BPF and Zia fight OTC regulation

Draft European Union (EU) regulation intended to inject greater transparency into the over-the-counter (OTC) derivatives market could result in “market instability and systemic risk” for both the property and banking industry, the British Property Federation (BPF) has warned.

The purpose of the EU regulation is to deal with risk-taking in the OTC derivatives market which is thought contributed to the economic crisis. The draft regulation requires financial businesses to clear their derivatives centrally and provide cash collateral, or “margin”, to cover their exposure under those derivatives.

Most ordinary businesses that use derivatives simply to protect themselves against risks such as climbing interest rates or currency movements are exempt but property businesses will be treated in the same way as banks or derivatives dealers.

The BPF joined with German property federation ZIA to write a letter to Members of the European Parliament (MEPs) warning that systemic risk in the property finance market would increase if property businesses were forced to provide cash margin on interest rate swaps and other hedging derivatives.

They wrote that companies would be forced to adopt different hedging strategies that did not expose them to the risk of needing to fund margin calls, and those strategies would almost certainly be less safe and efficient than the swaps currently used in the market.