Wednesday, January 6, 2010

Businesses demand OTC exemptions

Original posted in the Financial Times by Jeremy Grant:

More than 160 of Europe’s largest companies have swung behind efforts to persuade regulators to exempt corporate users of over-the-counter derivatives from tough new regulations.

The move is a sign that European company boards believe there are differences emerging between the US and European approaches to reforming the OTC markets that could adversely affect their operations.

Lawmakers in the US and officials in Brussels are finalising sweeping rules that would force more OTC derivatives on to regulated exchanges and to be processed through clearing houses, to safeguard against counterparty risk.

Companies on both sides of the Atlantic have been lobbying for exemptions from requirements to use OTC derivatives that are cleared and traded on ex-changes, arguing that this would cause a huge drain on cash and choke off what they see as legitimate options for hedging routine business risks.

Clearing requires market participants to post funds as collateral against default, something companies currently do not have to do since they negotiate OTC derivatives – such as foreign exchange and interest rate swaps – from banks directly. Legislation passed by the House of Representatives last month exempted non-financial users of OTC swaps under certain circumstances, partly as a result of intense lobbying by US companies such as Caterpillar, the equipment maker.

But the Senate, in a draft bill, has taken a firmer stance. While final legislation is some way off, companies in Europe fear that any toughening of the US stance might prompt Brussels to follow suit, even though European officials have so far signalled flexibility on the issue.

The European Association of Corporate Treasurers on Tuesday sent a letter to the European Commission warning that if proposals being considered were not “further refined” there could be “a reduction in the amount of funds allocated to productive investment in the [European] economy and less use of prudent hedging to eliminate market risks, with a resulting increase in uncertainty and volatility in the real economy of Europe”.

Richard Raeburn, EACT chairman, said companies were looking for a “clear carve-out” from the clearing and exchange-trading requirements.

“My fear is that what happens in the US will pre-empt the ability to be sensible over here,” he told the Financial Times.

The letter was signed by 164 companies including Beiersdorf, the consumer goods company, Cable & Wireless, Linde, the chemicals group, Renault, Skanska and Wolters Kluwer, the publishing group.

Mattias Levin, an official in the internal market and services unit of the Commission, said last month staff did not believe it was possible to exclude “non-financial users” of OTC derivatives from the proposed regulations.

He also said, however: “This is something that the Commission has taken to heart. We will not do anything to harm them [companies] excessively.”

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