Too many corporate end users of swaps remain unprepared to comply with new regulatory requirements in the US and Europe, according to a new survey, suggesting some have already seen their swap activity impacted and others soon will.
Chatham Financial recently released the results of a survey of 156 end users that found 60 percent of respondents unprepared to comply with Dodd-Frank-Act requirements and 74 percent unprepared to comply with European Market Infrastructure Regulation (EMIR).
Ryan McKee, senior regulatory adviser at Chatham Financial, noted that while corporate end users are exempt from key requirements under both sets of rules, such as clearing, there are still several obligations that require them to take action.
For example, Ms. McKee said, Chatham’s communication with end users suggests some of them have been slow to adopt documentation protocol that US rules required by May 1 if they are trading with US swap dealers, and that has likely delayed trades they otherwise would have pursued. In addition, she said, end users complying with US rules must connect to swap data repositories and begin reporting trade data to them by July 1, if a swap dealer which would otherwise report the data is not involved in the transaction. End users complying with EMIR rules may face similar reporting requirements by late September.
“Because end users must connect to the repositories, that’s a process that they’ll have to have underway well before the deadlines,” Ms. McKee said. She added that it’s also important to take into account the “persistent lack of guidance from international regulators regarding the applicability of the new regulations to cross border transactions.”
The poll of treasury and risk management executives at US- and European-based companies also found that 60 percent of respondents have subsidiaries in different countries that enter into derivative transactions directly with each other—so-called inter-affiliate trades. Ms. McKee noted that transactions involving dealers benefit from those financial institutions providing their expertise on complying with local rules, but that dealer expertise may not be available to treasury centers conducting inter-affiliate swaps.
“The survey results showed how prevalent cross-border, inter-affiliate transactions are,” Ms. McKee said, adding, “End users [engaged in those transactions] will still have obligations under both regulatory regimes.”
The Securities and Exchange Commission recently proposed exempting foreign subsidiaries and branches of US parent companies from US swap regulations and allowing them to follow local regulations if those rules are deemed equivalent. The SEC, however, oversees security-based swaps, which make up a small percentage of the swap universe.
Interest-rate swaps and other derivatives most frequently used by corporate end users are regulated by the Commodity Futures Trading Commission (CFTC), and its rules on cross-border jurisdiction, proposed last summer, would instead apply US rules to any transaction if there is a US swap dealer or end user involved.
“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,” Ms. McKee said.
The survey revealed that 44 percent of respondents were uncertain of their firms’ status under EMIR, and 10 percent said they did not know whether Dodd-Frank requirements applied.
The survey also found that end users’ increased costs to engage in swaps, stemming in part from compliance, may change their behavior in significant ways. Nearly half of respondents said they plan to simply pay the higher costs, but 13 percent said they expect to hedge less or stop hedging altogether, and 40 percent said they would seek alternative ways to manage risk. Just 22 percent said they were definitely considering voluntarily clearing their derivatives or using exchange-traded products.