Derivatives Users Likely to See Higher Costs

Rising OTC costs may push companies to clear derivatives.

Krishnan Iyengar of RevalNearly 60% of global financial institutions say higher capital requirements will make them wary about engaging in capital-intensive businesses, such as derivatives transactions, and 18% say they will pass the associated costs on to clients, according to a recent survey. In fact, the survey, conducted by SunGard and the Professional Risk Managers’ International Association (PRMIA), found a quarter of respondents have already exited such businesses.

While the survey collected input mostly from financial institutions, its results point to rising costs and fewer providers, which almost certainly means higher prices for corporate users of derivatives.

Tom Deas of FMC Corp.Tom Deas, treasurer at FMC Corp and chairman of the National Association of Corporate Treasurers (NACT), says the issue of CVAs has not gotten much attention among NACT members. That’s because most of NACT’s member companies are investment grade, similar to their bank counterparties, reducing the impact of CVAs, says Deas, pictured at left.

Calculating CVAs becomes more critical when companies are rated less than investment-grade, resulting in a greater credit spread between them and their bank counterparties. If the vast majority of swaps remain uncleared, as the SunGard survey suggests, and auditors continue to push for CVAs, non-investment-grade companies could find themselves incurring costs to implement more sophisticated CVA calculation systems.

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