For End Users, OTC Derivatives are about Managing Financial Risk

Manufacturing companies have been intensely engaged in the debate over legislation to expand federal regulation of the financial industry, concerned that Congress will restrict access to an important tool, over-the-counter derivatives.

Manufacturers generally support an exemption for end-users, that is, companies that use OTC derivates not to speculate, but rather to manage their risk.

“We didn’t cause the problem,” says Dorothy Coleman, vice-president for tax policy at the National Association of Manufacturers (NAM). “This isn’t speculating. We’re not making money off these transactions.”

That’s from a Bloomberg story that examines the importance of risk management for the brewing industry and users of agriculture commodities, “Let’s Have a Beer and Talk Derivatives

Bloomberg outlines the issues more fully in a separate story, “Industry Opposes ‘Monumental’ Expansion of CFTC Power“:

A provision in the bill known as the “end-user exemption” is of particular concern to industry groups representing Koch, Lockheed Martin Corp. and Caterpillar Inc. The rule would exempt companies that use derivatives to hedge their risks in commodities, currencies and interest rates from posting margin, or a deposit against default, on over-the-counter trades.

Margin requirements would increase costs and cripple small businesses, said Paul Cicio, president of the Industrial Energy Consumers of America, whose group represents companies including Dow Corning Corp., The Goodyear Tire & Rubber Co. and Tyson Foods Inc.

And …

The Natural Gas Supply Association and the National Corn Growers Association are writing a letter to Dodd and Senators Harry Reid and Richard Shelby saying the end-user exemption is too limited, according to a draft obtained by Bloomberg. The gas association conducted a study in December that concluded that requiring end-users to clear their derivatives transactions could cost the U.S. economy as much as $900 billion.

“Without such an exclusion, energy and commodity producers will be forced to divert capital that would have otherwise been invested in producing energy, food and thousands of jobs, while risk would be increased rather than decreased,” the trade groups say in the letter.

The NAM is a leader in The Coalition for Derivatives End-Users, which supported a broader exemption included in the House-passed version of the financial regulation bill. (See this Oct. 2, 2009, letter for the coalition’s principles.)

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