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Development Bank To Facilitate Lenders' Use Of OTC Derivatives

The African Development Bank has drafted a proposal which would allow the bank's borrowers to use over-the-counter derivatives for the first time to hedge interest-rate, foreign exchange and commodity-linked risks. The bank has used derivatives for its own risk management for about a decade. This development, however, would facilitate the use of OTC derivatives by its lower-rated borrowers, according to Samuel Mivedor, financial analyst in the treasury department in Abidjan, Cote d' Ivoire. "We will be acting as an intermediary between these companies and the banks; all the clients that are eligible for borrowing will be eligible to use the risk management tools," he said.

Without the ADB acting as a go-between entering swap contracts would be too costly for these organizations because of their low credit quality. Mivedor could not quantify how much OTC business this will create, although he noted the bank's commercial lending program provides USD1 billion per year to African companies.

Several derivatives professionals welcomed the move, so long as the Aaa/AA rated development bank stands in the middle. "We would do a swap for any amount; if we have a client that has to do something, we don't ask for a minimum size," said one head of derivatives sales in London.

The ADB enters swaps with "all of the major banks," Mivedor said. He added the proposal is currently in draft stage and formal approval is expected by Omar Kabbaj, the ADB president, later this year, declining to be more specific.

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