Corporate concerns about OTC derivative regulation

The EACT's main concerns and recommendation for change are:

  • It looks as though non-financial companies may be called on to put up margin monies in respect of derivative positions even though their use of those derivatives poses no systemic risk.
  • Companies may be required to be able to pay margin to their contracted counterparty for negative positions during the life of a derivative although the offsetting, hedged, underlying cashflows will not take place until maturity.
  • Margin calls could be large in relation to the size of companies. Capital and undrawn lines of credit must be held against potential margin for major price changes in the derivativeā€Ÿs underlying reference.
  • While margin would be received for derivatives showing a gain, it cannot be used in the business prior to maturity as it is "hot money" that could flow out again just as quickly as underlying prices change.
  • All this would be likely to cause a reduction in corporate activity, with obvious consequences for the real economy, employment, taxes, etc.
  • Derivative contracts between non-financial companies and the financial sector should be exempt from any requirements for mandatory margining or for use of central counterparties with margin requirements as non-financial companies pose no systemic risks in their use of derivatives.
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