Most End-user Costs Would Increase to Comply With Dodd-Frank, Says Reval
In a live webinar poll by Reval, the software-as-a-service (SaaS) provider for financial risk management, 68% of non-financial end-users of derivatives said that they do not have a credit support annex (CSA) in place with counterparties to their over-the-counter (OTC) derivative contracts, indicating potential cost impacts for key compliance requirements expected under the Dodd-Frank Act. CSA’s are legal documents amending each ISDA Swap Master Agreements.
In addition, despite the potential headaches and costs associated with the requirement for all market participants to have CSA’s to handle margin requirements, 92% of non-financial end-users of derivatives polled say they do not expect to decrease their use of the instruments post final rules.
“This validates the importance of OTC derivatives for commercial hedgers of risk as despite the increases in costs coming their way, the need is still there,” said Jiro Okochi, chief executive officer (CEO) and co-founder of Reval. “Most companies will have to negotiate at least 10 ISDA agreements and monitor thresholds and collateral to each of their swap dealers. This number could also go up for commodities hedgers as they most likely would have to negotiate new ISDA’s with pushed-out commodities market-making desks from banks.”
Reval’s poll indicated that 41% of registrants do not even have ISDA’s in place. “Even for those that have CSA’s and ISDA’s in place with swap dealers, all ISDAs would have to be re-negotiated,” Okochi said.
Under the current draft business conduct and margin rules proposed by the US Commodity Futures Trading Commission (CFTC), the regulatory agency working to implement Dodd-Frank, non-financial end-users would be required to obtain a CSA to describe how their company’s swap transactions would be covered under collateral or margin agreements. In addition to the legal costs of amending each ISDA, companies would “have to have the people, processes and systems in place to monitor these CSA agreements,” according to Okochi.