Euro Plunge Shows Why Derivatives Matter

NEW YORK (TheStreet) -- Worries about how the euro's swing will impact multinational, blue-chip corporations also highlight the way financial regulatory reform will reach beyond Wall Street.

Congress is still haggling over the measures that will be included in a wide-ranging reform bill which aims to restructure the way banks operate. One issue in particular -- derivatives -- has gotten a lot of attention. That's partly because derivatives are used by a wide array of businesses, from Coca-Cola (KO) to Delta (DAL) to Nike (NKE), to protect their core results. Products like swaps, options and futures allow non-financial firms to concentrate on growing the business instead of worrying about currency, interest-rate and commodity price fluctuations.

>>Nonfinancial Companies Impacted by Derivatives Legislation

Sen. Chris Dodd (D., Conn.), who structured the bill now being negotiated, has proposed that these plain-vanilla derivatives be traded on an exchange. Such a move might garner better derivative-product pricing for the Cokes and Nikes of the world, but it may also raise the cost of doing business with banks, since their costs of compliance will rise.

As a result, corporate lobbying groups have been fighting against measures that would put derivatives on openly traded exchanges. The Coalition for Derivatives End-Users, which includes the Chamber of Commerce and other entities, recently issued a statement arguing that its corporations shouldn't have to foot the cost of financial reform. The group supports an amendment by Sen. Saxby Chambliss (R., Ga.), which would exempt common over-the-counter derivatives from clearing requirements and higher margins.

"If implemented, we believe many end-users of derivatives would be forced to divert precious working capital away from productive use to margin accounts, move their hedging practices overseas, or forego hedging altogether -- leaving them exposed to the volatility and price uncertainty that OTC derivatives have so effectively mitigated," the coalition said.

Perhaps more importantly, the euro contagion shows why derivatives are important -- not just to banks, but to corporate America as well.

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