Tag: Coalition for Derivatives End-Users

House Votes to Ease Regulation of Non-Banks Under Dodd-Frank

The  Dodd-Frank financial reform law enacted in 2010 in response to the crippling financial crisis imposed new regulations on financial markets and companies. Unfortunately, the law’s vast reach sweeps manufacturers into areas of new oversight and regulation, even though manufacturers had nothing to do with the financial crisis.

We have written many times before about the negative impact of Dodd-Frank derivatives requirements on manufacturers, but another provision of the law, which grants broad regulatory authority over companies involved in financial activities, threatens to designate some manufacturers as systemically important financial institutions (SIFIs).

The Dodd-Frank Act created a council of regulators made up of representatives from several different regulatory bodies called the Financial Stability Oversight Council (FSOC) that is charged with identifing existing or emerging systemic risks to the financial system. Section 113 of the Act authorizes the Council to consider whether a nonbank financial company could pose a threat to financial stability and if they determine that there is a threat, then they can subject that company to Federal Reserve supervision and “enhanced” prudential standards – aka more regulation.

The problem is the FSOC looks at a company’s size and scope as part of its determination for what is a nonbank financial SIFI, threatening some large global manufacturers that must engage in lending and financing as part of their everyday course of business. Despite the global reach of these companies, manufacturers did not contribute to the financial crisis and do not engage in the same type of financial activities that banks do, especially not ones that would threaten the financial system. A SIFI designation can bring unnecessary costs for companies that could be put to better use by investing in the business and creating jobs. The NAM wrote to FSOC previously to express concerns with their proposal.

FSOC has already begun to designate companies as nonbank SIFIs, but the House this week adopted an amendment to the financial services appropriations bill offered by Rep. Garrett (R-NJ) to the put an end to this process by ceasing funding for the FSOC designation of non-bank companies as SIFIs. Manufacturers that need to be engaged in financing large projects or machinery as a part of their regular business, should not be regulated as if they were large banks.  The NAM applauds the House action. Global manufacturing companies already face enough challenges remaining competitive internationally, and the NAM will continue to support efforts aimed at preventing unnecessary regulation of these businesses.

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NAM End-User Priorities Advance in House CFTC Reauthorization

Legislation to ensure that certain Dodd-Frank requirements do not overburden manufacturers advanced on Wednesday when the House Agriculture Committee approved legislation to reauthorize the Commodities Futures Trading Commission (CFTC) (H.R. 4413) that included a number of NAM end-user priorities. Prior to consideration of the bill, the NAM joined the Coalition for Derivatives End-Users in urging committee members to approve the bill.

As approved by the committee, H.R. 4413 would ensure that manufacturers and other nonfinancial end-users would not be subject to mandatory margin requirements when hedging business risk. This provision is similar to a bill (H.R. 634) that already passed the House overwhelmingly last year with 411 votes, but has yet to be considered in the Senate even though the bill (S. 888) is backed by 20 Senators from both sides of the aisle. A recent survey finds that without this fix, a company that uses derivatives to hedge commercial risk may be forced to sideline approximately $125 million, negatively impacting business investments, R&D, and job creation.

Manufacturers that use a centralized treasury unit or hedging center would also be relieved of unintended consequences stemming from Dodd-Frank in the Agriculture Committee’s bill. Currently, companies that use this centralized structure, a best practice in corporate treasury, may be forced to clear and margin their hedges since this unit may be considered a “financial entity,” preventing them from taking advantage of the end-user exemptions provided by Dodd-Frank. The CFTC reauthorization includes language stemming from a bipartisan bill (H.R. 677) which was approved by the Committee last year.

The CFTC reauthorization also included provisions from another bill (H.R. 3814) the NAM has supported to require the CFTC take an affirmative action before lowering the swap dealer de minimis threshold. Without action, the exemption level for engaging in a de minimis quantity of swap dealing automatically drops from the current $8 billion threshold down to $3 billion in 2018.

