In all the furore about the move to regulate OTC derivatives – an initiative gifted to us by G20 politicians on the rebound from the failure of the financial system – there have been some nuggets of commonsense and some frankly worrying arguments.
Most of the bad ‘arguments’ (if they can be so dignified) have in my view been the result of political grandstanding: were politicians ever presented with such an unimpeachable gift of a target as the woeful – yes, I mean it – financial system? A rational and not political argument – but one I strongly disagree with – has been floated that says that corporate end-users of OTC derivatives should get their exemption from the scope of the regulations…..but this should be based on whether or not the derivative being used qualifies for hedge accounting treatment in the hands of the corporate.
Now I don’t consider this passes as commonsense. There are numerous and very valid reasons why a corporate going about its business of risk mitigation may not achieve hedge accounting for a particular business risk and its OTC derivative. Just for starters, international accounting standards in this area were built on the crumbling sand of US accounting rules. There is a major effort underway to achieve international convergence and to do so on a stronger foundation. So, currently less than glorious accounting principles…..
But the real flaw here is to suggest that accounting standards offer a serious platform for global regulation. The challenge in achieving the latter is great (and one that I personally support so long as the politicians are put back in their boxes); but the civil servants in Brussels and Washington need to tackle the flaws in their current proposals from the bottom up rather than setting out to steal a crutch from the IASB as a quick fix to the need to isolate corporate end-users from the seriously adverse consequences of the early drafting. More anon on those adverse consequences.
Richard Raeburn's Blog 