CFTC commissioner says rules may conflict and that users should speak up if there is a problem.
If Las Vegas is putting odds on the occurrence of conflicting rules coming out of the derivatives rule-writing over the next nine months, they’re probably not very long. This fact isn’t lost on the rule writers themselves, one of whom recently acknowledged that there were bound to be problems.
According to a recent Financial Times article, Michael Dunn, who is a commissioner at the Commodities Futures and Exchange Commission, told a New York derivatives conference audience that “unintended consequences” could happen in writing the nearly 100 rules to be written related to OTC derivatives. And if they did, reported the FT, Dunn said market participants have the right to petition for changes to regulations. “Tell us when we’ve made a mistake,” he told the group.
US corporations will have to keep that in mind. Although it appears they have been spared the full brunt of the proposed derivatives rules (so far non-financial entities will be exempt from central clearing), there are still many questions surrounding OTC derivatives rule-making (see related story here), particularly as it relates to margin requirements.
According to Chatham Financial, which recently presented at a NeuGroup Tech20 Treasurers’ Peer Group meeting, there is still “some ambiguity” as to whether regulators will have the ability to impose margin on end users, although “the CFTC has privately indicated that it believes it has authority to impose margin.” Nor have regulators disclosed whether they will impose margin on pre-existing trades, Chatham said.
Corporate treasurers should find this disconcerting because once again, it will raise the cost of doing business. “As we have been arguing for more than a year, a margin requirement could be very damaging to corporate America and the economy at large,” wrote Michael Bontrager, Chatham’s founder and CEO. That’s because requiring margin would likely divert the flow working capital normally used for new projects and investments into margin accounts, “where it would sit idle as collateral for hedges.”
Over the next few weeks and months some of these questions might be answered, as regulators plan to more clearly define what entities will be regulated on December 1. Then in the months following there will be some clarity on what products will be regulated. This is where the “turf battles” will likely begin, Mr. Dunn said. And this is the time corporations and their treasurers will have to stay particularly engaged.