Derivatives have long been a critical tool for many companies managing risks, such as interest rate and foreign exchange. On Thursday, we looked at the potential impact of fluctuations in commodities prices on current and future corporate commodities hedging plans.

However, it is not just prices that affect hedging programs, and many companies worldwide are on tenterhooks, waiting to see how global rules on OTC derivatives will develop.

Global regulations are changing, but not at the same pace. This is causing confusion and the potential for what the experts call regulatory arbitrage, in which participants choose which markets to trade in based on how strong or lightly they are regulated.

Dodd-Frank, for example, increases the regulation of OTC derivatives and pushes more trades on to exchanges and through clearinghouses – however the actual impact on corporate hedging programs is minimal, thanks to a carve-out policy exempting corporate end-users.

In Europe, the potential for new regulations is still a work-in-progress. 

This makes it very difficult for corporates to plan interest rate and foreign exchange hedging strategies at a volatile time when it is most needed. 

On July 10, the European Community closed the comment period on Public Consultation on Derivatives and Market Infrastructure, which could mean a new regulatory framework is on the way toward becoming reality. But here is the problem. 

The draft proposal includes a reference to a designated clearing threshold for non-financial users of derivatives, beyond which they would be required to clear through an exchange. This means if the position threshold is passed, they would have to clear through a designated exchange. Given that this threshold has not been defined, this is a big concern for corporates. This is more onerous than under the new US legislation, which has no corporate clearing threshold. 

Take the example of the airlines. As  Roland Kern, head of treasury at German airline Lufthansa noted in Risk magazine, European airlines use more than 300 million barrels of jet fuel each year. 

The massive volatility in oil prices since early 2008 has left airlines in the region with potential losses of as much as $27 billion as a result of price uncertainty.

So changes to derivatives regs that make it more difficult or expensive to hedge could have a huge impact on airlines, and other sectors that must deal with the uncertainty in global currencies, interest rates, and commodities. 

Although proponents of central clearing say that it could lower prices, this is unlikely to be the case for the type of one-off, uniquely-tailored hedges that corporates typically use.

The result may simply be that companies look to other markets for their hedges. If derivatives becomes too onerous or expensive in Europe, companies may move hedging programs to the US or UK, for example.

But Jeffrey Wallace, managing partner at Greenwich Treasury Advisors, says that may be complicated: “It is easy to move hedging out of the UK if necessary. However not so easy, but feasible if there are too many restrictions in the EU.”