Although Dodd-Frank offers exemptions to non-financial end-users of derivatives, they’ll still see costs increase.
While nonfinancial derivative end-users have been successful in carving an exemption from clearing requirements, they’re not out of the woods when it comes to paying to use derivatives to hedge or mitigate commercial risk.
As a recent Fitch report on derivatives noted, “in spite of the exemption, increased reporting, infrastructural, collateral, and margining requirements are likely to subject many nonfinancial users of derivatives to increased costs.”
So they get the exemption but still get some of the costs associated with not having the exemption. To be sure, at least a few people in the regulatory camp are on their side. One is Scott O’Malia, commissioner at the Commodity Futures Trading Commission. In a May 22, 2012 speech, he told members of nuclear industry conference that the CFTC needs to define bright regulatory lines and most of all, make the rules less burdensome. “We need to ensure that hedging and price discovery remain cost effective, encourage liquidity, and continue to be the hallmarks of our jurisdictional markets in support of, and attendant to, the goals of the Dodd-Frank Act,” Commissioner O’Malia said.
“One commonality among all end-users is the desire to have clear rules that don’t interfere with their ability to cost-effectively access to swaps and futures markets to hedge commercial risk—which they have in spades. The level of sophistication among commercial firms varies as does the extent of their trading. However, their primary business or ordinary business is producing or manufacturing products, not trading. Futures and swaps markets are both critical to price discovery and hedging. Swap market users, however, generally require more customized trades unique in location, duration or size that don’t neatly match-up with standardized futures contracts.”
Gathering forces. On June 19, 2012 many Fortune 500 end users will meet at the US Chamber of Commerce to discuss how they can keep those exemptions and meet with members of congress. The purpose of the meeting is “for treasurers, assistant treasurers, CFOs and other finance professionals to make their case to key congressional offices.”
Specifically the Chamber is hoping to gather more support (especially the support of actual end-users) for Senate passage of two bills that were already passed by the House March 26, 2012: H.R. 2779, (Bill to Exempt Inter-Affiliate Swaps from the Regulatory Requirements of Title VII) and H.R. 2682, (Business Risk Mitigation and Price Stabilization Act of 2011). According to the Chamber, these bills will create “clear end-user exemptions from Dodd-Frank derivatives requirement.”