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Regs May Trim Hedges

Companies say the plan to corral derivatives activity on exchanges will increase costs and make hedge accounting difficult.

By Susan Kelly | Updated on August 01, 2009

Given the havoc caused by credit default swaps, the Obama administration is proposing regulations that could shift most derivatives transactions onto exchanges, where requirements to post collateral keep a lid on counterparty risk. Companies say the changes could limit their use of derivatives by adding to costs and making it harder to account for such transactions. The cost concerns relate to collateral requirements. In a letter to Sen. Mike Crapo (R-Idaho), Randall Durling, director of international finance at Boeing, estimated that as of February, the aircraft manufacturer would have had to put up $150 million in collateral on derivatives positions. That “could significantly impact our business operations since [the money] is not available for our day-to-day business needs,” Durling noted.

Oil giant BP Energy worries collateral requirements could prove onerous for smaller companies it does business with, says Mark Stultz, vice president of policy and U.S. regulatory affairs at BP. If companies choose not to hedge as a result, that could lead to more volatility, he says. If they need to borrow to come up with collateral and their credit rating is not good, “there’s a cost-of-money factor,” he adds.

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