There has been lots of activity coming out of the CFTC in the last few days surrounding derivatives end-users, providing end-users some answers but still leaving many questions. The activity makes sense as the National Association of Manufacturers (NAM), many of our member companies and the Coalition for Derivatives End-Users had been pleading the case for months for a no-action ruling for end-users from reporting rules for inter-affiliate trades which were set to take effect beginning yesterday.

Late Friday night that relief came in the form of an announcement from the CFTC’s Division of Market Oversight and Division of Clearing and Risk issued a Joint No-Action Relief for swaps between affiliated counterparties from certain swap reporting requirements, “which granted relief from certain reporting requirements and the end-user exemption to mandatory clearing for intra-group swaps involving wholly-owned subsidiaries.”

This no-action ruling provides some end-users with more time to comply with the reporting requirements and others are exempt entirely. Of course while we are very pleased that the no-action relief came, we would have liked to have received it more than a mere three business days before the requirement kicked in.

In the days leading up to the no-action relief being announced, the NAM was one of a handful of participants in a press call with Commissioner Chilton who called for the creation of “The End-User Bill of Rights” which would guaranty certain rights including the “right to reasonable implementation”, a “right to legal certainty”, a “right to clear (or not to clear)” and critically, a “right to margin flexibility and reasonable capital rules.” The NAM thanked Commissioner Chilton for his leadership and attention to end-user concerns and for the attention the whole CFTC has paid to manufacturers who did not contribute to the financial crisis that led to the writing and enactment of Dodd-Frank but who have been affected nonetheless. (continue reading…)

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.

There has been a lot of chatter in the blogosphere recently about David Aronson’s op-ed “How Congress Devastated Congo,” in the New York Times on Monday concerning the impact that the Dodd-Frank legislation provision (Section 1502) on conflict minerals is having on the economy and workers of the Democratic Republic of the Congo (DRC).  

Many activists claim that the Dodd-Frank requirement that companies disclose their use of conflict minerals (tin, tungsten, tantalum and gold) in their products is essential to ending the horrific violence taking place there, even though there is relatively little evidence that will be the case.  What is of concern to many stakeholders across the spectrum is the potential for the provision creating an embargo on minerals from the DRC and surrounding countries, causing further economic devastation. 

Paul Kavanaugh, writing for Bloomberg BusinessWeek, reported July 28, “The new rules left tens of thousands of people out of work, according Paul Yenga Mabolia, head of Promines, a World Bank program assisting Congo’s mining industry. ‘Nobody was prepared and there was no program to alleviate the impact of the law,’ he said by phone from Kinshasa, Congo’s capital, yesterday. ‘Almost everything came to a standstill.’” (continue reading…)

The Detroit News editorializes on the new rules required by the Dodd-Frank financial regulation law to require publicly traded companies to report their use of select minerals that might come from the regions of Africa involved in the Congo war. The paper analyzes  “Another burden on automakers,” with the secondary headline, “Demanding the industry trace the origin of the metal used in car parts adds billions in costs”:

Proposed new rules requiring manufacturers — in particular auto parts suppliers — to identify the origin of some of the common minerals in their products could impose heavy additional costs on an industry that’s just now getting its head above water. The well-meaning goal of the rules is to limit the use of minerals from war-ravaged central Africa, but the expense could impose additional hardships here….

Rick Goss of the U.S. Information Technology Council, at a meeting on the issue in Washington last month, reportedly called the law a “sledgehammer” that could create what amounts to an embargo on mineral products from a major portion of Africa. Once the metal is refined in smelters, Goss was quoted as saying, there is no way of identifying the country of its origin. The only way to the assure the SEC that the metals don’t come from central Africa, he said, is to refuse to do business with anyone “who touches central Africa,” the Voice of America reported….

The law ought to be repealed. The auto industry and its suppliers shouldn’t be encumbered with the duty of solving the internal problems of central Africa.

At the very least, any regulations ought to allow manufacturers to report minerals as of an “indeterminate origin” until they are able to develop techniques for tracing and indentifying the raw materials in a more cost effective manner.

The National Association of Manufacturers submitted formal comments (here) to the Securities and Exchange Commission on March 2, estimating it will cost industry $9-16 billion to put the new regulations into effect.

The Detroit News reports, “Suppliers warned about ‘conflict minerals’“:

Washington — New disclosure rules for minerals from war-torn Africa could impose a major burden on auto suppliers.

Six of the largest automakers have warned suppliers to prepare for federal regulations requiring them to disclose whether they use “conflict minerals” in auto parts.

The joint letter from the heads of purchasing from General Motors Co., Ford Motor Co., Chrysler Group LLC, Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. told suppliers that the rule will require them to disclose the use of minerals from the Democratic Republic of the Congo and neighboring countries.

Conflict minerals are defined as tin, tantalum, tungsten, or gold. The Dodd-Frank Wall Street Reform and Consumer Protection Act required the Securities and Exchange Commission to propose regulations to require public companies to supply detailed reporting of their conflict mineral controls and sourcing. Challenged by the difficulty of the task — consider the complexity of global supply chains — the SEC recently delayed implementation of the rule until the second half of this year.

The National Association of Manufacturers submitted formal comments (here) to the SEC on March 2, estimating it will cost industry $9-16 billion to put the new regulations into effect and urging the SEC and Obama Administration to conduct a more rigorous analysis of the costs. The impact on supply chains — so important to the auto industry — is a key concern. As the NAM summarized in a briefing document for the SEC:

While the new reporting mandate only applies to companies required to report to the SEC, we expect these requirements will rapidly be passed through the entire supply chain. The requirements will effectively force suppliers not subject to SEC reporting to maintain extensive records of their source materials, costing them thousands of dollars to establish and maintain these records. The NAM believes that the proposed rule is a significant rulemaking and will cost U.S. industry between $9-16 billion to implement.

This memo from Dykema Gossett addresses the central issues, as well: “Conflict Minerals Act will have widespread impact on global supply chain.”

Then why all the social policy? From Diana Furchtgott-Roth of the Manhattan Institute, “Racial, Gender Quotas in the Financial Bill?”

I was searching the bill for a provision about derivatives. What did I find but Section 342, which declares that race and gender employment ratios, if not quotas, must be observed by private financial institutions that do business with the government. In a major power grab, the new law inserts race and gender quotas into America’s financial industry.

In addition to this bill’s well-publicized plans to establish over a dozen new financial regulatory offices, Section 342 sets up at least 20 Offices of Minority and Women Inclusion. This has had no coverage by the news media and has large implications.

The Treasury, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the 12 Federal Reserve regional banks, the Board of Governors of the Fed, the National Credit Union Administration, the Comptroller of the Currency, the Securities and Exchange Commission, the new Consumer Financial Protection Bureau…all would get their own Office of Minority and Women Inclusion.

Furchtgott-Roth is referring not to the text of H.R. 4173, but rather to Section 342 of the House Committee Report: House Report 111-517 – DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT. 

The section, “OFFICE OF MINORITY AND WOMEN INCLUSION,” begins:

The title requires the establishment of offices of Minority and Women Inclusion by the Treasury Department, and the financial regulators, to coordinate technical assistance to minority-owned and women-owned businesses and to promote diversity in the workforce of the regulators.

It takes a mighty circuitous argument to claim this provision has anything to do with strengthening oversight and regulation of the U.S. financial system.