This bill was approved overwhelmingly by a voice vote, and will next move to the House floor. The NAM is also advocating for the Senate to include these important pro-manufacturing issues in their version of the CFTC reauthorization.

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Another Opportunity to Fix Dodd Frank

Let’s start the year off on an optimistic note…. Here’s to hoping that 2014 is the year that a bipartisan Congress fixes a number of flaws in the Dodd-Frank Wall Street Reform Act.

As we’ve talked about before, Manufacturers, as derivatives end-users, have been working over the past several years to prevent the implementation of the Dodd-Frank Act from having a negative and costly impact on companies that use derivatives to manage risk. On issues like margin requirements, inter-affiliate trades and the use of centralized treasury units, the NAM has fought against new regulations that will create new costs and burdens on manufacturers who utilize derivatives to mitigate commercial risk and not for speculative purposes. The rationale is simple, manufacturers did not contribute to or cause the financial crisis that triggered Dodd-Frank, and as several regulators have stated before Congress, do not pose a systemic risk. Thus, regulators’ efforts should be focused elsewhere.

So far we’ve made some headway… Bipartisan bills (H.R. 634/S.888) moving through Congress would exempt end-users from margin requirements. In fact, H.R. 634, led by Reps. Grimm (R-NY) and Peters (D-MI) passed the House with a huge bipartisan vote last June with only 12… yes, 12 votes in opposition. The Senate companion bill (S.888) has 18 cosponsors from both sides of the aisle and two strong champions in the bipartisan team that is leading the effort – Sens. Johanns (R-NE) and Tester (D-MT). And that’s not all. H.R. 677, the Inter-Affiliate Swap Clarification Act by Reps. Stivers (R-OH) and Fudge (D-OH) was approved by the House Financial Services Committee also with broad bipartisan support.

Earlier this week, Rep. Hudson (R-NC) introduced legislation addressing another problem we have talked about before, the looming change in CFTC’s criteria for companies to register as a swap dealer. The bill, H.R. 3814, would require that the CFTC take an affirmative action to change today’s de minimis level of $8 billion. Without action, the CFTC’s rules currently lower the threshold to $3 billion by 2018. It seems odd to us that the CFTC has seen fit to set a de minimis level at a reasonable level and while doing so then set into motion an automatic drop in the level by over 60% several years in advance. One would think that regulators would prefer to establish the threshold and then go back and reconsider what the appropriate level will be in the economy of some future year. The bill by Rep. Hudson, like the other ones referenced above, is straightforward and a common sense solution to problems arising from the enactment of the massive Act known as Dodd-Frank.

Manufacturers continue to work to encourage members of both parties in both the House and Senate to move these bills in a timely manner.

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Another case for fixing Dodd-Frank

Manufacturers, as derivatives end-users, have been working over the past several years to prevent the implementation of the Dodd-Frank Act from having a negative and costly impact on end-users. On issues like margin requirements, inter-affiliate trades and the use of centralized treasury units, the NAM has fought against new regulations that will create new costs and burdens on end-users who utilize derivatives to mitigate commercial risk and not for speculative purposes. The rationale is simple, end-users did not contribute or cause the financial crisis that was the impetus for Dodd-Frank and as several regulators have stated before Congress, end-users do not pose a systemic risk, regulators efforts should be focused elsewhere.

A recent report from Abraham Energy Report highlights yet another threat to end-users. Specifically,  rules issued by the Commodity Futures Trading Commission (CFTC)  that will drastically limit the use of hedging by energy businesses and will impact the broader economy through higher costs and fewer risk mitigation options for all energy users. The CFTC now requires any firm engaged in over $8 billion annually in commodity swaps to register as a swap dealer that makes them subject to a regulatory regime more similar to rules for financial institutions than end-user rules. To date only a few firms have been forced to register as swap dealers. That will change though when the threshold drops, as it is scheduled to do by 2018.  The lower threshold will capture a much broader group of companies and will impose greater costs throughout the economy. In another effort to expand their regulatory domain, the CFTC is also seeking to further regulate the energy market by treating volumetric options of commodities, including oil and gas, as swaps and subject to CFTC regulation. America is on the cusp of an energy boom poised to create a competitive advantage for American manufacturers. That is, unless regulators get in the way.

