New OTC markets regulation "could damage businesses"

Regulatory attempts to reduce systemic risk within the financial sector should not extend to non-financial sector companies, according to the London-based Association of Corporate Treasurers (ACT).

"We believe non-financial companies using derivatives for hedging are not systemically significant. There should be no need to include OTC deals with the non-regulated sector in any new processes and regulation," commented the ACT.

The ACT raised a number of concerns over the adverse effects planned European Commission regulations on over-the-counter derivatives markets could have on non-financial sector companies. These companies would require extra capital, the ACT said, as the proposed legislation could compel corporate parties to convey collateral to their counterparty daily during the life of the derivative. Currently, when companies hedge their exposure to future cashflows, no cashflows are required prior to maturity. This requirement "to find additional cash to meet a margin call could be the final thing that triggers the collapse of the company," according to the ACT response.

It added that regulatory plans for product standardisation, which would only permit certain fixed amounts, dates or rates to be dealt over these markets, could leave firms open to volatility and commercial risks.

The ACT rejected the EC's calls for more transparency of prices, transactions and positions, arguing that companies in the non-financial sector have less exposure to equity and credit derivatives, and more on interest rates and commodities where, the ACT argued, that pricing is already transparent.

See also: EC calls for greater standardisation of over-the-counter derivatives