Will Dodd-Frank Alter Corporate Hedging?

As the Dodd-Frank rules and other regulatory changes take effect for dealers, the cost of using OTC derivatives is expected to rise, a development that could push corporates to alter the way they hedge in spite of the exemption they won from many Dodd-Frank rules.

Traditionally, corporates have gone directly to their dealers—their banks—to put on over-the-counter (OTC) trades to hedge such exposures as foreign-exchange and interest-rate risk. Such bilateral trades with dealers usually weren’t cleared. Companies use OTC derivatives rather than exchange-traded products because one of their key goals is to achieve a structure that closely replicates the time frame and cash flows of the risk being hedged so that the derivative transaction qualifies for hedge accounting.