Wednesday, February 16, 2011

Key Senators Urge SEC and CFTC Not to Impose Margin on Derivatives End Users and Avoid Driving Derivatives Markets Offshore

In a bi-partisan letter to SEC Chair Mary Schapiro and CFTC Chair Gary Gensler, key Senators said that it is critical that the commercial end user exemption provided both in Sections 723 and 763 of Dodd-Frank be implemented consistently with Congressional intent, which is that margin requirements should not be applied to the end users of OTC derivatives. Imposing margin requirements on those who engage in the hedging of legitimate business risks would blatantly disregard the end-user exemption and the intent of Congress, the letter noted, and could also drain capital from corporate balance sheets. The letter was signed by Banking Committee members Mike Johanns (R-NE), Herb Kohl (D-WI), Mike Crapo (R-ID), Roger Wicker (R-MS), David Vitter (R-LA), Jerry Moran (R-KS), and John Tester (D-MT), as well as Senate Finance Committee Chair Max Baucus (D-MT).

The Senators also cautioned the SEC and CFTC to preserve the sanctity of existing derivatives contracts by not applying new margin requirements retroactively since doing so would upset the expectations of countless end users and call into question years of contract law.

Also, the SEC and CFTC must avoid creating a prohibitively expensive and rigid structure for the trading of derivatives in order to prevent the derivatives market from moving offshore. In their view, an overly prescriptive US derivatives market would encourage market participants to take advantage of ``less punitive’’ overseas derivatives markets. The Senators urged the SEC and CFTC to implement Title VII of Dodd-Frank consistent with international standards so that US derivatives markets are not placed at a competitive disadvantage.

More broadly, the Senators urged the SEC and CFTC to take the time to thoughtfully implement Title VII, paying close attention to the ``array’’ of unintended consequences that may arise. If this major overhaul of US derivatives markets is hastily implemented, they warned, the resulting regulations could damage the economy.

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