End-users are the theme that unites this supplement, which marks the 29th annual meeting of the International Swaps and Derivatives Association. At its centre is a survey of over-the-counter derivatives users, the results of which act as a rebuke to post-crisis OTC reforms. Respondents say the reforms are doing little to make the financial system safer, and also expect the new regime to make the swaps market more complex, less liquid and more expensive.
In the throes of transition, that might not be a surprise. One difference between the OTC reforms and the new prudential rules – which respondents see as a big contributor to improved systemic safety – is that the latter do not apply directly to end-users. People are generally more likely to support new restrictions if they are not the ones being restricted.
That’s why the two profiles of corporate end-users are worth reading. In the first, Airbus Group says it is trying to encourage customers to pay for its planes in euros, rather than dollars – if customers have euro-denominated revenues, it can be a way for both sides to avoid a derivatives market that has become increasingly expensive, says the company’s head of corporate finance and treasury. In the second, Pirelli’s head of risk says the company would have three times as many cross-currency swaps in place if the cost had not soared in recent years.
A similar point is made in the interviews conducted for the article accompanying the survey. “The range of hedging instruments available to us has decreased, particularly for very long-dated liabilities,” says one large liability-driven investment manager. His firm is now looking at other ways to mitigate exposure, without using the derivatives market.
This is not the fault of OTC reforms – or, at least, not primarily. Uncollateralised corporate hedges are more expensive because of Basel III’s credit valuation adjustment (CVA) capital charge, as well as the funding obligations created when they are offset by collateralised transactions. Very long-dated trades are also penalised by the CVA charge. So end-users should be worried about the impact of these other changes, too, which might be more lasting.
As a general rule, people are more likely to support new restrictions if they are not the ones being restricted
This point is taken up by two Isda board members in a video roundtable. Their hope is that once the various reforms have bedded down, and participants have had time to adapt, the swaps market will flourish.
If not, end-users will go elsewhere. Some already have.