| LIVERPOOL, England, April 19
LIVERPOOL, England, April 19 European companies
are increasingly alarmed that new rules on derivatives could
leave them paying threefold for vital tools for managing risk or
more exposed if they shun them, ultimately hampering growth.
Derivatives are used, for instance, to hedge against
currency or interest rate fluctuations.
But banks are being told to hold more capital against these
tailor-made instruments they arrange for companies, meaning they
could end up charging more.
Regulators have been clamping down on derivatives in Europe
and the United States after some of the complex versions of
these deals, and the speculative way in which they were used,
were blamed for exacerbating the financial crisis of 2008-9.
Companies could alternatively bypass banks and use central
clearing counterparties for their derivatives trades, a system
lenders themselves are forced to use by regulators.
But that could end up being even more expensive and tricky
to manage for companies which would have to post collateral as
margin to cover risks.
While banks can deploy a range of securities as collateral,
such as government bonds, companies might have to raid cash
"The need to have more liquidity available for margin calls
would be my concern," said Tim Hayter, group treasurer at
disposable products supplier Bunzl, speaking at the annual
conference of the Association of Corporate Treasurers.
"We have headroom available to run the business for
acquisitions, and I don't want to go to my financial director
and say I need 50-60 million (pounds) of that to go off to pay
for margin calls."
Bunzl said this week it was in deal-mode after a good start
to the year, while many other companies are in cautious mode,
hoarding cash and shunning acquisitions.
Expensive derivatives could make firms that want to grow
think twice about investing outside their home turf as cash
flows in different currencies require hedging.
In certain businesses, such as oil, dollars are the
prevailing currency for trading, meaning European energy firms
which have to hedge the currency risk could end up at a
disadvantage to U.S. rivals.
Regulatory changes could affect even the biggest and
"Companies are being told to have diverse funding, but if a
UK firm wants to get working capital in dollars, they'll also
want to use derivatives to convert that. And in turn they're
effectively being told that derivatives are bad and they
shouldn't use them," said one derivatives sales banker, who was
not authorised to speak to journalists.
MIXED LOBBYING SUCCESS
Companies and banks alike have lobbied for exemptions from
various aspects of the new rules, with mixed success.
Under the European Market Infrastructure Regulation,
regulating derivatives, companies will not be forced to clear
their trades through central counterparties as long as they are
using them to hedge risk and not to speculate.
But new Basel regulations being applied in Europe mean banks
face capital charges depending on fluctuating values of their
derivatives trades with companies.
"The cost of risk management could increase up to three
times as a result of the imposition of a CVA (credit value
adjustment) capital charge, which again reinforces our desire
and lobbying to try and remove this charge for corporates,"
Douglas Flint, Chairman of HSBC, told the corporate treasurers.
On balance, most companies said they would rather still deal
with their banks than go through central clearing. One benefit
of this approach is that lenders desperate for business may not
end up passing on all of the added costs.
"Competitive pressures will make (the effect of derivative
rules) more moderate," said Rick Martin, group director for
treasury and investor relations at Virgin Media. "What is the
quid pro quo for that? It is prospectively diminished financial
But banks are under increasing pressure from investors over
returns, and companies may not be able to count on all lenders
giving them cut-price rates.
Banks could also cancel out some of the capital burden of
derivatives trades with companies by themselves hedging those
trades with other derivatives such as credit default swaps
(CDS), a form of protection against default.
(Editing by David Cowell)