Derivatives users fear cost burden of reforms

Major companies that use derivatives to hedge their liabilities have expressed concern that reforms of the over-the-counter derivatives market in Europe and the US could have the unintended consequence of making derivatives more expensive and less effective.

At a conference in Brussels on September 25, Derivatives in Crisis: Safeguarding Financial Stability, derivatives end-users from companies including Lufthansa and Rolls-Royce complained that reforms on both sides of the Atlantic were being crafted without taking the needs of corporates into account.

“We’re hearing many non-financial firms expressing their worries that a rigorous regulatory approach on derivatives could make it more expensive to hedge their investment projects and expose them to more risks,” said David Wright, internal markets and services, at the EC.

Some dealers suggested the idea of incentivising the use of standardised contracts to be centrally cleared missed the point and wrongly assumed a non-standardised contract meant a complex and risky one.

“Non-standard can mean something as simple as the maturity of the contract is December 31 as opposed to December 20, which is the standard date. But a corporate might have a very legitimate need for hedging something out to December 31: it might have a delivery of products or it might have a bond delivery at that date,” argued Blythe Masters, head of global commodities at JP Morgan.

If the EC pushed ahead with higher capital charges and collateral requirements for non-standardised products that cannot be centrally cleared or exchange traded, she argued, corporates would ultimately bear the cost.

“It is misleading to think this would not increase costs for corporates. Categorically it would,” she said.