April 08, 2013
Background Paper on OTC Derivatives End-User Exemption
Related Studies & Resources
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 throughout the legislative and regulatory processes. We are continuing to advocate for an unambiguous exemption for financial and non-financial end-users from margin requirements 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 the financial crisis and, in fact, many were able to successfully mitigate their risks during this period by using derivatives.
Overly broad derivatives regulation will be economically harmful. An April 2010 Business Roundtable survey found that a three percent margin requirement could result in the loss of up to 120,000 jobs. A February 2011 survey conducted by the Coalition confirmed these findings. By unnecessarily tying up capital, money needed for job-creating investments will be reduced. This problem will be exacerbated if regulators impose similar requirements on swaps between the affiliates of a single company.
Although key House and Senate negotiators publicly stated their support for a clear end-user exemption, 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.