Survey Shows Need for Greater Clarity Surrounding Compliance Requirements for Cross-Border Transactions
According to a recent survey from Chatham Financial, the majority of derivatives end-users facing compliance requirements from Dodd-Frank and EMIR are underprepared to meet key obligations for one or both sets of rules. Among a sampling of more than 150 companies, 60 percent of respondents who face regulatory requirements from Dodd-Frank indicated that they are not yet prepared for compliance, with nearly three-quarters (74 percent) of end-users facing EMIR compliance stating that they were not fully prepared.
The survey of end-users was conducted during a recent webinar hosted by Chatham Financial, the European Association of Corporate Treasurers, and the National Association of Corporate Treasurers. It polled 156 treasury and risk management officials of U.S. and Europe-based firms that utilize derivatives in their risk management activities.
According to the poll, 60 percent of derivatives end-users have subsidiaries in different countries that enter into derivative transactions with each other. These cross-border “inter-affiliate” swaps are internal transactions that serve to allocate the risk mitigating benefits of derivatives within the company.
“International regulators have not yet agreed upon how new derivatives rules will apply to cross-border transactions involving entities in different regulatory jurisdictions,” said Ryan McKee, senior advisor with Chatham Financial’s regulatory services advisory group. “Complying with one set of rules is challenging enough, and until international regulators act, many end-users will be subject to two sets of rules for the same transactions – even for those that are within the same company.”
Regulators are currently discussing a system of recognition whereby counterparties in different jurisdictions can comply with one set of rules but satisfy both regimes’ obligations, so long as the rules are designed to produce equivalent outcomes. Until such a system is put in place, Dodd-Frank will apply for any transaction in which a U.S. entity is a party and EMIR will apply whenever an E.U. entity is a party.
According to the survey, end-users are underprepared for both regimes. Forty-four percent of respondents indicated that they were unsure of their firm’s status under EMIR, signaling a need for further understanding of the provision’s applicability to derivatives end-users who operate or transact with counterparties located in Europe. Ten percent stated that they did not yet know if Dodd-Frank compliance requirements apply to their firm.
“With the compliance phase for U.S. and E.U. regulations now upon us, derivatives end-users face an environment that is as complex as it is uncertain,” said Luke Zubrod, director of Chatham Financial’s regulatory services advisory group. “Right now, as many firms are working toward complying with their home country regulations, they’re just beginning to scratch the surface of additional regulations stemming from the jurisdictions of their counterparties. This means additional cost, confusion and uncertainty – the very factors end users enter into derivatives to avoid.”
When asked how increased OTC derivatives pricing would affect hedging behavior:
· Thirteen percent of respondents said that they expect to hedge less or stop hedging altogether
· Nearly half (47 percent) plan to simply pay the higher prices
· Forty percent stated they would seek alternative means to manage risk
· Separately, just 22 percent of end-users said they were definitely considering voluntarily clearing their derivatives or using exchange-traded products such as futures
“As the push for compliance continues to keep treasurers up at night, Chatham Financial remains committed to helping end-users navigate these growing complexities in the U.S. and abroad,” said Zubrod.
