Tags: derivatives

Firms Gird for Fight Against Derivatives Rule Reform

Monday, 13 Jul 2009 02:31 PM

By Dan Weil

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Derivatives, starting with subprime mortgage securities, played a major role in what experts agree is the worst financial crisis in 70 years.

But blue chip companies use over-the-counter (OTC) derivatives to hedge against risks such as volatile commodity prices and currency rates.

So they are working hard against proposals to regulate the OTC derivatives market more strictly, The Wall Street Journal reported.

The White House last month proposed rules requiring more derivatives trades to be executed on exchanges where regulators can monitor them.

In addition, companies would have to put aside more cash to protect against losses in their derivative positions.

At least 42 non-financial companies and associations are lobbying Congress hard against the tighter rules, The Journal reported. The companies include Caterpillar, Boeing, 3M, MillerCoors, Bayer and Delta Air Lines.

Big moves in materials prices, interest rates and currency rates can cause major problems for their finances.

Caterpillar, which uses derivatives to guard against increases in copper prices, said the new regulations might drive U.S. companies to seek derivatives overseas.

Companies say the changes will raise the cost of hedging their risks and make them set aside capital that could be used to improve their operations.

But some say the derivatives market needs tighter regulation.

“The status quo has to change,” Keith Styrcula, chairman of the Structured Products Association, told Bloomberg.

“It’s been a privately negotiated market, and with the credit default crisis we’ve had, that’s no longer acceptable.”

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