Derivatives Regulation Case Study: Regulatory Compliance Assessment

Our Client:

A Fortune 100 technology company with international operations and multiple hedging programs involving exchange-traded and over-the-counter (OTC) derivatives across different asset classes, including foreign exchange, interest rates, and credit.

Situation:

The company was concerned about the impact of new derivatives regulations on its hedging programs, including how the parent company and numerous subsidiaries might be classified under Title VII, what new regulatory requirements might apply, and the extent to which hedging costs may increase due to new regulatory requirements. The client’s hedging programs spanned multiple global regulatory jurisdictions and included several different entities including both financial and nonfinancial entities.

Summary:

Chatham conducted an in-depth review of the hedging programs, spending two days onsite at the client’s premises to interview stakeholders within the company, including representatives from treasury, risk, operations, legal, and accounting. In addition, Chatham did a comprehensive assessment of the client’s use of derivatives and how the proposed OTC derivatives regulations could affect its derivatives risk management strategy in terms of work flow, transaction cost, liquidity, and operations.

Outcome:

Chatham completed and presented a comprehensive impact analysis to senior management which identified over a dozen areas of impact, including the extent to which inter-affiliate transactions would be regulated, the impact of clearing, and the applicability of certain exemptions under Title VII. Chatham proposed several potential solutions for the identified problem areas, and detailed over 30 action items for the client, including recommending specific modifications to hedging programs which could reduce the costs of regulatory compliance. Based on these findings, the client has initiated, in collaboration with Chatham, a corporate communications strategy and a full implementation plan of the actions to ensure full regulatory compliance.