US groups win partial victory on derivatives

By Tom Braithwaite in Washington

Published: April 12 2011 19:24 | Last updated: April 12 2011 19:24

Large US companies fighting to escape expensive rules on derivatives trading have won a partial victory, after regulators put forward plans to hit hedge funds and to spare non-financial companies.

The requirement to post margin, or collateral in the form of cash or government securities, against derivatives transactions has been the most hard-fought area of the Dodd-Frank financial reforms for large US companies. The likes of IBM and Boeing have argued it would tie up billions of dollars in collateral, hurting their businesses and the wider job market.

US regulators on Tuesday published proposals which they said made the impact “minimal” for these so-called commercial end users. Banks trading with a company would be required to assess its credit risk and demand margin requirements for transactions that exceed a certain threshold and do not pass through a clearing house.

Jamie Dimon, chief executive of JPMorgan Chase, said last month that US companies would simply take their business overseas to avoid draconian rules. Using the example of Caterpillar, Mr Dimon said the US group would take its custom to Singapore.

However, Scott O’Malia, a Republican commissioner at the Commodity Futures Trading Commission, said the proposals left the door open to margin requirements for non-financial groups and were therefore unacceptable. He was particularly upset because the instructions from members of Congress were to leave non-financial users out of the new regime.

“We are imposing increased costs on non-systemically relevant commercial firms, who will now be faced with the decision of hedging risk or investing in their business,” he said. He added that the banking regulators’ proposals would “require that end users pay … margin to banks”.

But an official at the Federal Deposit Insurance Corporation, one of the regulators involved in the rule-making, denied that would be the effect of the rule. “End users would not be required to post margin … below a credit exposure limit that the bank has established,” the official said.

Sam Peterson, an analyst at Chatham Financial, said regulators were going against the intent of Congress by stating that they could impose margin requirements on non-financial companies. “We disagree with that,” he said. “The ideal would be that we have a clear iron-clad exemption.”

Regulators are now braced for a flood of comments on their proposals.

Hedge funds and other “high-risk” financial companies would be required to post margin under the rules set out on Tuesday – many of them are already required to do so by banks managing their credit risk. But lower-risk financial companies, such as a community bank engaging in a few derivatives transactions a year, could escape margin requirements.

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