U.S. companies could face as much as $1 trillion in additional costs as a result of new laws designed to reduce risks in the $450 trillion, privately traded derivatives market, a derivatives trade group said.
U.S. lawmakers are close to finalizing legislation to overhaul the country's financial system, including moving most derivatives contracts to central clearinghouses, which stand between trading counterparties and guarantee trades.
Final rules will also require that companies that use derivatives to hedge their businesses, sometimes referred to as end-users, post margins to back the trades. Companies had argued they should be exempt from clearing and margining requirements because it would make hedging their business risk too costly.
"The margining requirements for corporate end-users as currently drafted in the bill runs the risk of imposing a significant cost on U.S. companies and could impede their ability to manage their business and financial risks," Conrad Voldstad, Chief Executive Officer at the International Swaps and Derivatives Association, said in a release.
ISDA estimates that companies would need to post about $400 billion of collateral with dealers to cover their current derivatives exposures as a result of new regulations, based on market surveys taken by the Office of the Comptroller of the Currency on derivatives use.
Companies would also need another $380 billion in additional credit capacity to cover the potential future exposures of their derivative positions, ISDA said.
If markets return to levels prevailing at the end of 2008, additional collateral needs would likely bring the total to $1 trillion, the trade group added.
Derivatives are based on foreign exchange, debt, equity or commodities or can be tied to changed in interest rates and are used to hedge financial risks or speculate on market movements.
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