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U.S. Lawmakers Move to Clarify Margin Requirements Exemption on Swap End-Users

  • By Konstantine Kastens, AFP Government Relations Administrator
  • Published: 2011-08-05

Four U.S. House members introduced legislation on July 28 that would remove margin requirements imposed against non-financial end-users of swaps, effectively sharpening existing language within the Dodd-Frank Act.

Filed by Rep. Michael G. Grimm (R-NY) with the support of Rep. Bill Owens (D-NY), Rep. Gary Peters (R-MI) and Rep. Austin Scott (R-GA), H.R. 2683, Business Risk Mitigation and Price Stabilization Act of 2011 aims to delineate the divide between regulation of financial investment entities that speculate on markets and non-financial commercial entities that hedge against fluctuating prices.  With all four members serving on committees that oversee derivatives markets, at first glance, final passage of this bipartisan legislation would appear reachable.  Given the current toxic climate on Capitol Hill, however, successful movement of any legislation needs take into account the broader politics at play. 

In a joint statement, the four lawmakers said their newly-introduced legislation “clarifies what congress clearly intended—commercial end-users who are not engaged in harmful speculation should not be required to divert capital away from job creation.”  Pointing to several vulnerabilities left exposed in the event that “true end-users” are forced to post margin, the lawmakers noted that incurred high costs would dissuade hedging and impact consumer prices, likely leading to an exodus of businesses to foreign derivatives markets.

Over the months of rulemaking debate, much of the conversation – as well as delay in rule implementation - centered on the scope of swap counterparties that should be forced to post margin requirements. The Securities and Exchange Commission and the Commodity Futures Trading Commission, the two bodies that regulate swaps and security-based swaps, suggested enforcing margin requirements under ambiguous terms that would restrict available capital that businesses rely on day-to-day to balance their own finances and protect their markets.

Exemption of margin requirements for non-financial end-users is a key issue for AFP. The position of AFP, representative of those corporate finance departments responsibly facilitating derivatives markets to hedge against risk, is that--beyond inclusion of the provision within Dodd-Frank--absence of an exemption for non-financial end-users dismantles a proven model for safe corporate risk management and undermines overall economic growth.

Throughout the regulatory comment period assigned to the new rules governing the over-the-counter derivatives markets, AFP has been adamant about this necessary protection for non-financial end-users.  In a comment letter to federal agencies overseeing swaps, AFP warned that imposing margin requirements on non-financial end-users would “inadvertently place additional strain on the capital markets, reduce liquidity and add additional stress to an already troubled job market.”

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