CFTC Backs Exempting Companies From Rules Governing Derivatives as Hedges

The U.S. Commodity Futures Trading Commission will seek comment on derivatives regulations that a Republican member said would create a “lack of harmonization” in rules for financial companies and commercial end-users.

CFTC members voted 4-1 today to propose rules that would exempt end-users such as large manufacturers from requirements to set aside margin to reduce risk in trades with non-bank dealers or major swap participants. The Federal Deposit Insurance Corp. voted separately today to proposal a measure governing banks.

The Dodd-Frank Act requires agencies including the CFTC, the FDIC and the Securities and Exchange Commission to establish margin requirements as a way of limiting swap-market risk. Lawmakers sought the safeguards after unregulated trades helped exacerbate the 2008 credit crisis.

CFTC Commissioner Scott O’Malia, one of two Republicans on the five-member panel, said before the meeting that regulators “couldn’t be further apart” on their proposals.

“The rules proposed by the prudential regulators will require that end-users pay initial and variation margin to banks,” O’Malia said in remarks prepared for the CFTC meeting. “Commercial end-users and many of the financial end-users will be dissatisfied with the lack of harmonization,” said O’Malia, who voted against the CFTC proposal.

CFTC Chairman Gary Gensler said in his prepared remarks that the agency’s staff “worked very closely with prudential regulators to establish initial and variation margin requirements that are comparable to the maximum extent practicable.”

The proposals voted on by the CFTC and FDIC today will be released for public comment before final approval.

End-Users Coalition

Members of the Coalition for Derivatives End-Users, a group including agricultural equipment maker Deere & Co. (DE) and brewer MillerCoors, have lobbied for an explicit exemption, saying margin requirements would tie up capital that could be used to hire workers or expand business.

The CFTC rule would create a three-tier system for trades that aren’t guaranteed by central clearinghouses.

The first tier would govern swaps in which both sides are dealers or major swap participants. For each trade, the sides would need to pay or collect initial and variation margin that would be kept at a custodian.

The second tier would regulate margin in trades between dealers or major swap participants and smaller financial clients. In those trades, the dealer would need to collect margin from the client but not pay any margin.

The third category would include trades between dealers or major participants and non-financial end-users. Under the proposal, end-users would need separate credit agreements with dealers to limit risk. While not a requirement under the CFTC rule, those agreements could permit margin payments.

To contact the reporter on this story: Silla Brush in Washington at

To contact the editor responsible for this story: Lawrence Roberts at


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