The European Union (EU) has a plan for adopting stricter capital requirements and better corporate governance for banks and investment firms (the so-called ‘CDR IV’ project). Despite the fact it only concerns financial institutions, this projected Directive could indirectly heavily impact non-financial corporations. The new rules will have to be translated into national law by the end of 2012. In this new proposal, it appears that there will be no exemptions for exposures to corporates from Credit Valuation Adjustment (CVA) charges (regulation, part3, title VI, p.56). Should we as European corporate treasurers be worried by this part of the proposal? We certainly should.
At the treasury association level, we are really concerned about the potential impact on bilateral derivatives trades, which may become very expensive due to new capital requirements imposed on banks to hold the capital to cover the CVA risk. Banks will be forced to charge more to corporates and therefore hedging may become unaffordable. As for the EMIR discussions on OTC (over-the-counter) derivatives reform, we believe that there is a very strong case for exempting trades with corporates from the CVA charge in the CRD IV.
François MasquelierHead of Corporate Finance and Treasury, RTL Group, and Honorary Chairman of the European Association of Corporate Treasurers