Central clearing of derivatives introduces new challenges for non-financial companies. Margin requirements affect liquidity and introduce uncertainty around daily cash needs. Non-financial companies often take directional positions when hedging underlying business risks, which can lead to significant margin calls. Most non-financials lack access to central bank liquidity and hold limited cash on their balance sheets. As a result, margin requirements increase hedging costs and could influence investment strategies. Non-financials must also understand clearing bank credit risk and set up objectives for preferred clearing arrangements.

1. Challenges of clearing for non-financial
institutions – a treasury perspective
Michael Spieler, Head of Treasury E.ON Energy Trading
Duesseldorf, 13th December 2012

2. 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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3. 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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4. 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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5. 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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6. 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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7. 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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