What’s on International Treasurers’ radar screen.
This week’s editorial discussion brought up several topics, including the continued uncertainty of how Dodd-Frank rules will ultimately impact the market and treasury. This is of particular interest as news reports of the unintended consequences keep popping up.
Unintended consequences
From its very outset, there have been many concerns regarding Dodd-Frank, many of which could have an indirect impact on treasury – from the way companies issue debt, to liquidity to the cost of hedging, and finally, to whether certain hedges must be cleared or not (see related story here).
One of the first issues to crop up was ratings firms would not allow use of their ratings because with Dodd-Frank, they were liable for the quality of their ratings decisions. The companies announced that until they had a better understanding of their legal exposure, they would refuse to let bond issuers use their ratings. Soon after, however, the SEC announced that companies selling securities backed by loans would have six months of breathing room to comply with new regulations.
More recently another news story, suggested that new derivative clearing rules under Dodd-Frank “unintentionally opened the bond-market up to high frequency traders by passing controversial derivatives-clearing requirements as part of the Dodd-Frank financial reform bill.” The fear is that having high-frequency traders in the CDS market could create more volatility and, possibly, a “flash-crash” similar to the one that took place in the equity markets in May.
Other possibly unintended consequences relate to the literal “wall of rules” coming from both US and Europe (Basel III) regulators, which include the possible increase in the cost of hedging for corporations as well as well as the thorny administrative hassles of figuring out what hedges must be centrally cleared or not.
Board communication
At a recent NeuGroup FX managers’ peer group meeting, members were treated to a discussion on calculating FX performance, reporting FX results to management, and communicating FX impacts to investors by several members. Granted there were differences in frequency, level of detail and report focus, reflecting how different companies are in their hedge programs and approaches to analyzing and mitigated FX risk. But it was instructive. This is a subject – specifically communicating various business projects and processes to the board — that spans other peer groups as well.