October 6, 2014 / 11:24 PM / 3 years ago

Exclusive: BNP asks other banks for help as dollar clearing ban nears

A BNP Paribas sign is pictured on a building of the bank in Geneva July 1, 2014.Pierre Albouy

LONDON/NEW YORK (Reuters) - BNP Paribas has asked at least three banks to help it clear certain energy transactions in U.S. dollars next year to make sure it can keep its energy trade finance division operating after a ban imposed for violating U.S. sanctions, sources said.

The French bank made the requests to JP Morgan Chase and Co (JPM.N), Bank of America Merrill Lynch (BAC.N) and Citi (C.N) in July and August, according to sources who asked not to be named because talks are confidential.

Four sources with banks and trading houses in Europe and the United States said JP Morgan decided against accepting the request but other sources said talks were still going on.

"Discussions are ongoing and the process is moving forward in a constructive way," a source close to negotiations said.

BNP Paribas, JPMorgan, BAML and Citi declined to comment.

BNP's request to other banks is legally permissible.

However, experts say banks may be reluctant to clear for BNP Paribas because they could be opening themselves up to risk or the perception of risk which could hurt their reputations. One said BNP Paribas may be reluctant to give up as much info as the other bank needs to be comfortable processing transactions, for fear of losing clients.

A New York banking regulator suspended the French bank from clearing transactions in energy trade finance for the whole of 2015 as part of a punishment for violating U.S. sanctions against Sudan, Cuba and Iran. The suspension also included financial penalties of nearly $9 billion.

"Without getting help with the clearing, BNP will simply not be able to operate its energy trade finance division," a source at a trading company which works with BNP said.

The energy trade finance business accounted for as much as 5 percent of BNP's revenues in 2006 but was scaled back after the 2008 financial crisis and then again after the U.S. probe. It now only represents 1 percent of overall revenues although still accounts for hundreds of jobs.

U.S. dollar typically transactions pass through one of two major clearing systems in New York where large volumes of the main currency for global commodity trades are readily available.

Despite the suspension imposed by the New York regulator, the terms of the punishment left the door open for the French bank to pay others to do the job.

The suspension of dollar clearing was on business lines that were the central points of wrongdoing, according to the New York Department of Financial Services.

Any bank temporarily taking on clearing on behalf of BNP would be able to charge a high rate for the service and they might also gain new clients if switching back to the French bank in 2016 proved complicated or otherwise less desirable, sources familiar with talks said.

Major global banks such as BNP hold dollar accounts with the two main U.S. payment systems - CHIPS and FedWire - so that foreign companies can make or receive payments to or from suppliers in dollars or do transactions with American clients.

BNP mainly clears dollars on behalf of its own clients, and not on behalf of other banks. CHIPS is owned by 23 large commercial banks and supervised by the U.S. central bank, the Federal Reserve. FedWire is operated by the Fed.

   

REDUCED ROLE

Commodities exporters, importers and trading houses all rely on bank funding to manage capital intensive international trade flows in areas such as oil, metals or coal.

BNP Paribas has been the leader in energy trade finance for decades and trading houses such as Glencore (GLEN.L), Trafigura and Mercuria have long relied on the French lender for up to 40 to 50 percent of their credits lines.

But that business has been scaled back. BNP Paribas, along with other banks, has pulled back from some lending businesses which are seen by regulators as more risky and therefore require banks to hold more capital in case they encounter problems.

Sources at those trading houses said BNP was currently providing around 10-15 percent of their credit lines as banks from the United States to Europe and Australia - such as Citi, and ABN Amro - expanded in trade finance.

Spokespeople for Glencore, Trafigura and Mercuria declined to comment.

In Europe, dozens of senior managers and BNP's front office staff in energy trade finance left the bank between 2011-2013, according to insiders and trading sources. BNP declined to comment on staffing.

Earlier this year BNP exited its role of coordinating mandated lead arranger on Glencore’s $1.275 billion facility. It has stopped new lending to trader Trafigura and is cutting trade finance lending in Africa, according to trading sources. Glencore and Trafigura declined to comment.

Additional reporting by Maya Nikolayeva and writing by Dmitry Zhdannikov; editing by Anna Willard

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