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.

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.

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.

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.

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“

From The Washington Post, “Trade Groups Seek More Limited Plan to Regulate Derivatives Market“:

While government officials are seeking to rein in the excesses that contributed to the financial crisis, business lobbyists have been warning key lawmakers that companies such as Ford, Johnson & Johnson and Coca-Cola could suffer if the new regulations are far-reaching. …[snip]

The Coalition for Derivatives End-Users, organized by groups such as the U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers, sent a letter to lawmakers last week saying that “some reform proposals would place an extraordinary burden on end-users of derivatives in every sector of the economy — including manufacturers, energy companies, utilities, healthcare companies and commercial real estate owners and developers.” The letter was signed by more than 170 companies and trade associations.

Here’s the coalition’s letter.

From Reuters, “U.S. groups eye second Obama decision on China yuan“:

WASHINGTON (Reuters) – U.S. labor and manufacturing groups urged President Barack Obama on Tuesday to live up to his campaign rhetoric and formally label China a currency manipulator in a Treasury Department report due out next week….[snip]

The largest U.S. manufacturing group, the National Association of Manufacturers (NAM), also wants Obama to designate China a currency manipulator to increase pressure within the International Monetary Fund on Beijing.

“A lot of people were surprised they didn’t cite China before. NAM’s view is that if the U.S. doesn’t cite China under the law, then it is unlikely that the IMF is going to do so,” said Frank Vargo, vice president for international economic affairs at the manufacturers’ association.