Isda AGM supplement: Challenges for end-users
Corporates and others frustrated by swaps reforms and higher costs
A survey of end-users by Isda reveals many are sceptical about the value of swaps market reforms. These could be teething problems, but some say they are already looking for other ways to manage their risks
End-users are the theme that unites this supplement, which marks the 29th annual meeting of the International Swaps and Derivatives Association. At its centre is a survey of over-the-counter derivatives users, the results of which act as a rebuke to post-crisis OTC reforms. Respondents say the reforms are doing little to make the financial system safer, and also expect the new regime to make the swaps market more complex, less liquid and more expensive.
In the throes of transition, that might not be a surprise. One difference between the OTC reforms and the new prudential rules – which respondents see as a big contributor to improved systemic safety – is that the latter do not apply directly to end-users. People are generally more likely to support new restrictions if they are not the ones being restricted.
That’s why the two profiles of corporate end-users are worth reading. In the first, Airbus Group says it is trying to encourage customers to pay for its planes in euros, rather than dollars – if customers have euro-denominated revenues, it can be a way for both sides to avoid a derivatives market that has become increasingly expensive, says the company’s head of corporate finance and treasury. In the second, Pirelli’s head of risk says the company would have three times as many cross-currency swaps in place if the cost had not soared in recent years.
A similar point is made in the interviews conducted for the article accompanying the survey. “The range of hedging instruments available to us has decreased, particularly for very long-dated liabilities,” says one large liability-driven investment manager. His firm is now looking at other ways to mitigate exposure, without using the derivatives market.
This is not the fault of OTC reforms – or, at least, not primarily. Uncollateralised corporate hedges are more expensive because of Basel III’s credit valuation adjustment (CVA) capital charge, as well as the funding obligations created when they are offset by collateralised transactions. Very long-dated trades are also penalised by the CVA charge. So end-users should be worried about the impact of these other changes, too, which might be more lasting.
As a general rule, people are more likely to support new restrictions if they are not the ones being restricted
This point is taken up by two Isda board members in a video roundtable. Their hope is that once the various reforms have bedded down, and participants have had time to adapt, the swaps market will flourish.
If not, end-users will go elsewhere. Some already have.
Further reading
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Markets
Regulatory crackdown puts Korea autocalls in deep freeze
Mis-selling fears see distributors pull back, leading to 40% issuance fall in a month
Invesco more than triples size of its FX options book
Counterparty Radar: Manager’s portfolio exceeded $5bn notional in Q4
Volatility shape-shifters: arbitrage-free shaping of implied volatility surfaces
Manipulating implied volatility surfaces using optimal transport theory has several applications
BGC forming consortium to take on CME Group’s rates empire
Banks and PTFs are being offered a stake in FMX, which has CFTC approval to launch a futures exchange
RMB vol returns as hedge funds take barrier trade profits
Unwinds of exotic positions saw vol jump 72% after surprise PBoC move last week
‘Fear gauge’ within expectations, some say
Several options specialists dismiss claims that structured products are distorting the Vix
Brazil readies long-dated FX hedging scheme for green projects
Development bank IDB will lend its credit rating to unlock cheaper USD/BRL hedges out to 25 years
Options market still searching for cause of the Vix plunge
BIS paper blames yield-enhancing structured products, but market participants are unconvinced
Most read
- As FCMs dwindle, regulators fear systemic risk
- Top 10 operational risks for 2024
- Top 10 op risks: AI fears drive cyber risk to record high