A study commissioned by business groups and released ahead of House hearings on Dodd-Frank Title VII found that the federal derivative regulation mandated by Title VII could cost thousands of US jobs and shift hedging activities to foreign jurisdictions. There is also concern that reporting requirements in Title VII will facilitate front running and thus raise the costs associated with hedging activities. The survey was prepared for the Coalition for Derivatives End-Users and conducted by the Business Roundtable and the U.S. Chamber of Commerce’s Center for Capital Market Competiveness, among others.
More broadly, many firms are uncertain about whether and how they will be subjected to different requirements. For instance, nearly half of firms surveyed are unsure whether the central clearing and trading requirements of Dodd-Frank would apply to them or whether they will be required to post collateral for hedges that have not been centrally cleared.
This uncertainty explains why fully half of the firms surveyed are not sure whether they will disclose the impact of Dodd-Frank on their next financial statement
Regulations requiring 3 percent cash collateral on OTC derivatives could result in a significant diversion of cash flow from normal operating and investment activities. In turn, this could reduce capital spending and, following an analytical model, result in the loss of approximately 100,000 to 130,000 jobs.
The study hastened to add that the 3 percent initial margin figure is illustrative only and is not a prediction of what regulators may impose, directly or indirectly. The Coalition for Derivatives End-Users believes that the Dodd-Frank Act does not provide regulators with the authority to impose margin on end-users.
While CFTC Chairman Gary Gensler has indicated that his intent is not to impose margin directly on non-financial end-users, the Coalition remains concerned that the CFTC and other prudential regulators might attempt to impose margin indirectly on end-users, through counterparties or otherwise. The study notes that the federal financial regulators have not expressed agreement with the Coalition position on the authority to impose margin and hence could attempt to impose margin on non-financial end-users in the future or might attempt to impose margin directly on financial end-users.