EACT turns up heat on European Banking Authority

Major group of treasury associations steps up criticism of plans to levy extra charges against non-financial firms for using OTC derivatives

Non-financial firms should not be subject to additional levies for using OTC derivatives to hedge against risk, the European Association of Corporate Treasurers (EACT) has insisted.

The prominent grouping of European national treasury associations has reiterated its stance in response to a consultation by the European Banking Authority (EBA), which had originally proposed the measure.

Under the EBA’s plans, non-financial companies would no longer enjoy an exemption from the credit value adjustment (CVA) capital charge, introduced in Basel III to compel banks and other financial institutions to hold extra capital while conducting OTC trades. Initially, the rule did not apply to non-financial counterparties (NFCs) – and as such, many well-known brands have attacked the EBA’s intervention as unreasonable.

As The Treasurer reported in December, the EACT co-signed a letter to the EBA from 90 blue-chip corporations that were appalled by the proposed change, arguing that it impacted too heavily upon NFCs’ ability to use derivative trades for risk mitigation.

On 12 February, the EACT heavily intensified its criticism of the plans, saying in its consultation response: “EU NFCs are, for structural reasons, more dependent on risk-mitigation tools than, for instance, their US counterparts, and putting at risk the continued availability of such tools would put EU companies at a competitive disadvantage.”

In particular, it noted, post-crisis financial regulations have “already materially affected the offering of OTC derivative products by banks to their corporate customers”. As a result:

1. Pricing of OTC derivatives has increased, sometimes substantially, and is generally less transparent – probably due to the complexity of the different price components;
2. Hedging long-term exposures has become very difficult, if not impossible – even though some businesses need to hedge for long maturities because of the nature of their industries;
3. Some products, such as cross-currency swaps, have become difficult to obtain altogether; and
4. There is increased pressure by banks to demand collateralisation, even when there is no legal requirement to do so.

Furthermore, the EACT wrote, “the number of banking counterparties has reduced, which in turn increases counterparty risk”. That reduction, it pointed out, has arisen from factors such as i) problems with banks’ delegated reporting; ii) firms ceasing to deal with US banking counterparties because of regulatory uncertainty (largely stemming from Dodd-Frank); or iii) the relative ease of managing the reporting obligations with fewer banking counterparties.

At its most stinging, the EACT’s renewed attack questioned the underlying validity of the EBA’s move to impose such a change, on the grounds that it is a European supervisory authority (ESA), not a legislative body. “In our view,” the group wrote, “the EBA does not hold a mandate to impose supervisory measures that will overrule the democratically agreed [legislation].

“Such action by an ESA would be a dangerous precedent that poses serious questions about legal certainty and visibility in the EU. Policy decisions such as the CVA exemption are solely the competence of the legislator, not the competence of an ESA.”

It added: “Implementing the guidelines will result in materially altering the CVA exemptions and essentially eliminating their beneficial impact on non-financial corporate end-users. Banks will inevitably pass on the cost of additional regulatory capital requirements to their corporate clients.”

Read the full response here.