The New York Times missed the mark last Sunday in its editorial criticizing proposed exemptions for business end-users of OTC derivatives from exchange trading requirements (“Too Little Regulation for Derivatives“). Many large and medium-size U.S. manufacturers use customized over-the-counter (OTC) derivatives to manage the cost of borrowing or other risks of operating their businesses, including fluctuating currency exchange and interest rates and commodity prices. For the record, transactions involving business end-users constitute about 10 percent of the overall OTC market, hardly “a big chunk,” of the industry.

A key benefit of OTC derivatives to manufacturers and other end-users is the ability to customize derivatives to specific risk management needs. In contrast, exchange trading requires the use of standardizing contracts, eliminating the ability of companies to tailor derivatives to specific risks, exposing businesses to increased costs, uncertainty and earnings volatility. Manufacturers agree that more transparency is needed in the derivatives market but mandatory exchange trading is not the way to go. Trade data repositories or other reporting requirements would achieve the same goal-without eliminating a risk management tool that allows manufacturers to focus on their core business.

In today’s challenging economy, OTC derivatives-by insulating companies from risk-help businesses keep operations going, invest in new technologies, build new plants and retain and create jobs.

From Bloomberg, “Manufacturers Win Exemption in Frank Derivatives Plan,” reporting on House Financial Services Chairman Barney Frank’s draft plan to regulate over-the-counter (OTC) derivates.

The National Association of Manufacturers, U.S. Chamber of Commerce and the Business Roundtable, three of the biggest trade associations in Washington, lobbied Congress and the administration to exempt end-users from new rules and collateral requirements. End-users employ derivatives to hedge a risk to their operations, such as swings in interest rates, foreign currencies or commodities prices.

“This bill is certainly very positive,” said Dorothy Coleman, vice president of tax and domestic economic policy at the manufacturers organization, in an interview today. “It has clearer exemptions for end-users, which is something we’ve been pushing for.”

Chairman Frank announced the legislative developments on Friday as described in his news release, “Frank Circulates Discussion Draft of Legislation to Regulate OTC Derivatives.”

Also, the House Financial Services Committee holds a hearing Wednesday, “Reform of the Over-the-Counter Derivative Market: Limiting Risk and Ensuring Fairness”