Wednesday, May 04, 2011

House Subcommittee Approves Legislation Exempting Derivatives End Users from Posting Margin

With strong securities industry support, the House Capital Markets Subcommittee marked up and approved with bi-partisan support H.R. 1610, the Business Risk Mitigation and Price Stabilization Act, which would exempt end users from having to post margin for derivatives contracts. SIFMA noted that the legislation recognizes that end users like U.S. corporations, manufacturers, agricultural producers and pension funds and municipalities should not be required to post margin for derivatives they use to hedge legitimate business risks since such could make the cost of hedging business risk more expensive and result in higher prices for consumers who purchase products from these companies.

The legislation was introduced by Rep. Michael G. Grimm (R,C-NY) and exempts true derivatives end-users from having to post margin as required under Dodd-Frank. According to Rep. Grimm, true end-users are firms and companies that use derivatives to manage their risks, not to speculate. Exempting them from posting margin will free up capital that will help maintain low and stable prices for consumers, create jobs, and keep US companies competitive. During the mark up, a amendment offered by Subcommittee Chairman Scott Garrett (R-NJ) was accepted by voice vote and clarifies that the legislaiton applies to counterparties using swaps to hedge or mitigate commercial risk.

Rep. Grimm noted that forcing true end-users to post margin could have three negative consequences: 1) the costs of hedging could be become so high that they stop hedging, resulting in a detrimental rise in prices for consumers; 2) capital will be restricted that would otherwise be used for job creation or reinvestment to make American companies more competitive in the global economy; and 3) high costs of hedging could drive business overseas to foreign derivatives markets.

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