Whether the CFTC has the authority to require end-user margining may not matter.
Focus on the Commodity Futures Trading Commission’s role on margining may be misdirected. As it turns out it could be the Fed and other prudential bank regulators that have the final say over who and who does not need to post margin. And what is its view? “The Fed appears to believe it must impose margin on all swaps, including end-user hedges,” according to interest rate and currency risk advisor Chatham Financial.
Among several contentious aspects of Title VII of Dodd-Frank legislation is the issue of posting margin. Throughout the rule-writing process, CFTC Chairman Gary Gensler has indicated that his agency has the statutory authority to make the final determination on margining. However, end-users and others say this goes against the intent of Dodd-Frank, particularly the Dodd-Lincoln side-letter, which sought to make clear that a corporate exemption from margining requirements was the intent of the legislation (see related story here).
Yet it could be out of the CFTC’s hands, according to Chatham, which presented at a recent summit of The NeuGroup’s FX Managers’ Peer Groups (FXMPG1 & 2). According to this view, it will be the Fed and other bank regulators that determine whether margining is required. And more importantly, it will not necessarily recognize the end-user exemption that non-financial companies are trying to carve out. Federal Reserve Board Governor Daniel Tarullo, testifying before the House Financial Services Committee in February, said the Fed would require regulated dealers to establish margin arrangements with counterparties depending on the size of the systemic risk posed—even if they qualify as exempt end-users.
But Chatham, which notes that the final rules have not been published, thinks the Fed will take a harder line. Here is a summary of the stand it thinks the Fed will take:
- The Fed believes there is a statutory requirement to impose margin on ALL swaps.
- There are no exceptions for any counterparty.
- The Fed is considering a “threshold” approach that requires all market participants to post collateral after certain thresholds.
- The Fed believes end-users pose little systemic risk. Imposing margin on end-users would be costly and may inhibit their ability to manage risks.
Given these Fed beliefs, companies may actually want to start pushing for more CFTC leadership in this fight. For its part, the agency “could focus on transactions that include swap dealers, MSPs and financial end-users rather than those involving non-financial end-users,” according to Chatham.
But companies are not standing idly. Many are actually taking matters into their own hands and negotiating credit support agreements (CSAs) with their counterparties. According to a banker who presented at the recent NeuGroup’s Treasurers’ Group of Thirty (T30) meeting, more and more of his clients are entering into CSAs to limit their OTC counterparty risks.