The latest spending bill from the US government, also known as the Cromnibus bill, could include a little good news for corporate hedgers. That’s because Section 716 of the Dodd-Frank Act, which bans FDIC-insured swap entities from undertaking certain derivatives transactions, could be abandoned as part of the latest House spending package.
The Federal Reserve approved the final 716 rule in December 2013. It would require banks to transact (or push out) their derivatives trade in subsidiaries that are not their insured depository institutions.
But banks have argued the rule would merely increase costs on corporations that use swaps to hedge against everyday business risks, i.e., hedging the cost of commodities or changes in interest-rates. What’s more, many banks argue, the rule could actually pose a greater risk to financial markets by forcing such trading out of regulated banks and into the unregulated shadows. Some regulators, including former Federal Reserve Chairman Ben Bernanke, raised similar concerns before and after its inclusion in the 2010 law, according to reports.
While it’s not yet official – and the hue and cry raised could push the push-out back in – companies could see costs drop slightly. However, with banks under constant pressure to hold every higher amounts of capital and to hold nothing in the short-end, corporates face other banking obstacles.
By the way, the name “cromnibus” does not come from the latest trend in pastries, the Cronut, which crosses a croissant with a donut. According to the Wall Street Journal, the cromnibus, which crosses “two types of spending bills: a continuing resolution, or CR, and an omnibus,” which packs several bills into one and can be passed with one vote. Cromnibus comes from putting the CR and omnibus together.