Several months into the Dodd-Frank rule-making and it’s clear that companies need to make their voices heard.
Five months into the rule-writing for Dodd-Frank and despite reassurances from regulators that all’s going smoothly, it doesn’t really seem like it. Comments from those within the ranks of the rule-writers hint that the mid-July deadline might be overshot and that the short creation period will produce unintended consequences.
In the meantime, bankers are lobbying hard to influence on how the rules will be written. Their comment letters dominate the Fed, SEC and CFTC websites, and, as the Charlotte Observer wrote in a story today, they’re making frequent visits to regulator offices “armed with a PowerPoint presentations” to lobby on this or that part of the legislation.
But what is becoming clear, particularly in light of recent comments from the CFTC Chairman Gary Gensler on margining (see story here), is that non-financial corporations are going to have to step up their efforts to influence policy, too.
Damned if they do, damned if they don’t
As alluded to above, CFTC Chairman Gary Gensler has indicated his belief that Dodd-Frank gives the CFTC authority to impose margin requirements on end-user transactions. For corporate treasury, this adds another layer of uncertainty and, as Pricewaterhouse Coopers notes in a report, it may now be causing some companies to set aside ‘just in case’ funds for the possibility of posting margin.
But actually no matter the outcome, companies could get hit with higher costs, according to PwC. If they do have to hold margin, they’ll likely have to set up infrastructure “to assign fair value to swap positions on a daily basis” in order to track and comply with margin posting requirements. And if they don’t have to hold margin, major swap participants “will either pursue corresponding margin posting or otherwise pass their added costs on to their end-user customers, making it more expensive to transact in swaps,” PwC said.
Hedge effectiveness
Other issues related to Dodd-Frank and derivative legislation have to do with hedge effectiveness. It is still unclear which types of swap transactions will have to be centrally cleared and whether those that are centrally-cleared swaps will be standardized (commercial end-users will have the option of choosing whether a swap should be centrally cleared, according to PwC). However, for exchange-traded swaps, standardization is expected “and will likely result in more hedging ineffectiveness, due to likely mismatches between hedged exposures and standardized derivatives, which may increase income statement volatility,” PwC said.
So for companies thinking of writing letters or joining an industry group to do so, now is probably the time to act. While the recent mid-term elections will mean a change of leadership on various committees – and thus possible changes again to Dodd-Frank – it’s still critical to get involved and make the company’s position known.