Earlier this week the NAM, on behalf of the Coalition for Derivatives End-Users where we serve as a steering committee member, sent a letter to every Senate office signed by over 50 companies – large and small – urging swift action on the passage of legislation to follow-through on the stated intention of the authors of the Dodd-Frank Act to exempt non-financial end-users from mandatory margin requirements imposed by regulators. Three years after the enactment of this law, companies are still left wondering whether they will need to sideline billions of dollars into margin accounts. Company after company has indicated that the cost of margin requirements which could be imposed by the Prudential (banking) regulators could sideline hundreds of millions of dollars to margin trades that simply seek to reduce commercial risk. As we’ve said in this space time and again, non-financial end-users, like manufacturers, do not use derivatives to speculate but simply to manage their own costs and risks inherent in doing their day to day business. End-users did not cause the financial crisis and throughout the Dodd-Frank debate the bill managers made clear that they intended to exclude end-users from new regulations that sought to reduce the speculative trading that contributed to the crisis, thus the clear inclusion of the end-user clearing exemption included in Title VII.
Unfortunately, despite various floor discussions that sought to build the legislative history to support the end-user exemption from margin requirements, today end-users face varying views of the statute from various regulators. This has been at the crux of the issue over the past two year. The Fed believes they have a statutory requirement under the Act to impose some level of margin requirement on all swaps, the CFTC on the other hand believes that they have the authority to exempt end-users… thus the uncertainty and the concern amongst businesses that they may need to make decisions later this year that would allow them to free up hundreds of millions of dollars to sit in margin accounts.
This issue, which has been of great concern to the NAM and the broader Coalition, is now coming to a head with regulators indicating that they plan to finalize margin rules later this year. Now is the time for the Senate to act and pass legislation (H.R. 634/S.888) to provide the clarification necessary to end the uncertainty. The bill was passed last month for the second year in a row by an overwhelming bipartisan majority of the House of Representatives who supported the bill by a vote of 411-12. The NAM is pleased that this issue is one that will be explored later this afternoon in a Senate Agriculture Committee Hearing on the reauthorization of the CFTC and the Commodities Exchange Act. Earlier this spring, the NAM submitted a letter requesting that the Committee take up this issue during the reauthorization process and we are pleased that this issue it is being addressed in today’s hearing by Jim Colby, an assistant treasurer at NAM Member Honeywell International. Jim’s testimony speaks to the need for swift action on this issue and explains the impact on a diversified technology and manufacturing leader like Honeywell.
Manufacturers, and the broader economy, do not want to feel the impact of the sidelining of billions of dollars to meet requirements that were never intended for this sector.