Coalition for Derivatives End-Users Archives - Shopfloor

House Approves End-User CTU Fix

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Manufacturers are one step closer to gaining certainty on whether they will be faced with unnecessary regulatory hurdles simply for structuring in an efficient way to manage business risk.

Many manufacturers use derivatives to hedge everyday business risks stemming from fluctuations in commodity prices, currency and interest rates. These manufacturers, and other nonfinancial end-users, typically employ a “command center” called a centralized treasury unit (CTU) to oversee the company’s derivatives transactions, vital to a manufacturer that  has multiple affiliates. Read More

A Glimmer of Hope

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Yesterday morning, the Federal Reserve Board released a re-proposed rulemaking regarding “Margin Requirements for Non-cleared Swaps.” At first glance, this long awaited re-proposal seems to acknowledge what end-users like manufacturers have long held, that when derivatives are used by non-financial end-users to hedge commercial risk, manufacturers should not face the same margin or capital requirements as financial entities engaging in swaps for other purposes. However, it appears as though the Fed in the new proposal has chosen to allow the decision as to whether margin is required to remain between the manufacturer and their financial counterparty, rather than be imposed by a third-party regulator.

As a leader of the Coalition for Derivatives End-Users, the NAM has worked over the past several years to share manufacturers concerns about the potential costly burden that such margin requirements. So we are pleased that at least at first blush the Fed appears to acknowledge manufacturers’ concerns. As we dig through the full 200 page re-proposed rule we are hopeful that this rule, if finalized, could provide manufacturers the reassurance that they will not face this significant cost burden. The NAM and the Coalition will be working in the coming weeks to determine if the re-proposal addresses all of the concerns of manufacturers who use derivatives to hedge commercial risk and if additional changes to the re-proposed rule are necessary.

Four Years Later and Still Unclear

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This week, at a House Financial Services hearing entitled  “Assessing the Impact of the Dodd-Frank Act Four Years Later,” manufacturers called on Congress to provide clarity for derivatives end-users and to enact legislation that ensures companies are not faced with undue regulatory burdens.

Four years into the rule-making process, regulatory uncertainty continues to harm manufacturers. Despite Congress’ intention to exempt derivatives end-users from costly margin requirements and clearing requirements, subsequent rules implementing Dodd-Frank are unclear and capture manufacturers trying to hedge risk. Tom Deas, Vice President and Treasurer of FMC Corporation, testified that even the rules that supposedly provide end-user exemptions do not provide relief.

When author of the 2010 law and former House Financial Services Committee Chairman Barney Frank was asked about potential updates to his legislation, he responded, “I agree with much of what [Deas] said about the end-user.”  House Agriculture Committee Chairman Frank Lucas mentioned several legislative fixes that the NAM supports saying, “End-users did not create the financial crisis of 2008 and should not be regulated like they did.” We couldn’t agree more. After four years of uncertainty, manufacturers welcomed this bipartisan support and urge lawmakers to act – better late than never.

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

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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.

NAM End-User Priorities Advance in House CFTC Reauthorization

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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.

Another Opportunity to Fix Dodd Frank

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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.

Another case for fixing Dodd-Frank

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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.

End-Users Keep Beating the Drum for Relief

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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.

NAM Leads Push for Solutions for Derivatives End Users

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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.

NAM Applauds Forward Motion on Derivatives Bills

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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.