The New York Times missed the mark last Sunday in its editorial criticizing proposed exemptions for business end-users of OTC derivatives from exchange trading requirements (“Too Little Regulation for Derivatives“). Many large and medium-size U.S. manufacturers use customized over-the-counter (OTC) derivatives to manage the cost of borrowing or other risks of operating their businesses, including fluctuating currency exchange and interest rates and commodity prices. For the record, transactions involving business end-users constitute about 10 percent of the overall OTC market, hardly “a big chunk,” of the industry.
A key benefit of OTC derivatives to manufacturers and other end-users is the ability to customize derivatives to specific risk management needs. In contrast, exchange trading requires the use of standardizing contracts, eliminating the ability of companies to tailor derivatives to specific risks, exposing businesses to increased costs, uncertainty and earnings volatility. Manufacturers agree that more transparency is needed in the derivatives market but mandatory exchange trading is not the way to go. Trade data repositories or other reporting requirements would achieve the same goal-without eliminating a risk management tool that allows manufacturers to focus on their core business.
In today’s challenging economy, OTC derivatives-by insulating companies from risk-help businesses keep operations going, invest in new technologies, build new plants and retain and create jobs.