Reval, a global derivative risk management and hedge accounting solutions provider to over 375 publicly traded companies, delivered what may be the final testimony heard on Capitol Hill this year on the over-the-counter (OTC) derivatives market. In his testimony before the US Senate Committee on Agriculture, Nutrition, and Forestry on ‘OTC Derivatives Reform and Addressing Systemic Risk’, Reval chief executive officer (CEO) and co-founder Jiro Okochi outlined key concerns for corporate end-users of derivatives and made specific recommendations that would address those concerns and aid in the long-term success of the reform’s implementation.
In his written testimony, Okochi emphasised that “non-financial corporations using OTC derivatives to hedge specific business risks were not the cause of the recent financial crisis, and every consideration should be given to this class of users so that they are not penalised for using OTC derivatives properly.”
Although Okochi acknowledges the fact that most companies agree with the need to regulate the OTC derivative markets, he highlights key concerns for end-users facing the pending reform, including hedging issues surrounding standardisation of trades and the various costs companies most likely will incur. Of specific concern, Okochi said, is “that even if end-users are exempted from posting margin, if swap dealers will be required to post capital and margin against end-user related transactions, then ultimately the swap dealers may in turn require their end?user clients to post margin to them. In such a scenario, the unintended consequence would be that end?users would have to post cash collateral to Swap Dealers instead of derivative clearing organizations, which would drive up costs anyway.”
Among his recommendations, Okochi suggested that, aside from event-driven instruments, such as credit default swaps (CDS) and OTC derivatives with notional principal exchanges, “swaps under 12 months in maturity could be exempt since they typically would not impose real systemic risk and their future potential risk is also lower than longer?dated swaps.” Specifically, he said: “I hope the committee will not only include the exemption of foreign exchange swaps and foreign exchange forwards included in other proposals but would also consider exemption for single currency interest rate swaps and commodity swaps less than 12 months.”
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