The Restoring American Financial Stability Act of 2010 unveiled this afternoon by Senate Banking Committee Chair Chris Dodd (D-CT) raises more questions and concerns for U.S. manufacturers. For one, manufacturers are disappointed that the new proposal does not make it clear that only businesses that are “predominantly engaged” in financial activities are covered by the overall reform.
Even though the thrust of the reform measure is to restore responsibility and accountability in the nation’s financial system, broadly worded definitions in the bill arguably could pull some non-financial companies into the new regulatory regime. Covered companies are defined as those with “substantial” financial activities and the Federal Reserve Board gets to decide who falls into the definition. Manufacturers that engage in routine financial activities as a small part of their main business, e.g., a global manufacturer that manages a foreign exchange trading operation, an equipment manufacturer that provides financing for customers, are concerned that they could be pulled into the systemic risk regulatory regime, drawing needed capital from their businesses and imposing new administrative burdens.
On the derivatives front, manufacturers were pleased to see that the definition of a “major swap participant” excludes OTC derivatives used to hedge business risk. Unfortunately, because it is not clear that business end-users who do not pose risks to the financial system are excluded from the definition, some manufacturers are concerned they could be considered a major swap participant. Another concern for manufacturers are requirements that they post margin on bilateral, customized derivatives contracts. End-users like manufactures do not pose a threat to financial stability and should be able to continue to access OTC derivatives without tying up valuable working capital.
On a brighter note, there may be more changes on the derivatives provisions during the Committee’s markup session, which could happen as early as next week. In comments this afternoon, Sen. Dodd noted that Sens. Judd Gregg (R-NH) and Jack Reed (D-RI) are working on a revised derivatives section that the committee could vote on next week.
Dorothy Coleman is vice president for tax and domestic economic policy at the National Association of Manufacturers.
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