Impact of EMIR and BASEL III on Non-Financial-Corporates’ Hedging Activities and their Response.

Abstract

This dissertation aims to explore and evaluate the impact of regulatory initiatives on corporate hedging activities of the non-financial-corporates (NFCs) and corresponding corporate response for risk and return considerations. Corporate hedging and corporate risk management have been extensively studied in finance literature. However, the previous research and theories focused on the rationale to hedge and the optimal hedging mechanisms and failed to consider regulation as an influencing factor. Subsequently, the existing research and theories do not provide a theoretical framework to analyse the impact of regulation on corporate hedging activities (CHA). This study, as such caters to this lacuna and explores the willingness and ability to conduct corporate hedging, as well as formulating an organisational response to manage the impact of regulation. Despite this gap, the literature review allowed a pre-conceptualisation of a model to analyse the impact of regulation on CHA. Subsequently, the study also yielded an initial conceptual framework based on ideas from literature relevant to corporate hedging and organisational response to regulation. The initial model and conceptual framework brought more focus into the research phase and allowed the usage of deductive qualitative analysis (DQA) procedures (Gilgun, 2010). Based on qualitative data from 12 German NFCs, a model (i.e., the impact-analysis-model, IAM) has been developed to systematically analyse the impact of internal and external actions/actors on CHA. This model addressed the first research question (RQ1), namely how EMIR and Basel III impact CHA of German NFCs. The RQ1 findings show that EMIR impacted NFCs mainly through increased costs, higher requirements for systems and processes, and an increased knowhow requisite. Basel III impacted the NFCs by leading to higher costs and less offers for complex and long-dated derivatives. Overall, the impact is regarded as moderate, which failed to affect any changes in the CHA. Furthermore, in the current study, the responses of the NFCs have been investigated and conceptualised based on the organisation response set of Cook et al (1983). The findings here show that NFCs mainly referred to managerial level responses with the impact on their activities categorised as moderate. Finally, the study proposes an integrated conceptual framework. This study offers significant relevance towards risk management and treasury practitioners as well as theorists, regulators, and other policy makers.