All of these end-user issues should be reviewed and considered as Congress reauthorizes the Commodity Exchange Act (CEA) and the Commodity Futures Modernization Act. While Congress has been stymied in recent months on myriad issues of importance to manufacturers, one thing that both parties in both bodies should agree on is that action needs to be taken to lessen the impact of harmful regulation on the growth of the economy and jobs. All of these issues should be addressed in the upcoming reauthorization process and manufacturers will continue to urge Congress to do so.

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End-Users Keep Beating the Drum for Relief

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.

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NAM Leads Push for Solutions for Derivatives End Users

On Tuesday, June 11th, the NAM along with the Coalition for Derivatives End-Users—of which the NAM is a leading member—organized a fly-in of corporate treasury executives advocating for Senate consideration of H.R. 634/S.888 and H.R. 677. The group, which included nearly two dozen representatives from 15 companies along with other trade associations, spent the day lobbying Senate offices to support the legislation. The first bill, H.R. 634/S.888, would provide a statutory exemption from margin requirements for derivatives end users. H.R. 677 would exempt internal, inter-affiliate trades from being treated for regulatory purposes in the same manner as market-facing trades and also ensure that centralized treasury units can take advantage of the clearing exemption available to non-financial end users when they are hedging commercial risk.

The morning of the event, the lead Democratic Senate sponsor of S. 888, Sen. Jon Tester (D-MT), joined the kickoff breakfast to discuss the status and outlook for the legislation. The Senator was followed by a discussion with is staff from Sen. Mike Johanns (R-NE) the bill’s lead sponsor who joined Sen. Tester’s staff to discuss strategy and the key messages for the day’s events. The group then set off for a day’s worth of visits, meeting with leadership and committee staff as well as staff in offices who have previously opposed this legislation.

Also that morning, the NAM sent to every member of the House of Representatives a coalition letter urging passage of the two bills. The letter was being sent in advance of the anticipated vote on H.R. 634 to be held in the House the following day. Manufacturers are thrilled that the House passed H.R. 634 by a strong bipartisan vote of 411–12. This vote, which is even stronger than last year’s tally of 370–24, sends the bill to the Senate to await action with a clear demonstration of the overwhelming support for this bipartisan legislation.

The NAM will continue to lead the fight to get the Senate to move these two critical bills in the near term. Manufacturers are encouraged by the overwhelming majority in support of the margin bill in the House. And we are committed to keeping up the fight for this exemption which was the clear intent of the authors of the Dodd-Frank Act as the Congressional Record’s reporting of the floor debate makes clear. Simply put, the portions of the bill that sought to regulate speculative derivatives trading were never intended to negatively impact commercial end users who use derivatives to hedge commercial risk. H.R. 634/S. 888 and H.R. 677 will ensure that nonfinancial end users—like manufacturers—who use derivatives to hedge commercial risk do not face increased costs of doing business because they use hedges as a risk-management strategy.

We will continue to press for swift Senate consideration of the H.R. 634/S. 888, margin bill which are now pending and we will continue to press for progress on H.R. 677 in the coming weeks.

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NAM Applauds Forward Motion on Derivatives Bills

As the old saying goes, every journey begins with a first step. We had a few positive and solid first – and second – steps today for derivatives end-users.

A little while ago, the House Financial Services Committee completed a markup on a number of Dodd-Frank related bills including  H.R. 634, “The Business Risk Mitigation and Price Stabilization Act of 2013” and H.R. 677, “Inter-Affiliate Swap Clarification Act”. H.R. 634 was reported out of committee with a unanimous 59-0 vote and the inter-affiliates bill was reported favorably with a vote 50-10. We believe that now that the relevant committees have both completed their review of these common-sense and critical bills, the House leadership will bring them to the floor for consideration by the full House of Representatives in the coming weeks.

