The US Senate passed legislation January 8 that institutes margin rules for uncleared swaps and largely exempts corporate end-users from those requirements, a long-awaited move giving corporate treasuries more certainty in their hedging strategies.
The Senate’s 93 to 4 vote followed by one day the 416 to 5 approval by the House of Representatives.
In both cases, the bill exempting corporate derivative end-users from margin requirements was attached to legislation reauthorizing for six years the Terrorism Risk Insurance Reauthorization Act (TRIA), which was instituted after the 9/11 attacks. It provides a federal backstop for insurers providing terrorism policies. The legislation now awaits the president’s signature, which he is expected to sign.
The Congressional passage is the culmination of a long effort to exempt nonfinancial corporates from uncleared swap margin requirements. Opponents of those requirements argued they were never meant to be incorporated in the Dodd-Frank Act, but US banking regulators’ conservative interpretation of the financial reform law raised concerns they would require banks to impose margin on corporate customers.
“[Financial Executives International] and its Committee on Corporate Treasury are grateful to the House and Senate for providing much needed clarity that Dodd-Frank does not, and for ensuring that financial regulators cannot impose unnecessary regulatory requirements and costs on the use of derivatives by non-financial end-users,” said Robert Kramer, vice president, government affairs, at FEI. “These companies are seeking only to mitigate their business risk and do not contribute to systemic risk.”
The prudential regulators first proposed in 2011 to require swap dealers to establish exposure thresholds with their nonfinancial counterparties that, when exceeded, required margin to be posted. The regulators pleasantly surprised swap market participants September 2, 2014 by issuing a re-proposal that for all practical purposes exempted nonfinancial derivative end users from margin requirements It shifted the responsibility of whether to impose margin entirely on swap dealer counterparties, essentially returning to the status quo.
The regulators have yet to pass a final rule, but even if they had finalized a regulatory fix it would have remained problematic compared to a legislative solution.
“Regulations are subject to change by regulatory authorities at any time,” said Tom Deas, treasurer of FMC Corp. and a director of National Association of Corporate Treasurers responsible for regulatory issues. “So it’s difficult for companies to plan when they have to provide for the possibility that the exemption could be withdrawn.”
The Coalition of Derivative End Users, of which NACT is a member, has long argued that corporates use swaps for hedging purposes and did not play a role in the financial crisis. In letters to Congress it explained margin requirements would be detrimental to the overall economy. A coalition survey found the requirements could funnel as much as $5.1 billion to $6.7 billion away from productive commercial use among the S&P 500 companies alone, costing 100,000 jobs or more.
“In another Coalition survey, more than two-thirds of corporate treasury respondents reported that a margin requirement on uncleared OTC derivatives would have a moderate or severe impact on capital expenditures,” the Coalition said.