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Standardisation and Organisation of Derivatives Markets: some necessary limits

by Olivier Bornecque,  Chairman, AFTE – The French Association of Corporate Treasurers

Improving and better regulating the OTC derivatives market is the order of the day. The idea even figures in the final G20 press release from Pittsburgh. We at the AFTE believe that several points should be taken into consideration.

In terms of both economics and accounting, companies need customised hedging instruments if they hope to be effective in managing and hedging their various risks (currency, interest rate, etc.). Accounting issues must not be neglected. Of special concern here are the classification and presentation requirements of IAS 39, especially those meant to soften the impact of hedges on earnings. The AFTE views the standardisation of these instruments as harmful, since it would reduce their flexibility and economic effectiveness while provoking artificial volatility in company earnings. Hedging operations would be designated as ‘trading’ if they were  ill-suited to the risks they were supposed to cover.

Remember, companies use derivatives not to speculate but to hedge their risks. Their use of these instruments does not incur systemic risks. In fact, according to the Bank for International Settlements, non-financial companies accounted for only 7% of current derivatives at end-2008.