Wednesday, October 7, 2009

European companies fear OTC curbs

Posted in the Financial Times by Richard Milne and Jeremy Grant:

Europe’s biggest industrial companies face the prospect of having to raise tens of billions of euros because of a proposed regulatory crackdown on “over-the-counter” derivatives.

Eon , Europe’s largest utility, said that it could have to raise about €7.5bn in new credit lines or extra cash reserves if the proposals from the European Commission were passed.

“It will have a big impact ... We were very surprised by the proposals, as using derivatives is just a normal part of hedging business risk,” Verena Volpert, head of finance at Eon, told the Financial Times.

Regulators in the US and Brussels are insisting that OTC derivatives be shifted on to formal exchanges and processed through clearing houses.

Non-financial companies fear this would oblige them to set aside extra cash – “margin” – to guarantee those trades. These groups nearly always do not have to post margin as they deal directly with banks.

Siemens would need more than €1bn in new credit lines or cash while Rolls-Royce, the UK aerospace group, estimated that its margin payments for last year alone would have been £2.5bn (€2.7bn). Other groups from BASF to Deutsche Post are protesting.

Hans-Peter Rupprecht, Siemens treasurer, said that the proposals would be unnecessarily expensive: “Siemens has a very solid credit rating, and at the moment there is no reason to give collateral to international banks.”

US companies are also protesting. A draft bill published last week by the House of Representatives’ financial services committee proposed giving exemptions to non-financial users of OTC derivatives. The Senate has yet to produce its own draft bill.

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