Some of the most extensive changes yet to the Dodd-Frank Act moved a step closer to reality with the House Agriculture Committee's approval last week of seven legislative proposals to amend its Title VII derivatives rules.
The bills include the following:
H.R. 634, the Business Risk Mitigation and Price Stabilization Act, “ensures that end-users can continue to use derivatives to manage business risks without being subject to costly margin requirements.: It would provide an exemption from Dodd-Frank margin requirements for swaps transactions that qualify for the end-user clearing exemption.
H.R. 677, the Inter-Affiliate Swap Clarification Act, ensures that transactions between affiliates within a single corporate group are not regulated as swaps.
Proponents argue that if these inter-affiliate transactions are subject to the same regulation as other swaps, companies could be subject to double margin, and this centralized trading model may become cost-prohibitive. Regulators are also considering requiring that inter-affiliate swaps are treated the same as all other swaps—requiring margin, clearing, and price reporting.
H.R. 742, the Swap Data Repository and Clearinghouse Indemnification Correction Act of 2013, would allow data sharing between U.S. and international regulators and swap data repositories without “adding an unnecessary layer of legal bureaucracy.”
H.R. 992, the Swaps Regulatory Improvement Act, would amend Section 716 of the Dodd-Frank Act to limit the swap desk push-out requirement so that it does not apply to equity or commodity swaps, but it will continue to apply to structured finance swaps that are based on an asset-backed security.
H.R. 1003 raises the legal standard for cost-benefit analysis and ensures that the Commodity Futures Trading Commission “must consider the potential consequences of its actions on businesses.”
H.R. 1038, the Public Power Risk Management Act, would allow utility companies, and other non-financial entities to continue entering into energy swaps with government-owned utilities without being required to register with the CFTC as a swap dealer.
Utility special entities would be allowed to keep using traditional swap counterparties to help manage their risk related to the generation of electricity or production of natural gas. “To hinder these utility's ability to manage risk would only increase their costs and possibly lead to higher energy rates for millions of Americans – an unacceptable result during a period of tremendous economic uncertainty,” a committee description of the bill says.
H.R. 1256, the Swap Jurisdiction Certainty Act, would direct the CFTC and the Securities and Exchange Commission to adopt a joint rule on how they will regulate cross-border swaps transactions as part of the new requirements created in the Dodd-Frank Act.
Any cross-border rule jointly issued by the two agencies must go through a formal rulemaking process subject to the Administrative Procedures Act. No “guidance” from either Commission will have the force of law. This would ensure that foreign countries with broadly equivalent regulatory regimes are allowed to govern derivatives transactions within their own borders unless the CFTC and SEC determine that they are not honoring their 2009 G20 commitments to enact financial regulatory reforms surrounding the trading of derivatives.
Financial Executives International, an association of CFOs and other senior-level finance executives, has worked with the Coalition of Derivatives End-Users to lobby for the legislation. Christina Crooks, senior manager of government affairs for FEI, said they wanted to ensure that “end-users who are just hedging risk and don't pose systemic risk don't get regulated in a costly and burdensome way that they weren't intended to. “They are just using derivatives to limit risk,” she says.
Crooks admits that, despite last week's success with the Agriculture Committee, upcoming votes will be more difficult. She remains optimistic, however, explaining that 2012, being an election year, meant that no one “wanted to touch Dodd-Frank.”
“This year we have a little bit better chance,” she says. “At least with this Congress, folks are a little more open to making tweaks that need to be made to make the law workable. Working with a chisel instead of a sledgehammer is really the way to go here.”
While FEI may be pleased by what it sees as progress, some watchdogs are cringing.
The Swap Jurisdiction Certainty Act, for example, has raised fears that large U.S. banks operating internationally could shuffle paperwork through their international locations to avoid domestic derivatives regulation.
Better Markets, a non-profit organization that promotes the public interest in the financial markets, has criticized H.R. 1003 as imposing “unnecessary economic analysis on every financial reform rule proposed by the CFTC."
“Wall Street uses cost-benefit analysis as its primary weapon in its many lawsuits to kill financial reform and protect their profits and bonuses, says Dennis Kelleher, president of the group.
The next step for the seven bills is an April 11 hearing before the House Committee on Financial Services.