The U.S. House voted to exempt manufacturers and commercial swap-users from collateral requirements and ease regulations on inter-company trades in a bid to amend the Dodd-Frank Act financial overhaul.
The collateral measure, approved 370-24 in Washington, is designed to bar regulators from requiring so-called end-users to post margin. MillerCoors LLC has sought an exemption for swaps it uses to hedge the price of aluminum, while Baltimore-based Constellation Energy Group (CEG) uses derivatives to hedge volatility in physical energy markets.
The two measures passed with bipartisan support and need Senate approval before heading to President Barack Obama for his signature. Republican and Democrat lawmakers have argued that regulators including the Federal Reserve and Federal Deposit Insurance Corp. have misinterpreted Dodd-Frank to lead some end-users to face margin requirements.
“They have interpreted Dodd-Frank as not providing a clear exemption,” Representative Scott Garrett, a New Jersey Republican, said today.
The Democrat-led Senate has yet to consider similar legislation and currently has no hearings or floor action scheduled on the bill. Senate Banking Committee Chairman Tim Johnson, at a hearing last week, said that he was open to making “technical corrections and fixing unintended consequences, but in today’s political environment, there will need to be broad bipartisan support to get anything approved.”
Dodd-Frank, the 2010 financial-regulation overhaul, is intended to reduce risk in the $708 trillion global swap market after largely unregulated trades helped fuel the 2008 credit crisis. The law is designed to have most swaps guaranteed by clearinghouses that stand between buyers and sellers, and traded on exchanges or other platforms.
A regulatory proposal published last April governing non- cleared swaps may lead end-users to post collateral, the Coalition for Derivatives End-Users has testified to Congress. The Fed, Federal Deposit Insurance Corp. and three other regulators designed the proposal to limit the burden on end- users, John Walsh, acting Comptroller of the Currency, said in December. The proposal would require swap dealers to set credit thresholds above which end-users could be required to post margin.
A separate measure, approved on a 357-36 vote, would bar regulators from imposing clearing, trading and margin requirements on transactions between affiliates of a company that files consolidated financial statements. “Without this bill, companies could face double the margin and regulatory costs,” Garrett said.
Exempting Certain Trades
The Institute of International Bankers and International Swaps and Derivatives Association Inc. have urged regulators to exempt inter-affiliate trades because they don’t present risks to the financial-system.
Requiring inter-affiliate swaps to comply with the clearing and margin rules, “could actually increase risk for individual swap dealers, as well as for the broader market, by impeding internal risk management and mandating strict adherence to costly and burdensome regulatory requirements that provide little to no benefits,” Keith Bailey, managing director at Barclays Capital, said in testimony before a House Financial Services subcommittee in October. Isda’s members included JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and Morgan Stanley. (MS)
Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said last month that the agency may seek comment on whether to require clearing for inter-affiliate trades between subsidiaries of a financial company. Transactions in which one party is a non-financial entity wouldn’t face the requirements, Gensler told House Agriculture Committee lawmakers on Feb. 29.
The House also passed by voice-vote a measure aimed at protecting attorney-client privilege on information that banks provide to the Consumer Financial Protection Bureau. The proposal, which has the support of Richard Cordray, the bureau’s director, would apply the same information protection guidelines as are followed by the other banking regulators.
The bureau proposed a rule earlier this month aimed at clarifying the legal confidentiality protections in place for documents that banks share with the agency.
Johnson and Senator Richard Shelby of Alabama, the top Republican on the panel, have introduced a similar proposal.
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