LONDON (Reuters) - E.ON AG (EONGn.DE) implored regulators on Tuesday not to force industrial consumers to clear and pay margins on over-the-counter (OTC) derivatives, saying such a move would raise costs and cut investment.
Tony Cocker, chief executive officer of E.ON Energy Trading, which manages risk for the European power and gas company, said end users such as E.ON were deeply worried by moves to impose these plans for all traders of OTC derivatives.
U.S. and European legislators are considering regulations to make end-users of OTC derivatives either use standardized OTC derivatives that are cleared and margined or move instead on to regulated exchanges and away from OTC markets.
Companies like E.ON as well as airlines, machine makers and many other companies buy and sell OTC products such as swaps to hedge their exposure to fluctuating raw material prices like oil, gas or metals. They say they find them much more flexible than standardized, regulated markets.
Cocker said forcing companies to treat their derivatives positions as if they were speculative trades would raise costs and make them set aside lots of cash for margin calls.
“Generally speaking, we welcome clearing and margining as this is a good tool to manage risk,” Cocker told the Reuters Global Energy Summit.
“But we don’t support mandatory clearing for end-users of the derivatives — for banks yes, but for end-users no.”
Cocker said end-users’ derivative positions were by definition “always asymmetric.”
“If you put in place a derivative with a credit-worthy counter-party then that hedges your price risk and you take on some credit risk with that counter-party. But if they are credit worthy ... and if you have a group of such counter-parties then the risk should be relatively low.” “If you are required to mandatorily put these through exchanges or clear or margin this, you have managed the price risk but you have turned that into a cash flow risk because ... you will have to reserve cash against that risk,” he said.
Cocker said imposing such rules would force firms to set aside money that would otherwise be used for investment.
“That’s cash that you would otherwise invest in building your widget manufacturing facility or, in our case, your power station ... cash that would otherwise have been invested in the business,” he said.
Alternatively, companies could choose to avoid hedging, a move that would raise risk and expose them to other dangers.
“If they don’t hedge, they will have to rejig their balance sheets so that they are capable of having volatile earnings.”
“If you decide to reduce your hedging then there will be more EBIT (earnings before interest and tax) volatility in your results and therefore your results are more volatile.”
He said European and U.S. regulators had somehow to “manage to put in place legislation that avoids loopholes for banks but at the same time doesn’t capture industry which uses these products to hedge.”
“It is not just about the energy sector but all big manufacturing which therefore has a foreign exchange exposure or has a commodity exposure that it wants to hedge.”
Additional reporting by Vera Eckert; editing by William Hardy