Despite House passage of two critical bills, doubts remain as to whether corporate derivative end-users will get a critical exemption.
A recent meeting of corporate derivative end-users convened by the US Chamber of Commerce shows there is still work to be done to get the exemptions corporations say they need to effectively hedge business risks. The Tuesday meeting included treasurers and others from corporate finance, who then met with members of Congress as well as US Treasury and Commodity Futures Trading Commission (CFTC) officials. The purpose was to show support and, ostensibly, to show who actually uses derivatives to hedge risk.
That support is needed because the additional economic burden of margining will increase the cost of hedging for many swap users.
One participant at the meetings said that while there appears to be bipartisan support for the proposed exemption measures, election year politicking could scuttle them. At issue are H.R. 2779, a Bill to Exempt Inter-Affiliate Swaps from the Regulatory Requirements of Title VII of the Dodd-Frank Act, which would prevent internal, inter-affiliate trades (and which do not create risk to the financial system), from being subject to the same regulations designed to be applied to market-facing trades; and H.R. 2682, the Business Risk Mitigation and Price Stabilization Act of 2011, which would create a partial exemption from margin requirements for derivatives end-users. The two measures passed by overwhelming margins in the House but could face opposition in the Senate.
The problem appears to be that some Democrats, despite showing sympathy for corporations, want Dodd-Frank to pass “in full and not watered down,” the participant said. “Most agree with our position but don’t want to change [Dodd-Frank].” He added that there were other members of Congress who would like to see the measures fail so they can see what’s wrong and then fix it. “They want it to blow up and then fix it after the fact.”
The group’s interactions with US Treasury and the CFTC were not much more encouraging, the participant said. He said Treasury was non-committal on the measures and both Treasury and CFTC officials indicated Dodd-Frank didn’t have enough bite as it was.
One interested party the group didn’t meet with was the Federal Reserve, which thinks it has the final say on margin requirements (see “The Real Rulers of Margin Rules“). In April US Fed Governor Daniel Tarullo talked about the need to introduce “minimum margin requirements for certain derivatives transactions that are not cleared with a central counterparty.” So while regulatory agencies have listened to their concerns, it could be the Fed who makes the final decision.
For treasurers with an interest in seeing this issue fall its way, now is the time for advocacy.