Thursday, August 02, 2012

Bi-Partisan Senate Legislation Would Codify Derivatives End User Exemption


Six US Senators have introduced bi-partisan legislation to expressly provide that commercial end-users of derivatives are exempt from margin requirements adopted by federal regulators implementing the derivatives regulatory regime created by the Dodd-Frank Act.  The legislation was introduced by Senators John Tester (D-Mont), Mike Johanns (R-NE), Mike Crapo (R-ID), Herb Kohl (D-WI), Pat Toomey (R-PA), and Kay Hagan (D-NC). The bill introduced by the Senators is identical to HR 2682, the Business Risk Mitigation and Price Stabilization Act, which passed the House by a large bi-partisan vote of 370-24, and an amendment Senators Crapo and Johanns introduced to the Farm Bill, but not included in the final package.

Senator Crapo urged the Senate to quickly pass the legislation to affirm Congressional intent that non-financial derivatives end-users should be exempt from margin requirements. Senator Hagan said that commercial, non-financial end-users should be exempt from margin rules because they pose a low risk to the financial system and use derivatives to manage price fluctuations in commodities that they use to build their products.   

The legislation is needed because the Dodd-Frank statute did not completely nail down a derivatives end-user exemption for commercial, non-financial companies. Following a late night Dodd-Frank House-Senate conference committee deliberations, numerous assurances were made that margin would not be required on these end-user transactions. These assurances were subsequently followed by formal letters and colloquies by the architects of the Dodd-Frank Act. Unfortunately, noted Rep. Scott Garrett, Chair of the Capital Markets Subcommittee and a strong supporter of HR 2682, federal financial regulators have interpreted it a different way and have interpreted Dodd-Frank’s somewhat rushed language as not providing a clear exemption for commercial end-users. The legislation would provide businesses with the certainty that they need to use derivatives to hedge against business risk, said Chairman Garrett. By any measure whatsoever, he noted, these end-users are not systemically significant. (Cong Rec, Mar 26, 2012, H1551). 

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