Last minute Dodd-Frank politicking indicates uncertainty with derivatives exemptions.
News this week of last minute political maneuvering to stop the Dodd-Frank (FinReg) bill is creating renewed concerns for corporate hedgers on their OTC derivatives exemption. With the July 4 signing target not being met, corporate hedgers should anticipate more of the same as Republican legislators pick out key language from the bill to try to reopen key provisions and delay passage for as long as possible. Derivatives reform, and the corporate exemption, in particular, is a popular target given that a willingness to exempt legitimate corporate hedging is one of the few aspects of the legislation enjoying bipartisan support (a credit to corporate lobbying).
Weasel words, please
At fault is language concerning margin requirements that is being interpreted as saying that margin requirements “shall” be set against “all” uncleared swaps—even for major swap participants that are not banks.
SWAP DEALERS AND MAJOR SWAP PARTICIPANTS THAT ARE NOT BANKS.—The Commission shall adopt rules for swap dealers and major swap participants, with respect to their activities as a swap dealer or major swap participant, for which there is not a prudential regulator imposing— ‘‘(i) capital requirements; and ‘‘(ii) both initial and variation margin requirements on all swaps that are not cleared by a registered derivatives clearing organization.
While there is a qualification for dealers and major market participants, the fear is that this widens the window of interpretation given to regulators to implement provisions for corporate hedger exemptions. This would be particularly true for commodity hedgers, since commodities don’t have the same blanket exemption as foreign exchange hedges. Sen. Saxby Chambliss (R, GA) tried to use this concern to reopen the issue for debate, but Senators Dodd and Lincoln quickly put a stop to this, promising clarifying language, as did Barney Frank on the House side.
Earlier in the week, legislators found language approved by a House and Senate conference committee, which would have limited the types of swaps that are not sent to clearinghouses, which are required to trade on exchanges or swap execution facilities. According to Bloomberg, “The definition of a swap execution facility only refers to ‘security-based swaps,’ a segment of the $615 trillion in private derivatives that totals no more than 5 percent of the market.”
With some 2,300 pages of text, it is easy to see how some stray wording will yet get through to the signing ceremony. Again, the concern is that when regulators come to interpret the rules set out by the legislation, they will potentially get more room to maneuver with each mistake, not to mention each overly vague clause that gets through. That’s why the fun really begins once Dodd-Frank gets passed.