Congress Seeks Regulation Of Derivatives, Balancing End-User Needs
October 9, 2009
(Washington, D.C., Oct. 9, 2009) As a part of a broad overhaul of the United States Financial System, the Obama administration and Congress have proposed significant regulation of the over-the-counter (OTC) derivatives markets. This issue has come to the forefront in recent weeks.
Considering the vital role derivatives play in corporate risk management, FEI members have made it clear that this issue is of vital importance.
FEI’s Committee on Corporate Treasury (CCT) has been very active on this issue in sharing information with FEI members about legislative proposals as they move through the process, and seeking to help educate congressional members and their staffs about how companies utilize derivatives to help manage day-to-day business risks.
In late September-early October, corporate treasurers from CCT, along with FEI’s President and CEO Marie Hollein, met with staff in 21 congressional offices to help in this education initiative. FEI’s efforts were matched by dozens of other congressional meetings held by industry representatives from across all sectors of the economy. Additionally, CCT has helped draft letters to members of Congress and submitted statements for the record at various committee hearings. Specifically, On Oct. 2, a letter was sent to all members of Congress, which had 172 signatures from corporations and associations showing overwhelming support for this cause.
As a result, the message is finally being heard. Members of Congress are beginning to understand that corporations have a legitimate business need for utilizing derivatives products for risk management purposes.
FEI and other industry groups still seek to help ensure that the final legislation does not require derivatives used by business end-users to be executed on exchanges, centrally cleared or subject to daily mark-to-market collateral or onerous capital charges. Any of these requirements could have the unintended consequence of preventing companies from using these important risk management tools in the course of their everyday business operations.
The following summarizes the current legislative proposals being considered.
Derivatives Legislation Proposed by Rep. Barney Frank:
On Oct. 2, 2009, Rep. Barney Frank (D-Mass.), chairman of the House Committee on Financial Services, released a discussion draft in the House Financial Services Committee that addresses the need for regulation of the OTC derivatives market, and the full committee held a hearing on Oct. 7 to discuss this draft. An in-depth summary of this legislation, written by Chatham Financial can be found here. Among the highlights of the bill:
- The bill provides a broad exemption from mandatory central clearing and exchange trading for end-users that utilize derivatives for hedging, including balance sheet hedging or for risk management purposes.
- The bill provides an exemption for foreign exchange forward contracts and swaps, which are among the most widely used derivatives products for end-users.
- There is still a potential for capital charges to be imposed on non-cleared trades, which could reduce liquidity available for corporate end-users.
- There is also a potential for margin requirements to be imposed by regulators on all derivatives trades, which could also reduce liquidity available for end-users.
Other Legislative Proposals, Timelines:
During the coming months, four committees in both the House and Senate have jurisdiction on this issue and will likely take up derivatives regulation.
House Agriculture Committee: On Sept. 17, the committee continued its work on derivatives regulation by holding a hearing complete with testimony from Chairman Gensler of the Commodity Futures Trading Commission and Chairman Schapiro of the U.S. Securities and Exchange Commission. On Oct. 9, the committee released its version of the bill as well as a side-by-side comparison of the Treasury, House Financial Services and House Agriculture proposals.
House Financial Services Committee: On Oct. 14, the committee will begin the markup of Rep. Frank’s derivative legislation. FEI looks forward to working with Rep. Frank to voice its concerns.
Senate Agriculture Committee: Sen. Blanche Lincoln (D-Ark.) has recently taken over the position of chair for the Senate Agriculture Committee. There is potential for a hearing and discussion on derivatives regulation in the next few weeks.
Senate Banking Committee: Sen. Chris Dodd (D-Conn.) anticipates targeting January as the potential month for Senate floor action.
Prepared Oct. 9, 2009, by Tyler Roberts (email@example.com), policy analyst, Government Affairs, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.