone interview. “It’s not just a question of what activities banks are in. It’s about which entities they put that business through and in which jurisdictions.”

Banks could record as much as 30 percent of the value of their trades through Hong Kong, Singapore and other jurisdictions instead of hubs such as London and New York without running into trouble with regulators, Matten said. Such a move would hurt traditional hubs such as London because assets are treated for tax and regulatory purposes in the country where they are booked. It would also allow banks to sidestep the U.K. bank levy, introduced last year to raise 2.5 billion pounds ($4.1 billion) from lenders operating in Britain, as well as any financial transaction tax imposed by the European Union.

‘Regulatory Pressures’

“It is really about trying to understand where all the different regulatory pressures are going to squeeze the hardest and looking to see if there are more efficient ways of reorganizing the booking model and business model so as not to have too many restraints,” Matten said in an interview with Bloomberg TV today.

Lenders aren’t required to publish which entities they book their assets through globally.

Banks are trying to find ways to reduce costs amid declining revenue and a rising cost of doing business under regulations introduced to prevent a repeat of the financial crisis. The 50 biggest global banks have announced plans to cut 65,000 jobs since Jan. 1, according to company statements and data compiled by Bloomberg Industries.

“Capital scarcity has meant there is greater focus on where activity takes place and where it is booked,” Peter Muir, a London-based tax partner at Deloitte, said in a telephone interview. “People are likely to be looking to arbitrage the rules in a fair way to see if they can avoid more highly regulated markets.”

‘A Fair Contribution’

National regulators are likely to resist any measures that put local creditors at risk. There has to be a legitimate reason for suggesting that a trade be booked in a certain jurisdiction, said Deloitte’s Muir.

“The purpose of the bank levy is to ensure the banking sector makes a fair contribution, which reflects the risks they pose to the financial system and the wider economy,” a British Treasury spokesman said in a statement. “The levy legislation includes a targeted anti-avoidance rule aimed at arrangements entered into with the purpose or a main purpose of avoiding or reducing a liability to the bank levy.”

The U.K. financial-services industry contributed 53.4 billion pounds in taxes for the year to March 2010, accounting for 11.2 percent of the country’s tax income, according to a December 2010 report from the City of London Corporation, the financial center’s municipal government. That compares with 61.4 billion pounds the previous year and 67.8 billion pounds for the year to March 2007.

Swiss Bank Taxes

The Swiss Financial Market Supervisory Authority is in “intensive” discussions about the subject, spokesman Tobias Lux said in an e-mail. Swiss financial companies paid 58.6 billion Swiss francs ($72.5 billion) in 2010, or 10.7 percent of all tax, according to the Swiss Bankers Association. That compares with 59.1 billion Swiss francs in 2009.

Banks’ global trading books can be subject to advanced pricing agreements, where the tax authority in the country where assets are booked agrees to share tax income with other jurisdictions. That allows trades originating in Hong Kong, London and New York over a 24-hour period to be booked through a subsidiary in London, with the tax income being divided among the countries.

Approaches Will Vary

“For a foreign bank with a U.K. branch which historically booked activity through the U.K., if in fact the traders are in say Asia-Pacific, they may look to book it through the Singapore branch or subsidiary,” Muir said.

The most attractive booking model will vary from bank to bank, according to analysts and lawyers. Options under consideration include setting up new branches or subsidiaries in more favorable jurisdictions such as Hong Kong and Singapore, where taxes and capital surcharges are lower; booking a higher proportion of trades through multiple existing entities rather than through one global hub; and switching from a model based on a network of global branches to one based on a series of ring fenced, fully capitalized global subsidiaries.

Nomura, Japan’s largest brokerage, has its headquarters in Tokyo and books the bulk of its global trading business, including equities, bonds, foreign exchange and derivatives, through London-based subsidiary Nomura International Plc. There, it is subject to the U.K. bank levy.

Nomura’s Model

“At the moment much of our European business is booked through a central hub,” Chief Financial Officer Junko Nakagawa said in an interview. “As regulators become more localized, one option would be to place more business in a number of different locations.”

Banks such as Nomura have tended to book all their business in hubs because their clients prefer to deal with fewer counter-parties and because it allows the banks to net out and hedge their global risk holdings, a process known as risk-warehousing.

Cities such as London and New York have dominated because they have the infrastructure to book, process and risk manage large volumes of complex, derivatives trades, executives said. The advantages of booking assets centrally are starting to be outweighed by the cost of rising taxes and capital surcharges though some bankers still question whether the other jurisdictions have the personnel and expertise to compete.

HSBC Considers Changes

HSBC’s head of global banking and markets, Samir Assaf, said in May the London-based bank will re-engineer its so-called transaction booking model as part of a broader cost-cutting drive. The bank operates through a network of independently capitalized subsidiaries that are subject to local regulations. A person with knowledge of the situation said the bank may look to cut the number of subsidiaries through which it books assets. A spokesman for the bank declined to comment.

Plans by Swiss regulators’ to impose higher capital requirements are prompting UBS to rethink its structure, Chief Executive Officer Oswald Gruebel said in February. The lender operates a branch structure where assets booked by entities overseas, including London, are subject to the regulations of the Zurich-based parent.

Swiss regulators are considering forcing banks to hold 19 percent of their risk-weighted assets as capital, which includes an allowance for contingent convertible bonds. Under Basel III banks are required to hold 9.5 percent in core Tier 1 capital.

Gruebel said the bank may change its structure so capital-intensive operations such as derivatives and securitization are booked through fully capitalized subsidiaries.

John Cryan, chief financial officer at the time, said these would likely include subsidiaries in London and the U.S. In a July 26 letter to shareholders, Gruebel said the bank would continue to evaluate “potential changes to our businesses, corporate structure and booking model” in light of a weakening economic outlook and increased capital requirements.

Lux at Swiss regulator FINMA declined to comment on UBS’s plans. Banks must fulfill Swiss capital rules at a group level as long as their headquarters are in the country, he said.

To contact the reporter on this story: Liam Vaughan in London at lvaughan6@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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