New York, April 20, 2010 –The clear definition of a corporate end-user of over-the-counter (OTC) derivatives, introduced in a new bill last Friday by U.S. Senate Agriculture Committee Chairman Blanche Lincoln (D-Ark), addresses most of the concerns previously held by companies that use derivatives to hedge commercial risk, says Reval, a derivative risk management and hedge accounting solutions provider to over 400 of the world’s largest public companies.
“Senator Lincoln’s bill does what no other bill does, which is that it defines what an end-user is and more clearly articulates what an end-user will be exempted from,” says Reval CEO and Co-founder Jiro Okochi, who testified on behalf of corporate end-users last December before the Senate Agriculture Committee hearing on OTC derivative reform.
“It is unfortunate that FX Forwards and FX Swaps are no longer exempted outright as they have been in previous proposals, but we may now be at that juncture where it is as good as it gets for end-users,” he says. Senator Lincoln’s Wall Street Transparency & Accountability Act of 2010 is the last bill to be proposed in an effort to reform the OTC derivatives market.
Clearly defining the corporate end-user was a suggestion Okochi made in his testimony in an effort to address the major concern by some lawmakers that previously proposed exemptions were too broad and could allow hedge funds and other speculators to take advantage of any exemptions.
“Two key issues that end-users were concerned about were having to bear additional costs to post cash margin—from clearing or from costs passed on by dealers who would be required to clear trades—and being forced into standardized instruments that traded on exchanges,” Okochi says. By making it a requirement that margin will not be forced on Swap Dealers for swaps sold to end users, Okochi notes, Senator Lincoln’s bill now makes it less likely that Swap Dealers would eventually require margin from end-users, even if legislation did not require it.
“Senator Lincoln’s bill simply and cleanly eliminates these two issues, and while Swap Dealers’ capital costs may go up, I think it is reasonable now to say that some price will have to be paid by everyone who uses derivatives,” he says.
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