End Users Are Still Waiting for Relief
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As the second anniversary of Dodd-Frank rolls around, corporate end users of derivatives are still waiting for the regulatory relief they were assured was on the way.
A letter from former Senators Chris Dodd and Blanche Lincoln to Congressmen Barney Frank and Colin Peterson confirmed the drafters’ intent to exempt end users like manufacturers, and energy and agriculture companies from requirements that were meant for big financial firms and speculators. They couldn’t have been more clear:
This legislation does not authorize the regulators to impose margin on end users – those entities that use swaps to hedge or mitigate commercial risk. If regulators raise the cost of end user transactions, they may create more risk. It is imperative that regulators do not unnecessarily divert working capital from our economy into margin accounts in a way that would discourage hedging by end users or impair economic growth.
The response from the House came back almost immediately. With the Senate letter in hand, Congressman Frank explained to his colleagues on the House Floor, “The marginal requirements are not on end users.”
And yet here we are, almost exactly two years later, still trying to square the regulators’ actions with the words of Mr. Dodd and Mr. Frank themselves.
The banking regulators, in particular, think the law does not allow for any kind of margin exemption for end users. So even if they thought it was a good idea, their hands are tied. So now, it is up to Congress to ask for a technical fix to a law that seemed untouchable.
The House answered our call with a booming bipartisan voice. Two end users bills passed the House on March 26 – with only 24 and 36 votes against.
And just last week, Senators Mike Crapo and Mike Johanns filed the House-passed margin bill as an amendment to the Farm Bill to keep the ball rolling. It’s not an easy lift, but the Coalition is squarely behind the amendment. Today/tomorrow we will be making the rounds in the Senate with a group of corporate treasurers who have flown in from around the country to make the case for regulatory relief for end users.
The price of inaction today is the same as it was two years ago when Senators Dodd and Lincoln scrambled to clarify a small point in a very big bill: higher hedging costs which will lead to less hedging, or less economic growth.
Either outcome is a terrible idea is today’s anemic and hazardous economic environment. Protecting End Users from billions in cash margin requirements is not a Republican or a Democrat issue, and it never has been. Congress needs to rally around this targeted fix that will provide huge relief to Main Street. The Farm Bill may not be the perfect vehicle for moving this, but if not now, when?