The latest topics International Treasurer is investigating.
The growing chorus of complaints about China’s undervalued currency—which the Financial Times recently equated to an import tariff of between 50 and 60 percent—has prompted worries that the huge balance of payments distortions it creates are increasingly affecting commodity markets. Commodities are, in a sense, taking the place of currencies as mechanisms for righting these imbalances.
This could push commodity prices and volatility significantly higher in the coming years. Some treasurers at companies that are subject to commodity market risk are beginning to view it alongside their foreign exchange exposures and seek ways to address them both, potentially in a holistic manner.
Such efforts have been hampered for almost a decade by the need for treasurers to meet hedge effectiveness tests under FAS 133 or IAS 39. But these may not be a problem for much longer. There’s a good chance that revisions to the two standards will do away with hedge accounting, freeing end users to manage their risks more creatively, and potentially more effectively.
Doing away with hedge accounting would also remove one of the end user community’s problems with current legislative moves to shift standardized OTC derivatives onto exchanges. Corporate hedgers argue that being forced to use standardized instruments would make it much harder to meet effectiveness tests. But even if that problem is overcome at the accounting level, end users are still unhappy with the prospect of having to tie up cash in exchange margin. Luckily, an amendment tacked on to the bill just passed by the House would allow voice brokerages to fall under the definition of an exchange—that is, the OTC market could continue more or less as is.