Michael Spieler, a Treasury Perspective


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Michael Spieler, a Treasury Perspective

  1. 1. Challenges of clearing for non-financialinstitutions – a treasury perspectiveMichael Spieler, Head of Treasury E.ON Energy TradingDuesseldorf, 13th December 2012
  2. 2. Introduction Non-financials enjoy certain exemptions under EMIR and MiFID but a reinforcing trend towards central clearing and collateralization expected (and can already be observed in certain markets) As a result also non-financial companies will have to deal with central clearing and its consequences for liquidity management, financing, credit risk and processes if they wish to employ financial derivatives for hedging purposes on a cleared basis. In addition, non-financials need to understand the cost impact these consequences might have and review their investment and hedging strategies in light of this2
  3. 3. Impact of Central Clearing on Finance Margin requirements affect a firm´s liquidity and balance sheet Margin requirements introduce uncertainty regarding a firm´s daily liquidity needs and financial position Non financial companies use financial derivatives to hedge their business, as consequence they tend to have directional positions as the underlying (e.g. power stations) will not be cleared Hedging for non-financials often mean to secure earnings on a mid-term basis Length and directional position combined can lead to material cash swings! Most non-financial do neither have ECB access nor hold excessive excess cash or liquid assets on the balance sheet3
  4. 4. Measures to cope with finance impact Understand, Measure and Monitor Margining Risk (short and long-term impact) Agree measures to limit and manage margining needs Reserve liquidity buffer (same day availability of cash is key!) Include margining risk in your balance sheet planning (reserve debt capacity) Explore options to reduce margining risk (bank guarantees, margining lines etc.)4
  5. 5. Impact on Hedging Cost As margining requires a liquidity buffer and consumes a firm´s debt capacity it increases the cost of hedging for non financials In certain circumstances this might even influence the investment strategy and program of a company In addition, the margining management and processing will increase process requirements/ costInvestment and Hedging strategies as well as tactical hedging decisions needto consider the cost impact of hedging if cleared financial derivatives are used5
  6. 6. Clearing Set Up Currently the use of clearing banks is mandatory for non-financials at most exchanges As a result non-financials are exposed to clearing bank credit risk and not to the clearing house Segregation of accounts possible but depending on the jurisdiction of the clearing bank and vulnerable in case of fraud (MF Global) EMIR regulation addresses the fact but implementation will still take some timeNon-financials need clear objectives regarding their preferred set-up and asound clearing bank strategy6
  7. 7. Summary Clear trend towards clear markets will affect non-financials even if they are exempted Non-financial Hedgers are affected by margining risk due to their position profile and missing access to central bank liquidity Financial impact of margining adds to the cost of hedging Central clearing does not remove credit risk for non-financialsInherent risks of margining have to be fully understood and managed (… and always remember the case of Metallgesellschaft )7