Challenges of clearing for non-financial

institutions – a treasury perspective

Michael Spieler, Head of Treasury E.ON Energy Trading

Duesseldorf, 13th December 2012

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 this

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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 sheet

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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.)

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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/ cost

Investment and Hedging strategies as well as tactical hedging decisions need

to consider the cost impact of hedging if cleared financial derivatives are used

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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

time

Non-financials need clear objectives regarding their preferred set-up and a

sound clearing bank strategy

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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-financials

Inherent risks of margining have to be fully understood and managed

(… and always remember the case of Metallgesellschaft )

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