Banks tout break clauses as capital mitigant

Dealers say they are willing to jeopardise client relationships by exercising break clauses that allow trades to be terminated early – and should receive capital relief as a result. But regulators need to be convinced. By Matt Cameron

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Imagine a situation in which a small manufacturing company is in trouble. It is struggling to compete with foreign rivals and its borrowing costs are soaring. One of its dealers is in-the-money on some large interest rate swaps it transacted for the company five years ago, and has the option to terminate those trades – which would otherwise run for another five years – forcing the company to find the cash to pay a close-out amount.

In the past, banks have rarely exercised these break clauses. In

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