For many companies there is simply not enough of an investor base at home to satisfy their borrowing needs. This is big business in Asia. Across the region, excluding Japan, ordinary companies issued $78bn of bonds in US dollars, euros and yen last year - a record annual amount and, for the first time, more than they had borrowed via traditional syndicated loan markets.
If companies go abroad for money they wish to use at home, however, they must enter into contracts that swap the foreign currency into their own. Sadly, "swap" has become a dirty word, redolent of derivatives. The unfortunate thing is that cross-currency swaps, used on every foreign-currency denominated bond, have no central clearing house. Uncleared swaps and derivatives are a big baddie in the eyes of the Basel Committee and the International Organisation of Securities Commissions.
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The two bodies launched proposals last year aimed at pushing all derivatives on to central clearing and they will report on the industry response in coming weeks. Their method is to penalise uncleared swaps with higher capital charges and higher margin, or collateral, requirements. In most cases, rightly so. But foreign exchange swaps are not like the credit default swaps that most agree must be centrally cleared. They may not even be derivatives at all.
When banks, or others, insure investors against losses on bonds through credit default swaps, the payment - and the risk - only travels one way. If the borrower defaults, the insurer must pay up all the value of the bond. The risk is that the insurer does not have the money to pay.
With a foreign currency swap for a corporate borrower, each party hands a set amount of cash to the other at the beginning of the trade with the promise to hand back the same amount in, say, five years time. There are now two risks - so the logic goes - as either party could fail to repay the other. There is an argument - acknowledged by the Bank for International Settlements - that such trades are already fully collateralised. This is because each party physically exchanges cash at the beginning and the end of the trade. However, the Basel-IOSCO proposal says the question of two-way risk must be answered by two-way margin posting.
The International Swaps and Derivatives Association reckons the extra collateral demands on the currency swap markets would shoot up vertiginously - requiring $1trn to $10trn of extra prime collateral. Such an estimate is unlikely to be realistic, because for a start the proposals exempt non-financial companies. However, the changes would still be highly costly to banks themselves - and those costs would undoubtedly be passed on to companies. In fact, the strains on supplying collateral to trades would be so great, according to one specialist lawyer, that banks would have no choice but to demand margin from companies themselves.
In Australia, David Michell, head of the Finance and Treasury Association, which represents ordinary corporate treasurers, has a more sober, but still concerned, view. Banks have told him that investment-grade Australian groups would have to pay up to 0.6 per cent a year more on a five-year bond after all the regulatory changes. If not disastrous, this would still not be welcome to companies. And it assumes the market can source enough collateral to function.
Australia has one of the biggest problems here. Its companies have long borrowed offshore more than twice the funds they borrow onshore, according to Dealogic. Brazil and Mexico have too. China borrows billions of dollars offshore, but its domestic bond market has also ballooned. Since the 1997 financial crisis, southeast Asian countries have developed decent local bond markets, but still their companies raise significant funds abroad.
Asian and other emerging markets already need more market-based funding as banks face capital constraints on their growth and tougher regulations. It is not only emerging market companies but also those that invest in them which need to swap funding into local currencies.
Dodd-Frank has exempted foreign exchange swaps from harsher treatment. IOSCO and Basel should do the same.
Paul J Davies is the FT's Asia Finance Correspondent
