US corporate hedging declines, says AFP

A majority of US corporate respondents to a recent survey by the Maryland-based Association of Finance Professionals (AFP) reported that overall hedging activity has declined, with a third citing derivatives accounting rule FAS 133 as the reason for the decline.

The survey found that nearly half the respondents felt that ongoing compliance with FAS 133 is “excessively burdensome”. Nearly a quarter of US comapnies said they would not use complex FAS 133 hedge accounting for what they termed "significant portions" of their derivatives positions. Instead, they will put the exposures directly on their balance sheets. This means companies are prepared to show a higher level of income volatility that hedge accounting would otherwise mitigate, due to the complexity of FAS 133.

But a significant proportion of respondents - seven out of 10 - said the introduction of FAS 133, in June last year, had not affected their use of derivatives products, said Ira Kawaller, a New York-based financial consultant at Kawaller & Co, who conducted the survey for AFP.

Kawaller said US corporates may have reduced their hedging activities if they perceived market volatility in interest rates, currencies, raw materials and commodity prices had diminished during the past year. This would lower their need for hedging activities. "My overall impression is people who hedge appreciate the power of this process and they go ahead when they feel it is necessary," said Kawaller.But he added that FAS 133 does cause "major headaches" for small companies, deterring them from using a lot of derivatives.

AFP is an association of corporate treasurers and finance officials whose annual survey this year was based on the replies of 175 US companies with annual revenues between $1 billion and $5 billion.

A full report on the survey's findings is available in the September edition of Risk (See - FAS 133: routine or ruinous?).