Isda AGM supplement: Challenges for end-users
A survey of end-users by Isda reveals many are sceptical about the value of swaps market reforms. These could be teething problems, but some say they are already looking for other ways to manage their risks
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.
Further reading
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Markets
Cable basis set to shrink as pension buyouts dwindle
BoE rate cuts and tightening US credit spreads expected to further normalise the sterling-US dollar cross-currency basis
Supply chain decoupling fires up alpha focus at BofA
Talking Heads: Stock dispersion sees funds gross up on long/short baskets, while US structured notes come of age
Barclays disputes CDS committee decision ahead of auction
Representing the bank, law firm Milbank argues the committee’s approach risks constraining the market and goes against expectations
How Risk.net’s robots unlocked Ucits trade data
Machine learning tool helps reveal the largest European derivatives users – and who they trade with
Pricing and funding woes hit gilt repo
QT-driven funding cost rises combined with clients’ price demands see at least two banks pull back
China set to extend NDF trading scheme for onshore banks
CFETS expected to introduce RFQ functionality and more currencies for non-deliverable forwards
New data reveals Pimco is top Ucits interest rate swaps user
Counterparty Radar: US managers and dealers reign supreme in European retail fund space
Goldman appoints new financial risk head
Promotion sees Josh Schiffrin oversee strategy and financial risk, including trading supervision