Corporates not properly hedging equity exposures, says UBS banker

Corporate accounting scandals and weak equity markets have made companies use less equity derivatives strategies, and this is to their detriment, according to a senior investment banker speaking today at the San Antonio Risk Management Conference.

"The corporate use of equity derivatives has changed dramatically over the past few years, and recent events have substantially reduced the frequency with which companies employ equity derivatives strategies," said Michael Collins, managing director and head of US corporate equity risk at UBS Warburg.

Collins said it is unfortunate that companies have decreased their use of equity derivatives because the "underlying exposures are still there". "But usage [of equity derivatives] has gone down and that's bad," said Collins.

Corporates can use equity derivatives to hedge against the risk of having to buy their own shares in the future at a relativley high price.

Collins said corporate scandals have slowed the addition of new corporate derivatives users, while the market downturn has created cashflow uncertainty.

Also, new accounting policies that require the mark-to-market of derivatives share repurchase strategies through the profit and loss statement have also decreased the use of derivatives, said Collins.

"If FASB [the Financial Accounting Standards Board] makes it more complicated for you to look at the financials, then that will reduce the use of derivatives," said Collins. "It will create volatility in the income statement."

FASB is expected to require the mark-to-market of share buy-back strategies in October.

The Texas conference is being hosted by the Chicago Board Options Exchange, the Chicago Board of Trade and the Chicago Mercantile Exchange.