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September 22, 2010 2:09 am
IBM could have to hold off on acquisitions and see its organic growth stunted if it is included on a list of major derivatives users, the technology group’s director of global funding said.
Large companies in the US are lobbying hard to escape being designated “major swap participants” by regulators implementing the Dodd-Frank financial reform act. Such a designation will require companies to post margin against derivatives trades.
Tammy Evans, director of global funding at IBM, said if the company were designated an MSP “you could potentially have $5bn of capital that’s held up with margin requirements” on its $40bn-$45bn derivatives portfolio.
“That equates to a year’s worth of acquisitions and so that would either eliminate the ability for us to go and acquire companies or do some organic growth ... and obviously ... [have] an impact on jobs,” she added at a conference on derivatives organised by the US Chamber of Commerce.
IBM said later: “Our model makes a lot of assumptions and the government hasn’t yet declared how the margin might be calculated.”
The warning from IBM is one of the starkest issued in public by a large multi-national group but a raft of companies are concerned that they could have to lock up capital as the financial reforms are implemented.
“It is the potential margin requirements which not only have the financial and liquidity burdens but also an administrative burden,” said Christine McCarthy, treasurer at The Walt Disney Company.
Gary Gensler, chairman of the Commodity Futures Trading Commission, which is drafting rules with other agencies, signalled that most companies worried by the MSP designation would not be included.
He pointed to AIG, the insurance group bailed out by the US government, and Long Term Capital Management, the hedge fund that was bailed out by Wall Street in 1998, as examples of companies with large risky derivatives books that required closer regulation.
“Most end-users ... are not likely to fall within the major swap participant category,” he said.
Warren Buffett, Berkshire Hathaway’s chairman, has warned that such a move would be highly disruptive to companies and markets.
Charles Mills, a partner at the K&L Gates law firm, said: “It seems there’s no real appetite I can detect to have retroactive application.” He added, however, that the future regime for derivatives that are not traded through clearing houses was a bigger threat.
“Going forward, if you have a non-cleared swap are margin requirements going to be imposed on you? That is an area where end-users aren’t out of the woods,” he said.
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