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Foreign Exchange

FX news: Corporate treasurers fear for business if derivative regulation goes through

Non-financial corporates are concerned by the new OTC derivatives regulation on both sides of the Atlantic.

At the first The Association for Financial Markets in Europe (AFME) global FX division conference, in Brussels last week, corporate treasurers expressed the view that standardization of products would be detrimental to their businesses.

Christian Held, head of corporate treasury at Bayer AG, led the discussion from the point of view of the buy side and explained that standardized products as outlined in Dodd-Frank and EMIR were not going to work for corporates, which are established users of OTC derivatives: “For us, our greatest fear in the whole regulation debate is that we do not need standardized products, we need tailor-made hedges,” he said. “So standardization via any standard exchange or standard maturities is a nightmare to us.”

Held spoke for the treasurers when he said he believed that the new regulation could push businesses offshore. “The new regulation was always going to have a bad impact on corporates,” he said. “As a company we are based in the eurozone and export to the rest of the world so we need the hedging. If somebody forces us into standardized contracts via collateralization to change our policy then we can only move our production out of the eurozone and into the countries that we export to.”

Corporates use derivatives to offset risk rather than for speculation, according to Richard Raeburn, chairman of the European Association of Corporate Treasurers, which represents 4,600 groups and companies in the EU. He told theWeeklyFiX last week: “It is vital that the approach taken to regulation of derivatives should be proportionate and recognize the essential role that these financial instruments play in allowing companies to offset the financial risks they face in their business. Companies need to be able to continue to undertake this activity without tying up substantial amounts of liquidity in providing collateral to a central clearing process.”

Pension funds have similar concerns about the forthcoming regulation, as they too hedge their international FX exposure to manage investment risk. Neil Record, chairman of FX Investor Group, which represents asset managers in Europe, said: “Asset managers for pension fund investors typically use FX forwards, of original maturity between one and 12 months. Under the current draft of EMIR, pension funds will have to post daily cash collateral for their FX hedging.”

It would be ironic if, as Record believes is possible, EMIR results in a situation where both corporates and pension funds do less hedging because of standardization and therefore open themselves up to risk: “Our view is that the disruption this will cause and the scale of it would mean that they do a great deal less hedging and maybe their advisers will say you need to do less international investment,” he said.

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