End User path forward

Identify what's regulated in your portfolio: Assess which instruments meet the official definition of a "swap" or "security-based swap" and thus fall under the scope of the Act.
Evaluate your classification: Establish whether or not the entity that executes the swaps qualifies as an End User, or whether it's considered a swap dealer ("SD") or major swap participant ("MSP"). While most corporates won't be considered SDs or MSPs, heavy users of derivatives, like companies involved in energy or commodities, may.
Weigh the costs and benefits of changing strategies: End Users have numerous choices for executing and clearing their swap transactions, each of which could impact price and cost.
Understand new collateral demands: Consider what impact the increasing collateral requirements will have on liquidity and borrowing. Armed with that analysis, a corporate End User can decide whether to trade on exchanges, trade over-the- counter, continue to trade OTC, or forgo derivatives altogether.
Analyze the administrative and operational requirements: Most derivatives will be subject to new recordkeeping and reporting requirements, so new systems for mass data storage and other compliance matters will need to be in place. Companies should look into outsourcing some of the necessary tools and infrastructure as well as exploring processes and liquidity requirements for posting collateral.
Assess impact on financial accounting and reporting: Standardized derivatives may not exactly match the terms of the hedged exposure, leading to a requirement to apply the more complex hedge accounting requirements (i.e., application of long-haul hedge accounting) as well as income statement volatility.

So while some rules are not final, it's clear that the Act will have a significant effect on most corporates. Companies must start planning now so they're not caught off-guard by growing costs, demands on cash, and changes in risk management.

Instant Insights /

Beyond the Banks: What Derivative Regulation means for the corporate world

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