The Use of Derivatives by Corporates has Increased Since the Financial Crisis | Push Digits Chartered Accountants

The Use of Derivatives by Corporates has Increased Since the Financial Crisis

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The use of derivatives by corporates has been growing in the recent times of increases in global rates on interest.

The increased request for instruments is creating a pressure on dealers who face a rise in derivatives trading costs due to the new regulations.

A new report that has been released by Greenwich Associates, looks closely into the results of 400 corporate and commercial treasurers in the global scale and has found that the corporate use of derivatives has gone up since the recent financial crisis, especially due to the yearly interest rate of the derivative exchange volume of the usual big and regular corporate user growing in 2014 to $3 billion from the $2 billion back in 2006.

Most of these users, around 87% of those who responded in the study, said that the recent regulations have not affected their derivative use.

However, this is not the case for dealers that carry out these trades. Dodd-Frank has excused end users on the corporate front from its clearing and trading mandates; dealers who are taking care of two-sided trades with these customers are subject to greater costs than those that are enforced on clear trades for other customers or clients.

According to Kevin McPartland, who is the Head of Market Structure and Technology Research at Greenwich Associates, banks will probably be passing such costs on to the client, if they already have not started, that is.

More than half of the corporations that are taking part in the study are giving credit charges to their dealer as a form of the preliminary transaction to get the dealer’s cost in Basel III.

Dealers Falling Back

These new and recent cost crescendos have triggered certain banks to cut back from their emphasis on corporate customers. Due to this, corporates are putting up their counterpart gradients to certify that they have access to both the services and liquidity that they need.

The major beneficiaries have been dealers under the second-tier; those with high credit ratings and huge balance sheets. Wells Fargo, RBC, and HSBC all fall under this camp and experienced robust growth in the last year or so.

McPartland stated that even with such measurements, end users of corporate derivatives probably wouldn’t be allowed to continue as though it is the year 2007 forever. The rates are likely to rise and Basel III will start to make its imprint on the dealer’s provided service and pricing. Both of these will lead to further approval of central clearing.

Bona fide hedgers, the other term for corporate end users, require customization within their switches above others, a huge factor in their decision to remain far away from the more uniform derivatives suggested by global economic reform.

As the price of such customization climbs and clearinghouses start to clear even more customized agreements, moving away and creating distance from bilateral dealings and transactions is logically expected.


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