The clearly unclear state of affairs continues as to what needs to be cleared and what doesn’t. Time to engage.
We are now in the Dodd-Frank Act’s rule-making phase and it is time for corporate hedgers, if they haven’t already done so, to get engaged in the discussion as to what types of hedges will be exempt for corporatations. So far, the major areas of concern for corporate hedgers, or “non-financial end users,” in Washingtonese, are:
- Will their hedge activities qualify as mitigating commercial risk? If yes, then they will be exempt from central clearing requirements (known as the end-user exemption). But, commercial end users’ transactions that do not qualify as “hedges” are subject to requirements applicable to financial entities. How does a corporate know which is which? Not yet clear. How do you get an exemption? By notifying the CFTC board and getting one. How often and based on what? Not yet clear.
- Will there be an exemption for FX forwards? For a long while it looked like there would, but in the final wording of the law, the Treasury Secretary instead has the discretion to exempt FX swaps and forwards from the central clearing requirement. No word from Mr. Geithner on where he stands yet, but the law requires he take into account whether they create systemic risk; are already regulated elsewhere; are supervised for capital requirements; there are adequate settlement systems; and whether their use is to avoid the use of non-exempt derivatives.
- What about balance sheet hedging? The reference to it in the end-user exemption did not make it into the Act. But if FX forwards are exempted, many corporate BS hedgers are in the clear, since that’s all they use.
So there is a lot still unclear about what lies ahead. But what is very clear is that it is a very politicized environment. In an effort to be seen as tough on the financial industry in a competitive election year, various members of Congress have been inclined to push rules through. One key player to watch will be Blanche Lincoln (D-AR), as she has been one of the most vocal lawmakers in favor of tougher restrictions. But as she’s in a heated re-election race some of the toughest measures being discussed may not come to fruition if she loses — and she is trailing significantly in September polling.