CFTC Chairman Gary Gensler tells Congress that corporates need not worry about margining.
CFTC Chairman Gary Gensler tried to reassure Republican congressmen and businesses that his agency will stay consistent with the Dodd-Frank rules and only impose margin requirements for financial companies.
Chairman Gensler previously had spooked corporations with comments that indicated he could arbitrarily impose margin requirements on companies in order to “…‘help ensure the safety and soundness of the swap dealer’ and set capital and margin requirements that are ‘appropriate for the risk associated with the non-cleared swaps,’” which he said in a November 2010 speech (see related story here).
But in testimony on February 15, 2011 before the House Financial Services Committee, Chairman Gensler reassured companies like Caterpillar and MillerCoors that hedging their commodities won’t increase the costs of their products. “We’re aware and focused on the cost of a six-pack,” Mr. Gensler told lawmakers. “We’ll get this margin thing right. We understand Congressional intent.”
As expected, the hearings have had a different tone now that Republicans are in control. House Financial Services Committee Chairman Spencer Bachus began the hearings by saying that jobs were at stake if the new derivative rules are applied to US corporations. “Let’s be clear up front right at the beginning of this hearing: End users of derivatives did not cause the financial crisis,” he said. Instead, “they were among its victims.”
Rep. Bachus said that although the 2,300-page Dodd-Frank Act was “promoted as being directed at Wall Street, as we are coming to understand more clearly, it is the end users of derivatives who will bear so much of the regulatory brunt of this law.” He added that close to 130,000 jobs could be lost if US regulators impose new restrictions on derivatives transactions too broadly, citing a study released on February 14, 2011, that made that claim. That study, however, has been widely panned as mistake-ridden. Professor John Parsons at MIT, who teaches a course called Advance Corporate Risk Management, highlighted some of those mistakes, including one that assumes the collateral requirement “is a deadweight cash flow cost to the companies. (See his points here).
Also testifying with the CFTC chairman were Daniel K. Tarullo, a Federal Reserve Board governor, and Mary Schapiro, chairwoman of the SEC. Mr. Tarullo said in reference to margining that the Fed would require margin depending on the size of the systemic risk posed by end users. Ms. Schapiro said that in proposing margin rules, the SEC “will be mindful both of the importance of security-based swaps as hedging tools for commercial end users and also of the need to set prudent risk rules for dealers in these instruments.”