In a move that reflects the growing caution of derivatives users, Air Products and Chemicals Inc. said it had terminated two currency hedges, though they were "consistent with the company's financial policies and practices."

Air Products was among a handful of companies that reported derivative losses in the past two months, stemming from the use of leveraged interest rate swaps.

The currency hedges appeared to be plain-vanilla derivatives. But losses from the more exotic leveraged swaps at Air Products, Procter & Gamble Co., and others fueled calls for increased scrutiny and regulation of derivatives dealers and users alike, creating a chilling effect in the derivatives market.

Early last month, Air Products reported an after-tax charge of $60 million for the second quarter on five leveraged interest rate contracts with Bankers Trust New York Corp., its dealer. In mid-May, the company said it expected to take an additional after-tax charge of about $9 million on the same swaps in the third quarter.

Wednesday, the Allentown, Pa.-based company said the termination of the two nonleveraged contracts would boost the third-quarter charge to about $14 million.

Export Risk

The two contracts were designed to hedge currency risk associated with anticipated chemical exports.

Because the contracts were meant to hedge anticipated, rather than actual sales, they were subject to mark-to-market accounting, which can create earnings volatility.

Derivatives experts at Emcor, a consulting firm in Irvington, N.Y., said that, while the rules are pretty clear about marking such hedges to market, the interpretation has been somewhat fuzzy at times.

As a result, they said, regulators have begun to crack down, causing accountants to become more firm in applying a strict interpretation of the rules.

Ezra Zask, a derivatives consultant in Norfolk, Conn., said he expects other companies to dump derivatives contracts that are subject to mark-to-market accounting treatment, though that could leave them with market risks that are not hedged.

"There's enough publicity and caution that I think companies will either liquidate [such] contracts, or certainly not take on any new ones," he said.

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