Yesterday, Shopfloor commented on the Senate Agriculture Committee’s vote on derivatives legislation that would generally preserve manufacturers’ and other commercial end users’ access to this important risk management tool.

The measure is expected to be included in the broader financial services reform legislation set for debate in the Senate next week.

However, as Roll Call [subscription] reports today, the derivatives plan — as do many other provisions — faces opposition, and its inclusion in the final bill is uncertain:

Senate Agriculture, Nutrition and Forestry Chairman Blanche Lincoln (D-Ark.) appears to be fighting an uphill battle to get her piece of the financial regulatory reform bill into the larger package before it hits the floor, possibly next week.”

She added that she is determined to make sure her legislation, or a compromise she approves of, makes it into the underlying bill and does not get set up for near-certain failure as a stand-alone amendment.

Marketwatch, “Senate committee approves controversial derivatives bill“:

WASHINGTON (MarketWatch) — Big commercial banks would be forced to shed lucrative derivatives trading operations under provisions of controversial, sweeping legislation to regulate the $450 trillion derivatives market that was approved Wednesday by the Senate Agriculture Committee.

The vote was 13-8 with all Republicans opposed except for Sen. Charles Grassley, R-Iowa. The committee has 12 Democrats and nine Republicans.

The bill establishes a clearinghouse and collateral requirements for trading in derivatives, and has important exemptions for many businesses, such as manufacturers, airlines, and other commercial “end users.” Marketwatch quotes Dorothy Coleman, the NAM’s top tax policy person: “We are encouraged that the bill approved this morning by the Senate Agriculture Committee recognizes the importance of these risk management tools to end-users like manufacturers.”

Marketplace also talked to the NAM in this story, “Some industries cheer derivatives vote.”

Committee Chairman Blanche Lincoln’s news release, “Bipartisan Bill Passage will Pave Way to Ending Backroom Wall Street Deals.”

UPDATE (8 a.m.): Wall Street Journal’s piece is good, “Grassley Bucks GOP, Backs Derivatives Curb.” There is, of course, much, much more in the financial reg legislation than just derivatives regulation. The consumer finance protection agency could have huge implications.

Manufacturing companies have been intensely engaged in the debate over legislation to expand federal regulation of the financial industry, concerned that Congress will restrict access to an important tool, over-the-counter derivatives.

Manufacturers generally support an exemption for end-users, that is, companies that use OTC derivates not to speculate, but rather to manage their risk.

“We didn’t cause the problem,” says Dorothy Coleman, vice-president for tax policy at the National Association of Manufacturers (NAM). “This isn’t speculating. We’re not making money off these transactions.”

That’s from a Bloomberg story that examines the importance of risk management for the brewing industry and users of agriculture commodities, “Let’s Have a Beer and Talk Derivatives”

Bloomberg outlines the issues more fully in a separate story, “Industry Opposes ‘Monumental’ Expansion of CFTC Power“:

A provision in the bill known as the “end-user exemption” is of particular concern to industry groups representing Koch, Lockheed Martin Corp. and Caterpillar Inc. The rule would exempt companies that use derivatives to hedge their risks in commodities, currencies and interest rates from posting margin, or a deposit against default, on over-the-counter trades.

Margin requirements would increase costs and cripple small businesses, said Paul Cicio, president of the Industrial Energy Consumers of America, whose group represents companies including Dow Corning Corp., The Goodyear Tire & Rubber Co. and Tyson Foods Inc.

And …

The Natural Gas Supply Association and the National Corn Growers Association are writing a letter to Dodd and Senators Harry Reid and Richard Shelby saying the end-user exemption is too limited, according to a draft obtained by Bloomberg. The gas association conducted a study in December that concluded that requiring end-users to clear their derivatives transactions could cost the U.S. economy as much as $900 billion.

