In 1976-77, The Chase Manhattan Bank N.A., London Branch, and ICI PLC, then one of the foremost British industrial concerns, signed what is believed to be the first ever long term (10 years) currency swap in an amount of £30 Million. It was prompted by English exchange controls, enabling UK companies with excess sterling cash to generate US Dollars offshore. The transaction needed the approval of the Bank of England, which it obtained.

The idea came from Alan Clement, later to become Member of the Board of ICI Ltd, a good friend of Chase and a good friend of Jeff Cunningham, then UK country manager. The transaction was executed by Archie Donaldson, later to become Treasurer of ICI, equally a good friend of Chase, and myself.

The documentation was over 40 pages long and structured like a parallel loan agreement except that drawdowns and repayments were expressed as exchanges. Interest payments were referred to as fees. Since the fees were structured based on rolling six months Euro interbank rates and therefore paid every six months, the exchanges of principal amounts were the same at the beginning and at the end of the transaction. This made the partial or full unwinding of the swap easy.

The transaction was reflected on Chase Manhattan’s accounts as a forward, i.e. below the line. In its monthly UK domestic sterling report it had to be shown–at the insistence of the Bank of England–as borrowing: no distortion of UK domestic banking activity and money supply!

It was only at a later time that long term currency swaps were constructed like short term forwards: i.e. the interest differential between the currencies involved were built into the final exchange and no payments were due during the lifetime of the swap.

The margin on the first transaction was 100 basis points in favor of Chase. On the day of signing the first transaction, Chase was asked whether it would want to do another transaction at a margin reduced to 50 basis points. Chase agreed for another £20 Million.

Ten years later, these transactions were done at margins of 2 to 3 basis points and documented by a deal slip.

In 1977, Chase was against pursuing this business. Continental Illinois really pushed the idea very successfully, so well that the man in charge was hired by Morgan Stanley and made Morgan Stanley #1 in the business. Three years later, the volume of business had reached a rumoured level of US$6 billion–a huge number in those days.

In 1980, I tried to generate business in New York together with the Corporate Bank. These swaps became very attractive to US Corporates because of the possibility of hedging their investments overseas (FASB 8). We found interest at IBM and Philip Morris for a rare US$/Ital.Lire swap. When we sent the copy of an agreement–used by Morgan Guaranty, approved by Shearman & Sterling and still many pages long–to Chase’s lawyers, we got a legal opinion back declaring a transaction of this kind illegal because of New York State Gaming Laws.

The rest is history as well.

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