One bill seeking to eliminate the imposition of swap margins on non-financial corporates and another limiting the jurisdiction of federal rules impacting swaps passed the US House of Representatives June 12—both by significant margins—and they now move to the obdurate Senate.
The Commodity Futures Trading Commission (CFTC) has said the Dodd-Frank Act gives it statutory authority to impose margin on nonfinancial end users, but it has proposed rules that mostly exempt them from margin. The banking regulators’ proposal, instead, would require banks to impose margin when a threshold determined by the bank is reached.
Introduced two years ago, the bill passed the house on a 411 to 12 vote. A Senate version was introduced in May that, as of June 14, had bipartisan mix of 13 co-sponsors.
“While the regulations proposed by the [CFTC] are preferable to the regulations proposed by the prudential regulators, the Commission’s regulations do not provide end-users with the predictability and assurance that H.R. 634 provides,” said the Coalition for Derivatives End-Users in a memo that was distributed to legislators a day before the vote.
The coalition’s letter further states that a survey found initial margin of 3 percent could “reduce capital spending by as much as $5.1 billion to $6.7 billion among the S&P 500 companies alone and cost 100,000 to 120,000 jobs.”
Tom Deas, treasurer of FMC Corp and chairman of the National Association of Corporate Treasurers (NACT), a member of the coalition, said the bill must next be addressed by the Senate’s banking and agriculture committees, which each have jurisdiction.
“[The coalition] has talked to as many people as we can—Senate committee staffers and senators themselves—and nobody has come up with substantive issues with this margin bill. To the extent they have concerns, they’re procedural,” Mr. Deas said.
Procedures, however, can present major hurdles in the deliberative Senate, where concerns may lie about unforeseen consequences. In favor of bill, Federal Reserve Chairman Ben Bernanke has testified he does not see end users engaging in risky behavior with derivatives.
“The Coalition for derivative end users hopes these procedural issues can be overcome and we can do what’s right for American business,” Mr. Deas said.
Passing the House on the same day, by a 301 to 124 bipartisan vote, was a bill to allow US corporations to follow foreign derivative regulatory rules if they’re “broadly equivalent” to US rules. Its language tilts more to a proposal by the Securities and Exchange Commission than the CFTC’s, which would require more of a rule-by-rule comparison of regulatory regimes that some argue would be resource intensive and could result in having to apply two sets of rules to a transaction.
The bill is saying “as long as the [rule regimes] achieve generally the same outcome we should be satisfied, and that’s important because the CFTC’s approach is much more a rule by rule analysis,” said Luke Zubrod, director at Chatham Financial.
The bill also requires the two US regulators to compromise and gives them more time to determine if there’s mutual recognition with other regulatory regimes, permitting corporates to use the foreign rules instead. In addition, the bill defines “broadly equivalent” by saying “the objective of the foreign rule regime should be comparable to ours, that the effectiveness of the supervisory regime should be similar, and the enforcement authority should be exercised,” Mr. Zubrod said.
The Senate’s members have expressed concerns about derivative activity moving to foreign jurisdictions with weaker rules that would be outside of US regulatory oversight. While the bill is unlikely to pass the Senate or be signed into law by the president, Mr. Zubrod said, its passage in the House could pressure the CFTC to loosen its more stringent and complex approach. The White House has signaled it would veto the bill.