Will European regulation on OTC derivatives bring about an era of fixed rate loans?

Interest rate hedging has been an element of many real estate finance transactions in recent years. This is often achieved by the borrower entering into a swap with the bank which transforms all or part of the loan into a fixed rate transaction. In some cases, the borrower may be permitted to hedge with a counterparty other than the lending bank. All this may change as a result of a draft regulation on OTC derivatives published by the European Commission.

Summary

• Rules proposed by the European Commission will force some borrowers to clear interest rate swaps and other derivatives through a clearing house.
• Borrowers who are not required to clear their swaps will be subject to as yet unspecified risk management rules.
• Typical hedging through a borrower swap may be replaced by fixed rate loan agreements hedged by the bank with another financial institution.
• Borrowers risk losing flexibility currently available.

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Lawyers Rodney Dukes, Martin Yells, Andrew Seager