Treasury 101 for the European Parliament’s ECON?

April 21, 2010

I’m wrestling with preparing my seven and a half allotted minutes to address the European Parliament’s ECON (Committee on Economic and Monetary Affairs) on the regulation of OTC derivatives.  I know from long experience that ‘talking treasury’ to those for whom the subject is a dark art – or worse – can be challenging.  What I face is I think more difficult still.

There’s clearly a priority to convey the message that forcing OTC derivative transactions by corporates (the ‘non-financial end users’) into central clearing would be a policy error of some gravity.  I believe that those working on the issue within the European Commission’s DG Markt team largely understand this – although they would I hope be willing to admit that last September they were not on this particular page of the debate.  But the politicians within Parliament in Brussels share a ragbag of well argued views, opinion and pure prejudice about what is really at stake.

So it seems to me that I have to make the ‘policy error of some gravity’ point but then undertake a little treasury education – back to Treasury 101: why corporates use derivatives and how do they do this.  I then want to make the point that systemic risk is (in the phrase I plan to use) an imaginary demon so far as the corporates are concerned: that risk is a characteristic of the inter-connectedness of financial institutions, without linkages to corporate failure.

I have also been advised to talk about SMEs, as these are a particular concern to Werner Langen, the rapporteur who prepared ECON’s ‘own initiative’ report on the OTC issue.  I am struggling in particular with this as I have difficulty seeing why we should distinguish between the largest corporates and SMEs.  I know why politicians and others think we should – because there is an implicit assumption that the largest corporates are responsible for systemic risk.  But if you don’t buy the systemic risk story then I suppose the circle is squared – in my mind if perhaps not in the minds of everybody else.  Back to the drafting.

2 Responses to “Treasury 101 for the European Parliament’s ECON?”

  1. Inky Sooty Says:

    Good luck, Richard.

    It might be worth bringing up the millennial corporate bankruptcies – Enron, WorldCom, Tyco, Global Crossing, Adelphia. Obviously Enron was a big derivatives user, and I’d assume the others had fair-sized portfolios as well. All of these companies failed within – what – an 18-month period? Was there any contagion? Any fears that they’d create a domino effect that took down the rest of the system?

    Of course not. Compare that with Lehman and AIG, and I think your point is made (as long as you can make it clear that those corporate bankruptcies weren’t CAUSED by derivatives, of course!).

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