Thursday, August 04, 2011

House Bi-Partisan Legislation Would Codify Derivatives End User Exemption

Bi-partisan legislation has been introduced in the House clarifying that true derivatives end-users are exempt from the margin requirements applied by the Dodd-Frank Act to many derivatives contracts. The Business Risk Mitigation and Price Stabilization Act (H.R. 2682), is sponsored by Representatives Michael Grimm (R-NY), Gary Peters (D-MI), Austin Scott (R-GA), and Bill Owens (D-NY).

The end users exemption in HR 2682 would allow end-users to continue to use derivatives to maintain low and stable prices for consumers and will free up capital. The legislation is based on the consensus view that the use of derivatives by commercial end-users did not pose a risk to the larger economy, said Rep. Peters. The narrowly crafted legislation clarifies that Congress intended that commercial end-users who are not engaged in harmful speculation should not be required to divert capital away from job creation. The legislation will ensure that community banks, agriculture co-ops and energy utilities can continue to hedge risk, said Rep. Owens.

As envisioned by the legislation, true end-users are companies that use derivatives to manage an actual business risk, generally to hedge against fluctuating prices, currency rates, or interest rates, and not to speculate. HR 2682 clarifies that end-users employing derivatives to hedge legitimate business risk are exempt from posting margin, consistent with the Congressional intent of Dodd-Frank. Forcing true end-users to post margin can have several negative consequences, said the sponsors, including pushing the costs of hedging so high that firms stop hedging, resulting in a detrimental rise in prices for consumers. In addition, capital would be restricted and the high costs of hedging could drive business overseas to foreign derivatives markets. H.R. 2682 eliminates the margin requirement and thus helps prevent these negative consequences from occurring.

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