Who Will Pay For Derivatives Reform?

WASHINGTON (TheStreet) -- With all the doomsday predictions of how derivatives reform will impact the financial industry, it's worth asking how much the measure currently being debated in Congress will cost.

The short answer: "It's difficult to say," according to Luke Zubrod, a consultant with Chatham Financial who works with derivatives end-users.

The overall cost estimate has been a moving target for the past several months. As Congress comes up with changes to the bill -- seemingly by the hour -- the estimates change as well. At the moment, there appear to be three main components to consider.

The two primary "costs" deal more with liquidity than costs, though they would tie up money nonetheless. The latest Senate bill would require certain end-users to post margins on trades and require broker-dealers to post capital against the risk that a trade goes bad. (The Senate failed to get the necessary 60 votes to invoke cloture, end debate on the bill, late Wednesday).

Corporate customers are against this idea because it could mean taking on new debt to use as cash collateral, or tie up funds that could be used to grow the business.

"It may not be a terribly expensive activity, no more expensive than having a company borrow money to meet the collateral requirements, but it's a question of companies not wanting to set aside precious working capital to take care of derivatives trades," says Zubrod, "If they don't want to do that, they won't hedge, and [the] ultimate cost of that is taking on more risk and more volatility."

In theory, the cost of doing business would then rise, either shrinking profit margins or creating higher consumer prices. In other words, if you think summer travel is expensive now, imagine the price if Delta (DAL) and Continental (CAL) couldn't hedge their fuel costs.

Or, if the price of a can of soda seems to have risen a lot in recent years, imagine how much it would cost if Coca-Cola (KO) couldn't hedge against currency swings. Most of its revenue comes from Europe -- while its workforce is centered in the U.S. -- and it gets bottling materials from other parts of the world as well.

On the banking side, the biggest uncertainty -- and potentially the biggest cost -- may be capital requirements. Banks fear that regulators will impose overly stringent requirements in an effort to snuff out the market for exotic derivatives. While those types of bets brought down American International Group(AIG) and put Goldman Sachs'(GS) feet to the fire, it's been a profitable business for Wall Street, and helped mitigate risk for clients with specific insurance needs.