Also this afternoon, Sens. Johanns and Tester led a large bipartisan group in introducing the Senate companion to H.R. 634 (the number is not yet available). The full list of original cosponsors includes: Senators Mike Johanns (R-NE), Jon Tester (D-MT), Roy Blunt (R-MO), Mike Crapo (R-ID), Joe Donnelly (D-IN), Kay Hagan (D-NC), Heidi Heitkamp (D-ND), Amy Klobuchar (D-MN), Jerry Moran (R-KS), Richard Shelby (R-AL), Pat Toomey (R-PA) and Mark Warner (D-VA).

The Senate introduction came on the heels of a concerted effort by end-users to educate Senate offices on the realities of end-user use of derivatives trades – we use them to hedge every-day commercial risk, not for speculative purposes. Thus, end-users like the thousands of manufactures who utilize these risk-management tools shouldn’t be regulated the same was as those companies that are speculating.

We continue to work with Senate offices to get a Senate companion to H.R. 677 (the inter-affiliates bill) introduced in the near-term. So although this is certainly positive progress, we are simply nearing the beginning of the second-act which is getting the Senate to take action on both of these important and common-sense bills that will ensure that main street businesses are able to focus on growing and investing in their business and their growth.

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The Clock Keeps Ticking for Derivatives End-Users

End-users continue to watch the time tick by on the countdown clock to the implementation of various aspects of Dodd-Frank while still awaiting clarity on a couple of critical – and costly – regulatory burdens which currently seem poised to impact them. In an ongoing effort to help find that clarity, the NAM has been working diligently as a leading member of the Coalition for Derivatives End-Users on both the hill and before the regulatory bodies implementing the law. Today we hope marked a positive step forward in the House Agriculture Committee’s hearing, “Examining Legislative Improvements to Title VII of the Dodd-Frank Act,” which featured testimony by NAM member and Honeywell International Assistant Treasurer Jim Colby. Colby testified on behalf of Honeywell and the Coalition — in support of coalition-backed legislation H.R. 634, which would provide a clear exemption from margin requirements for non-financial end-users as was the original intent of Congress.

The NAM has long advocated for this legislative fix and has worked longside the Coalition at the regulatory bodies urging that the rules promulgated under Dodd-Frank include this exemption. During the last Congress, the same legislation cleared the House overwhelmingly with over 370 votes in favor and withered in the Senate despite bipartisan support. We’re hopeful that today’s hearing and Ag Chairman Lucas’ indication that the Committee will soon move to mark up the bills included in the hearing will result in quick action that will allow the bill to be considered by the House Financial Services Committee and by the full House of Representatives in the near term.

The hearing also featured testimony in support of another NAM and Coalition endorsed bill, H.R. 677 which would exempt inter-affiliate and centralized hedging center unit swaps from clearing and other regulatory requirements intended for market-facing swaps. This legislation also clarifies a provision in Dodd-Frank that failed to distinguish internal risk management techniques in the form of inter-affiliate swaps from external market facing swaps. Many companies today use centralized hedging centers or centralized treasury units as a risk management tool – one that is often considered a best-practice. Under Dodd-Frank it this structure wasn’t contemplated and today without a change, the internal swaps a company does between these centers and their own affiliates would be subject to the same costly reporting and clearing requirements as external swaps with a swap dealers or a major swap participant. Further, the bill ensures that non-financial end-users who utilize these centralized hedging centers are allowed to use the end-user clearing exemption. Without this clarification, these centralized hedging and treasury centers wouldn’t qualify for the end-user clearing exemption because they would be deemed financial entities since their primary function is to engage in financial transactions for the corporate parent.

We are pleased that the committee also considered H.R. 677 today and hope that it too will be marked up and ready for review by the House Financial Services Committee and the full House in the near-term. A predecessor of this bill moved in tandem with a margin bill last year and also passed the House with over 350 votes. We hope to see that replicated soon.

