GLOBAL - New regulation in Europe and the US is seen pushing up the cost of using interest rate derivatives, but will not necessarily change trading practices or hedging strategies, according to a new study.

US consultancy Greenwich Associates found that most corporate interest rate derivatives users in its study thought the new Basel 2.5 and III derivatives regulations in Europe and the US would lead to wider spreads in derivatives markets, and ultimately increase their costs of capital.

Asked if the new capital requirements would affect current practices, the most common response was that users thought there would be little or no impact, or that they felt they had too little information about the rules to judge.

Of those worried about the direct and indirect consequences of the regulations, most seemed ready to accept wider spreads without curbing trading activity, the 'Global Interest Rate Derivatives Study' found.

Greenwich Associates consultant Andrew Awad said: "It's a much different story when it comes to margin requirements. A large share of study participants predict that the need to post collateral would cause them to reduce hedging activity and/or cut back their activity in interest rate derivatives."

While many users of interest rate swaps knew they would, at some point, be required to trade through swap execution facilities (SEFs) in the US, and organised trade facilities (OTFs) in Europe, there was still a lot of uncertainty about how new derivatives regulations would hit specific hedging and trading practices, the consultancy said.

But the implementation of Basel 2.5 and III by some leading banks around the world has led to higher credit charges to customers, raising transaction costs for corporate derivatives users, Greenwich Associates reported.

It said the impact of this would be felt even more widely after 2019, when all derivatives dealers will have implemented the new Basel requirements.

Peter D'Amario, consultant at the firm, added: "The capital requirements may well have a more meaningful impact on corporate demand for derivatives than any of the pending regulations specific to derivatives."

The study took in responses from 615 interest rate derivatives users at large corporations, government agencies and finance companies in North America, Latin America, Europe, Asia and Japan.