Attempts at Relief and Reform


Posted on Tuesday, March 15, 2011

Lawmakers, End-Users Press for Greater Clarity on Pending Derivatives Regulations; Jobs, Capital Could be Hurt by Overly Broad Application of New Margin Requirements, Survey Shows

Regulatory implementation of the Dodd-Frank Act’s derivatives provisions was again under scrutiny this week, as two congressional committees sought clarification of how broadly new margin requirements would be applied, and as a survey of U.S. companies showed substantial job losses arising from overly broad restrictions on over-the-counter (OTC) derivatives transactions. (See news release)

The survey, released Monday by the Coalition for Derivatives End-Users, found that if U.S. companies were required to put up 3 percent cash collateral on every OTC derivative trade, with no exemptions, capital spending by those firms could contract up to $6.7 billion annually, and 130,000 jobs could be put at risk (The Wall Street Journal, Feb. 13; Dow Jones, Feb. 14).

The analysis, based on the responses of 74 firms (30 percent of which are members of the S&P 500), also showed significant ambiguities among non-financial companies about potential requirements they might face under Dodd-Frank.

Nearly half of the firms polled said they are unsure whether central clearing and trading requirements would apply to them (44 percent), or whether they will be required to post collateral for hedges that have not been centrally cleared (49 percent). According to the Coalition, this uncertainty explains why 50 percent of the survey participants are not sure if they will be able to disclose Dodd-Frank’s impact on their next financial statement.

Another unintended consequence of the ambiguity over Dodd-Frank and its implementation is that many U.S. companies could be tempted to move their capital and jobs overseas. Forty-six percent of the companies polled indicated they would evaluate the ability to transact in foreign jurisdictions as a result of OTC restrictions and regulations in the United States.

As the Journal reported, a bipartisan group of 13 senators, led by Sen. Mike Johanns (R-NE), wrote to regulators this month urging them not to apply margin requirements to end users’ OTC derivatives. “Imposing margin requirements on those who engaged in the hedging of legitimate business risks would not only blatantly disregard the end-user exemption and Congressional intent, but it could also have the effect of draining scarce working capital from the balance sheets of mainstream American companies,” the senators wrote. (see letter at Roundtable Weekly, Feb. 4)

U.S. Commodity Futures Trading Commission Chairman Gary Gensler reportedly faced sharp questioning on these issues at a House Agriculture Committee hearing last week. This week, he returned to Capitol Hill to face additional questioning on derivatives, testifying before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Thursday.

At Tuesday’s hearing, Gensler reportedly sought to reassure GOP committee members and expressed support for a broad-based exemption from margin requirements for non-financial companies, although he noted the important role of other regulators in determining this issue, the Financial Times reported Feb. 16.

“Proposed rules on margin requirements should focus only on transactions between financial entities rather than those transactions that involve non-financial end-users,” he said. “We’ll get this margin thing right — we understand congressional intent on that.”

House Financial Services Committee Chairman Spencer Bachus (R AL) has expressed concern about nonfinancial companies being locked out of the derivatives market because of expensive margin requirements. "Requiring companies that did not cause nor contribute to the financial crisis to be treated like banks will unnecessarily remove capital from the economy," he said in a statement issued Tuesday.
Gensler was joined on the HFSC witness panel by SEC Chairman Mary Shapiro and Fed Governor Daniel Tarullo. (See testimony of all witnesses here).

Overseeing implementation of last year’s Wall Street reform law will be the top priority of the Senate Banking panel, according to a memo obtained recently by Reuters (Feb 7).

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