For the past several months, regulators at the Securities & Exchange Commission and the Commodities Futures Trading Commission have been drafting . Among other things, the law requires that "standardized" contracts for many market participants be cleared on an exchange or through a central counterparty. Contracts that cannot be cleared must be reported to newly created "swap information repositories." Dealers will be subject to new capital and margin requirements. --or until July of this year--to complete the bulk of their rulemaking activities.
Companies use over-the-counter derivatives -- swaps, options and the like -- for a wide range of hedging purposes, of course. Among the most common are exchanging floating-rate interest payments for fixed-rate payments, hedging foreign-currency risk and hedging commodity costs. In a typical transaction, an investment bank acts as the counterparty.
Other factors could drive costs for end-users higher, too.
While the new law exempts most corporate end-users from margin requirements if they are merely hedging risks--as opposed to speculating--it is widely expected that the dealers will pass their own marginal costs onto their customers.
"With the additional regulation creating more barriers to entry to this market, the banks are going to charge higher prices and find new ways to make money on these transactions," predicts derivatives veteran Reuben Daniels, who recently co-founded independent capital markets advisory firm EA Markets LLC, after serving as managing director and co-head of U.S. investment banking at Barclays Capital in New York.