Rolls-Royce Says Derivatives Rules Could Crimp Future Investment

Rolls-Royce Holdings Plc Finance Director Mark Morris said today that financial services regulators risk harming industrial companies and growth prospects with new rules on derivatives trading.

Restrictions being considered could hurt the ability of companies such as Rolls-Royce, Europe’s largest aircraft engine maker, to manage exchange-rate and other financial risks, Morris said at a British Bankers’ Association meeting in London.

The prospect of new regulations comes as industrial companies deal with the results of banks cutting lending to maintain higher capital reserves. Since 2008, aerospace companies’ customers and suppliers have had more difficulty in obtaining loans.

“There is a real danger of gold-plating regulation,” Morris said. Regulators have so far failed to work with companies to assess the effects of new financial rules, he said.

Regulations that require businesses to put up more money for derivatives transactions means investment spending could suffer because of the effect on companies’ capital, Morris said. Although many regulators have recognized the potential effect on growth and provided exemptions for companies such as Rolls-Royce, Morris said those terms could be reversed through the so-called Basel 3 framework and other proposals.

Regulators in Europe should work with those in the U.S. and other regions to harmonize regulations, Morris said. Such standardizing is particular important for companies such as Rolls-Royce, which operates in many markets, with facilities in countries including the U.K., Germany, the U.S. and Singapore.

Lending Costs

Large companies such as Rolls-Royce have seen lending costs come down to near pre-crisis levels, Morris said. Suppliers, though, “can’t get access to financing,” he said.

That is a problem for Rolls-Royce, which is boosting output to keep up with strong demand from aircraft makers such as Boeing Co. and Airbus SAS. Rolls-Royce has started providing supplier financing out of necessity, Morris said. Airbus-parent European Aerospace, Defence & Space Co. has also stepped in to work with struggling suppliers.

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