The banner, front-page story in today’s Wall Street Journal is “Risk Rule Riles Main Street“:
U.S. manufacturers, energy producers and other corporations are balking at a proposed rule they fear would drive up the cost of hedging against price swings in the commodities they depend upon, renewing a high-stakes debate over whether the regulation of derivatives should extend beyond the financial industry.
Caterpillar Inc., MillerCoors, Ford Motor Co. and other companies outside finance fought hard last year to avoid being regulated under a framework created by Congress to oversee the $583 trillion derivatives market, part of the Dodd-Frank financial overhaul. At the time, lawmakers said nonfinancial companies wouldn’t have to meet the potentially costly requirement to back up their derivatives trades with cash or other assets as collateral.
But the new rule, unveiled by the Federal Reserve, Federal Deposit Insurance Corp. and other bank regulators, said banks would have to impose such requirements on their corporate clients if their exposure to these trades grew too risky.
The regulators announced the proposed rules on Tuesday with a news release, “Agencies Seek Comment on Swap Margin and Capital Requirements,” and a notice of proposed rule-making.
The National Association of Manufacturers is a member of the Coalition for Derivatives End-Users, which released a statement in reaction to the proposal. While noting the responsiveness of the Commodity Futures Trading Commission to the group’s points, the release raises further objections:
Under the rules proposed by the prudential banking regulators, margin requirements will apply to all end-user transactions that exceed a credit threshold. And under both the CFTC and the prudential regulators’ rules, regulators will impose margin on several categories of end-user trades, including transactions designed to manage risks associated with pension plans, insurance products and certain types of business financing.
Despite the clear legislative history to the contrary, the regulators continue to misinterpret the Dodd-Frank Act as giving them authority to impose margin requirements on end-users. This misinterpretation exposes end-users to margin requirements that Congress did not intend regulators to impose, and the economy to the harm associated with these new requirements.
Indeed, as Reuters reports, CFTC Commissioner Scott O’Malia dissented in the 4-1 vote to publish the rules, arguing, “I believe commercial end-users and many of the financial end-users will be dissatisfied with the lack of harmonization among the different regulatory bodies.”
- Reuters, “Swap market crackdown seeks to spare businesses“
- Bloomberg, “End-Users May Face Swap Margin Requirements as CFTC, FDIC Split”
- CNBC.com, “Swap market crackdown seeks to spare businesses“
- Investor’s Business Daily, “Swap rules exempt end users“
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