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Leader: Death, Taxes and Black Swans

by Jiro Okochi, CEO and Co-founder, Reval

It is said that nothing in this world is certain except death and taxes. Reinforcing this idea of unpredictability are ‘Black Swan Events’, popularised by epistemologist Nassim Nicholas Taleb in his 2007 book, The Black Swan: The impact of the highly improbable. It makes sense, then, that as the year unfolds for corporate treasurers, we can only say for certain that something dramatically unpredictable will happen in the markets that will give treasurers one more headache.  

The global financial crisis was, by Taleb’s definition, a Black Swan Event. One lesson we should have learned from the financial crisis — when it seemed like one-in-100-year events were happening every week and prices moved by more than two standard deviations over the course of a lunch break — is that volatility can occur swiftly and unexpectedly. So, unless treasurers think they are Warren Buffet, they would be foolish to forecast the market. Rather, their best bet is to hedge, at least against catastrophic events that can destroy their businesses.

Because we have experienced the devastating effects of extreme volatility, we know that it will be too late and too expensive to hedge when the ‘Black Swan’ does splash down somewhere and sometime in 2010. Therefore, as treasurers work to mitigate risk from the unpredictable, they will want to make sure they keep abreast of — and have a voice in — the ongoing regulatory developments involving the use of derivatives.

At the time of writing, it seems that non-financial corporations may not have to post margin for derivative trades; however, it is hard to imagine that banks won’t start requiring it anyway. Therefore, the costs of using OTC derivatives will most likely rise if the capital charges, margin requirements and clearing fees go up as anticipated with US legislation in 2010 and, presumably, with similar legislation from the European Commission. On the flip side of such regulation, companies may actually benefit from increased transparency and efficiency as business conduct rules may require dealers to show all profits earned on the transaction, even if un-cleared.