Wednesday, November 30, 2011

House Financial Services Committee Approves Legislation Clarifying End User Exemption from Dodd-Frank Margin Requirements

The House Financial Services Committee has approved bi-partisan legislation clarifying that commercial end users would not be subject to margin requirements for uncleared swaps. The Business Risk Mitigation and Price Stabilization Act, HR 2682, sponsored by Rep. Michael Grimm (R-NY) and Gary Peters (D-MI), passed by voice vote.
The Dodd-Frank Act does not require regulators to impose margin requirements on end users and the legislative history makes it clear that Congress did not intend to impose margin requirements on end users. Nonetheless, the legislation was driven by end user uncertainty about whether they will be subject to margin requirements.

Rep. Grimm said that HR 2682 clarifies the intent of Congress to provide an explicit exemption on the posting of margin by end users. He emphasized that the legislation ensures that federal regulators will not impose margin requirements on true ends users that use swaps to manage their business risks, like to lock in the cost of raw materials.

True end-users are companies that use derivatives to manage an actual business risk, he noted, generally to hedge against fluctuating prices, currency rates, or interest rates, and not to speculate. Forcing true end-users to post margin can have several negative consequences, he noted, such as the costs of hedging could be become so high that they stop hedging, resulting in a detrimental rise in prices for consumers. Also, capital would be restricted that would otherwise be used for job creation or reinvestment to make US companies more competitive in the global economy. Further, the high costs of hedging could drive business overseas to foreign derivatives markets and could also increase regulatory arbitrage.

During the mark-up session, Rep. Shelley Moore Capito (R-WV) engaged in a colloquoy with Rep. Grimm over the status of captive finance companies as exempt from the margin requirements. Captive finance companies use derivatives solely to manage legitimate business risks, said Rep. Capito, and not for speculative purposes. They provide a key source of alternative funding, she emphasized, and should not be subject to margin requirements.

In a colloquy with Senator Debbie Stabenow (D-MI) on the day the Senate passed the Dodd-Frank Act, Senator Blanche Lincoln (D-ARK) confirmed that the legislation ensures that clearing and margin requirements would not be applied to captive finance or affiliate company transactions that are used for legitimate, non-speculative hedging of commercial risk arising from supporting their parent company's operations. Senator Stabenow noted, and Senator Lincoln agreed, that the legislation recognizes the unique role that captive finance companies play in supporting manufacturers by exempting transactions entered into by such companies and their affiliate entities from clearing and margin so long as they are engaged in financing that facilitates the purchase or lease of their commercial end user parents products and these swaps contracts are used for non-speculative hedging. (Cong. Record, July 15, 2010, p. S5905).

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