Standardisation and Organisation of Derivatives Markets: some necessary limits
by Olivier Bornecque, Chairman, AFTE – The French Association of Corporate Treasurers
Improving and better regulating the OTC derivatives market is the order of the day. The idea even figures in the final G20 press release from Pittsburgh. We at the AFTE believe that several points should be taken into consideration.
In terms of both economics and accounting, companies need customised hedging instruments if they hope to be effective in managing and hedging their various risks (currency, interest rate, etc.). Accounting issues must not be neglected. Of special concern here are the classification and presentation requirements of IAS 39, especially those meant to soften the impact of hedges on earnings. The AFTE views the standardisation of these instruments as harmful, since it would reduce their flexibility and economic effectiveness while provoking artificial volatility in company earnings. Hedging operations would be designated as ‘trading’ if they were ill-suited to the risks they were supposed to cover.
Remember, companies use derivatives not to speculate but to hedge their risks. Their use of these instruments does not incur systemic risks. In fact, according to the Bank for International Settlements, non-financial companies accounted for only 7% of current derivatives at end-2008.
In terms of both economics and accounting, companies need customised hedging instruments if they hope to be effective in managing and hedging their various risks.
The AFTE also opposes another item now on the agenda: mandatory clearing of OTC transactions. This measure would entail frequent margin calls, posting of collateral, credit-line freezes, and new expenses for companies. It could only be counterproductive. However, both standardisation and mandatory clearing could be justified for activities that are themselves highly regulated — portfolio management, UCITS, etc. — for which recourse to standardised hedging instruments is an everyday occurrence, and for which compensation reduces counterparty risk.
The AFTE strongly supports reporting to a central repository of all transactions including OTC derivatives to ensure complete transparency. It is necessary to group derivatives transactions on OTC markets and subject them to more systematic analysis. It is the view of the AFTE that regulators should be able to determine the exposure of the various counterparties, without curbing their freedom from transaction restrictions, in order to oversee systemic risks in those markets. Of course, such supervision could be truly effective only if undertaken on the European level at least.