Wednesday, February 09, 2011

House Committeee Hearings Will Explore Impact of Dodd-Frank Derivatives Title

Financial Services Committee Chairman Spencer Bachus (R-ALA) has set a hearing to examine the economic and market impact of the derivatives title of the Dodd-Frank Act. The hearing will take place on February 15. Chairman Bachus said that this will be the first hearing to review the impact of the Dodd-Frank Act on the U.S. derivatives markets. He noted that the derivatives market has evolved over the past twenty-five years into a highly sophisticated market that provides U.S. businesses with the ability to protect themselves against legitimate business risks.

In the Chair's view, requiring companies that neither caused nor contributed to the financial crisis to be treated like banks will unnecessarily remove capital from the economy. Thus, the Committee seeks to ensure that the derivatives title of Dodd-Frank does not force valuable capital to sit on the sidelines or create a patchwork regulatory regime leaving market participants with conflicting regulatory mandates. Allowing either to happen would further erode America’s status as the global leader in the derivatives markets, warned Chairman Bachus, and prevent businesses from using derivatives as a way to manage risk, resulting in fewer jobs.

The Chair recognizes that derivatives contracts are essential financial instruments for many companies to manage interest rate, exchange rate, commodity fluctuations, and other business risks. Companies, large and small, use derivatives every day to protect themselves against unforeseen market volatility, commodity price increases or currency fluctuations. The Dodd-Frank Act requires that all derivatives contracts be cleared through a central clearinghouse and collateral posted for each contract.

The hearing will review the strengths and weaknesses of Title VII; the potential effects on U.S. competitiveness, job creation, and the overall U.S. economy; the likelihood of international harmonization of derivatives regulation; the consequences of the derivatives marketplace shifting from the United States to foreign markets; and the establishment of margin and capital requirements for end users who engage in the legitimate hedging of business risks.

Regulatory arbitrage and international financial regulatory harmonization has been a major concern of Chairman Bachus in that he fears that the European Union will not legislate as stringent a measure as Dodd-Frank. Earlier, he sent a letter to the SEC and the Fed expressing such concerns with regard to Dodd-Frank's Volcker provisions.