European companies in derivatives protest

Article reports that European companies are hitting out against proposed EU reforms of the derivatives markets, saying that new rules requiring contracts to be routed through clearing houses could impose a huge drain on corporate cash.

Non-financial sector companies using derivatives to hedge their risks would require to keep large amounts of extra financing available if they are caught up in regulators' attempts to reduce systemic risk within the financial sector.

This is the principal concern of the Association of Corporate Treasurers in their response to the European Commission consultation on 'Over The Counter' (OTC) derivatives markets.

The concern arises because companies hedge their exposure to future cash flows. The future cash flows offset the hedges and vice-versa. OTC derivates, agreed between banks and their corporate customers usually require no cash flows prior to maturity – corporate credit risk is one of things banks exist to take. But if regulations require corporate parties to provide collateral to their counterparty daily during the life of the derivative, the hedge cash flows become immediate and companies would have to finance them up to maturity. This could be a material burden for many companies.

European Commission: DG Internal Market and Services: Financial Markets Infrastructure: Derivatives http://ec.europa.eu/internal_market/financial-markets/derivatives/index_en.htm

ESO: Background information: Warning to UK and France on derivatives http://www.europeansources.info/record/warning-to-uk-and-france-on-derivatives/

Website: Association of Corporate Treasurers (ACT) http://www.treasurers.org/

ACT: European Commission OTC derivatives proposals - ACT response, August 2009 http://www.treasurers.org/OTCderivatives/EUproposals/ACTresponse?SESS4ad21cf9c1028e0ae270cfdfdadae563=plfcftff5tis2bdjahqajd2km6

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