Regulations implementing “Dodd-Frank Wall Street Reform and Consumer Protection Act” (Dodd-Frank Act) provisions that impact end-users of derivatives need to be carefully tailored so that they do not disrupt risk-management practices that pose no systemic risk to the economy. The Business Roundtable helped create and runs the Coalition for Derivatives End-Users to give a voice to the end-user community in debates over derivatives policy and regulation. We are continuing to advocate for an unambiguous exemption for derivatives end-users from margin requirements for uncleared OTC derivatives and to avoid other costly and unnecessary regulation of end-user trades, both internal and street-facing. Managing risk through hedging is essential for many businesses, particularly regarding volatile commodity prices, currencies and interest rates. Moreover, end-users did not contribute to the financial crisis and, in fact, many were able to successfully mitigate their risks during this period by using derivatives.
Potential Impact of Regulation
Overly broad derivatives regulation will be economically harmful. A March 2014 Coalition survey of chief financial officers and corporate treasurers found that a margin requirement on uncleared OTC derivatives would have harmful effects on end-user companies. 86% of respondents indicated that fully collateralizing OTC derivatives would adversely impact business investment, acquisitions, R&D and job creation. And 91% of respondents reported that a margin requirement would alter the way they hedge risk. This problem will be exacerbated if regulators impose margin requirements on swaps executed by a treasury affiliate of an end-user company.
Although key House and Senate negotiators publicly stated their support for a clear end-user exemption from margin, regulators have not followed this path. As a result, legislation clarifying the original Congressional intent may be necessary. In the meantime, regulators should not promulgate rules that impose unnecessary regulatory burdens on end-users.