So, while the clock ticks, hopefully today’s hearing is the first steps towards fixing these two burdensome problems casting a shadow over sound risk management practices employed by end-users.

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Dodd-Frank the “Gift” that Keeps “Giving”

Even as Washington’s attention careens from one fiscal showdown to the next—which is reasonable with $85 billion in spending cuts due to go into effect in just a few days coming on the heels of December’s Fiscal Cliff–many manufacturers also await what could be an avalanche of regulations to implement the infamous Dodd-Frank Wall Street Reform Act that could prove to bury these derivatives end-users in excessive costs and regulatory burdens to “fix” aspects of the financial crisis that they neither caused nor contributed to.

For the past two and a half years since the passage of this voluminous statute, a number of unintended consequences of the 850 page statute have come to light as derivatives end-users—who use derivatives as a way to manage commercial risk and NOT for speculative purposes—come to recognize how their day to day business practice might be caught up in a slew of regulations from an array of regulators. These rulemakings have the potential to undo best practices, efficiencies and risk management strategies to improve business functions.

To combat this, for the past several years the NAM has served as a steering committee member of the Coalition for Derivatives End-Users working with a coalition of business associations and hundreds of end-user companies to mitigate the impact on end-users of Dodd-Frank’s implementation. The NAM drove an effort during the lame duck Congressional session to seek passage of two bills critical to manufacturers that use derivatives to manage risk.  The effort has served as a springboard for the Coalition’s activity this year.

Already this year, the Coalition has met with the staff, the Chairman of the CFTC as well as several of the Commissioners seeking relief from two of the most time sensitive concerns facing end-users including: the upcoming deadline of April 10th when, without no-action relief from the CFTC, end-users will need to begin reporting their inter-affiliate trades to a swap data repository within 48 hours of the trade; and, a June 10th deadline financial institutions are required to begin clearing trades – a deadline that will impact end-users who use centralized hedging centers to centralize inter-affiliate trades and use that hedging center to conduct external trades unless the CFTC provides exemptive relief to these centralized hedging units of non-financial end-users. The Coalition is working this week to submit requests for these relief actions to the CFTC.

Simultaneously, we continue our legislative effort and already this year the two priority end-user bills – one providing a clear end-user exemption from margin requirements and one exempting inter-affiliate trades from being treated in the same manner as external, market facing trades and rectifying the centralized hedging center issue described above. Those bills, H.R. 634 and H.R. 677, were introduced earlier this month in the House by bipartisan groups of members of both the House Agriculture and House Financial Services Committees–and we hope there will be companion legislation introduced in the Senate in the near term.

The NAM continues to lead both legislative and regulatory solutions to address the challenges facing end-users. Company participation in these efforts is critical to make the case for action and the NAM will continue to coordinate opportunities for members to weigh in on these matters.

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End-User Community Receives Bipartisan Support from House Ag Committee

The House Committee on Agriculture took up several pieces of bipartisan legislation that would help prevent unnecessary and harmful regulation of derivatives end-users – and ensure the original intent of Congress is upheld. There has been growing concern in the end-user community that proposed regulations to implement the Dodd-Frank bill could go beyond the intent of Congress and prove damaging to economic growth and U.S. competitiveness.

The bills include: H.R. 2682, the Business Mitigation and Price Stabilization Act; H.R. 2779, to exempt inter-affiliate swaps from certain regulatory requirements;  H.R. 3527, Protecting Main Street End-Users from Excessive Regulation; H.R. 1840, requiring the Commodity Futures Trading Commission to include a cost-benefit analysis of their regulations, and; H.R. 2586, the Swap Execution Facility Clarification Act.  Each offer solutions that would help prevent unnecessary and harmful regulation of derivatives end-users. The NAM stands in strong support of all of them.

Fortunately the bills passed out of committee with bipartisan support  and hopefully the momentum necessary to be on the house floor soon. These bills would ensure that any negative impacts of the Dodd-Frank implementation on end-users can be mitigated.

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