In one of his first public appearances since becoming Chairman of the Commodity Futures Trading Commission (CFTC) in June, Tim Massad today expressly supported the need to make derivatives markets still work for nonfinancial companies when hedging risk.
During a Politico Morning Money event, Massad said that nonfinancial companies had nothing to do with the financial crisis, and that Congress made it clear in Dodd-Frank that end-users should not be burdened by new derivatives requirements. Massad went on to explain that the CFTC has the authority to ensure that end-users are not overly burdened. For instance, the CFTC has proposed margin rules that effectively exempt nonfinancial companies from mandatory margin requirements.
Manufacturers applaud the Chairman for his comments and appreciate his commitment to keeping end-users from paying the price for the mistakes of financial companies. However, the NAM disagrees with Massad’s later statement regarding clarifications to Dodd-Frank where he indicated that tweaks to the law are better made through rulemaking or no-action relief rather than through a legislative fix.
You don’t have to look far to see that a rulemaking just doesn’t cut it in some cases. Take the proposed margin rules as an example. While the CFTC believes the Dodd-Frank Act gives them the authority to not impose margin on end-users, the Federal Reserve has a different interpretation according to testimony by former Federal Reserve Chairman Ben Bernanke; “We believe that the statute does require us to impose some type of margin requirement.” The Federal Reserve’s proposed margin rule differs from the CFTC’s version, and unless the Fed changes their interpretation of the statute, a legislative fix is the only way to ensure that end-users will not be subject to unnecessary and costly margin requirements.
Furthermore, the Commission’s no action relief also does not provide enough certainty for manufacturers who need to know the rules of the road to hedge risk as part of normal business operations. According to the recent Coalition for Derivatives End-users survey, 85% of respondents that use centralized treasury units to hedge say they could not rely on, or were unsure about relying on, the CFTC’s no-action relief intended to allow them to avail themselves of the end-user exemption from clearing requirements.
Clearly, targeted legislative changes are necessary when it comes to end-users. That is why the NAM will continues to urge Congress to pass legislation to exempt nonfinancial end-users from margin requirements (S. 888) and to make sure manufacturers utilizing CTUs can still use the end-user clearing exception (H.R. 677).