Dealers are breathing sighs of relief. Should corporates be equally pleased?
The House Agriculture Committee’s May 4 passage of a bill delaying implementation of Dodd-Frank’s derivatives-related rules is an obvious win for dealers and major swap participants. If the bill makes it into law, it will give their lobbyists another 18 months to undermine the integrity of the Act and its supporters. Whether treasurers should applaud the delay is another matter.
While the bill garnered headlines, its importance is easy to overstate. First, the Ag Committee is the younger, more reactionary,sibling of the House Financial Services committee. Its influence in financial regulation is usually limited to derailing new rules.
Ag had little to do with the drafting of Dodd-Frank; its involvement in financial oversight is only due to the historical accident of its purview over the Commodity Futures Trading Commission through its interest in agricultural futures. Gary Gensler, the CFTC chair, has already said some of the Dodd-Frank rules will not be ready by the July deadline.
The Financial Services Committee is the real force behind financial regulation in the House. It will take up the bill (H.R. 1573) on May 12.
Also, although Republicans may be able to push the bill through the House, it could easily be derailed in the Democrat-controlled Senate or subsequently vetoed.
The Devil you know
But the bill does not change the Dodd-Frank calculus. Administration-friendly regulators will still write the rules. Any further legislative attempt to gut Dodd-Frank would give Democrats, already armed with the charge that Republicans want to eviscerate Medicare, more ammunition for the 2012 election. Support for repealing Dodd Frank is being heard less frequently, and mainly from the right-wing fringe.
Also, between now and the end of 2012, a number of things could happen that might cause regulators to craft rules in such a way that they could adversely impact corporates (by forcing them to post margin and collateral on bilateral trades, for example).
– There could be another major derivatives blow-up. This is not too far-fetched; many of the most toxic pre-crisis contracts don’t roll off until later this year or next.
– Such a blow-up could cause the Europeans to change their mind about the commercial hedging exemption, causing US MNCs a world of trouble.
– Further political missteps by House Republicans could strengthen the hands of Gensler and Securities and Exchange Commission chair Mary Schapiro, allowing them to keep the issue open.
The corporate lobby has to weigh the gains now on the table – such as an exemption buttressed by H.R. 1610, the Business Risk Mitigation and Price Stabilization Act, now working its way through the Financial Services Committee – against the risk that their fortunes will reverse within 18 months. That is, after all, just the type of unexpected adverse event that treasury hedges against in the first place.