“Without such an exclusion, energy and commodity producers will be forced to divert capital that would have otherwise been invested in producing energy, food and thousands of jobs, while risk would be increased rather than decreased,” the trade groups say in the letter.

The NAM is a leader in The Coalition for Derivatives End-Users, which supported a broader exemption included in the House-passed version of the financial regulation bill. (See this Oct. 2, 2009, letter for the coalition’s principles.)

The U.S. House yesterday by a vote of 304-124 passed an NAM-supported amendment sponsored by Rep. Scott Murphy (D-NY) to H.R. 4173, the Wall Street Reform and Consumer Protection Act, to expand the federal government’s regulation of the financial sector, especially consumer finance. The legislation also further regulates over-the-counter (OTC) derivatives, a tool that manufacturing companies use to manage risk. The National Association of Manufacturers wrote a “Key Vote” letter supporting the Murphy amendment, explaining:

Manufacturers of all sizes use customized OTC derivatives to manage the cost of borrowing or other risks of operating their businesses, including fluctuating currency exchange, interest rates and commodity prices. In today’s challenging economy, these risk management tools help businesses keep operations going, invest in new technologies, build new plants and retain and expand workforces.

Unless amended, H.R. 4173 could unnecessarily subject some end-users to burdensome margin and collateral requirements aimed primarily at those whose activities present risk to the financial system. The Murphy-McMahon-Kratovil Amendment makes clear that end-users do not pose systemic risk, should not be designated as “Major Swap Participants” under the legislation and, therefore, should not be subject to these additional costly requirements. 

Bloomberg also reported on the provision in its story, “House Trims State Powers in Debate on Financial Rules Overhaul.”

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 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.

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”

The National Association of Manufacturers joined 170 businesses and organizations (and that’s a lot by coalition letter-writing standards) in sending  a letter to Congress to urge members to preserve the ability of companies to use over-the-counter (OTC) derivatives to manage their risk. (Here’s a copy.)

In May the Department of Treasury proposed new regulations of OTC derivatives (Secretary Geithner letter) to address concerns about the stability of financial markets. Congress has held hearings as well.

The Coalition for Derivatives End-Users, which sent the aforementioned letter, supports efforts to improve transparency, accountability and stability in the derivatives market. But the concern is the proposals would significantly increase costs for companies seeking to hedge risks through OTC products, limiting or even eliminating eliminate products needed for risk management.

Leaders of the U.S. Chamber, Business Roundtable, and NAM are all quoted in the news release that went out announcing the letter. To wit:

“Manufacturers in a wide range of industries use customized OTC derivatives to manage the risks of operating their businesses, including fluctuating currency exchange, interest rates and commodity prices. It is critical that policy makers ensure companies’ continued access to OTC derivatives, providing them with greater financial certainty and allowing them to allocate resources to core business activities,” said John Engler, President of the National Association of Manufacturers.

UPDATE (4:15 p.m.): The obvious peg is a House Financial Services Committee hearing next Wednesday, “Reform of the Over-the-Counter Derivative Market: Limiting Risk and Ensuring Fairness.”

We made a mistake by omitting this hearing in Monday’s “Dispatch from the Front,” Shopfloor.org’s look at the week ahead. The possibility of regulatory overreach on over-the-counter derivatives  is a major concern of large companies and manufacturers who want to maintain access to domestic capital.

So here is Treasury Secretary Geithner’s testimony today to a joint hearing of the House Finance and Agriculture Committees, “A Review of the Administration’s Proposal to Regulate the Over-the-Counter Derivatives Market.” Geithner:

In designing its proposed reforms for the OTC derivative markets, the Administration has attempted to achieve four broad objectives:
* Preventing activities in the OTC derivative markets from posing risk to the stability of the financial system;
* Promoting efficiency and transparency of the OTC derivative markets;
* Preventing market manipulation, fraud, and other abuses; and
* Protecting consumers and investors by ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties.

Good goals, one reckons. Although “inappropriate” is such a weasel word.