Two U.S. lawmakers who will take leadership roles in the next Congress said regulators must ensure manufacturers and commercial end-users are exempt from margin requirements for the $583 trillion swaps market.
It is “critically important” that the end-user exemption be clarified by agencies including the Commodity Futures Trading Commission and Securities and Exchange Commission, Republican Representatives Spencer Bachus of Alabama and Frank Lucas of Oklahoma wrote in a letter to Treasury Secretary Timothy F. Geithner, Federal Reserve Chairman Ben S. Bernanke, SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler. The CFTC and SEC are writing swap-market rules required by the Dodd-Frank Act.
“We have serious concerns that Dodd-Frank will force American companies, which did not cause or contribute to the financial crisis, to move billions of dollars in capital onto the sidelines,” Bachus and Lucas wrote in the letter today. Bachus was selected to lead the Financial Services Committee and Lucas picked to lead the Agriculture panel when Republicans take over the House next month.
Dodd-Frank, the financial regulation overhaul enacted in July, requires that most swaps be moved to clearinghouses, exchanges and other trading platforms to boost transparency after largely unregulated swaps contributed to the credit crisis in 2008. Bachus and Lucas said they would be open to delaying deadlines that require most rules to be completed by mid-July.
“We encourage you to carefully deliberate and take the time necessary to ensure that implementation of the act’s major overhaul of the derivatives market is done correctly the first time,” the lawmakers wrote.
Representative Scott Garrett, a New Jersey Republican slated to lead a Financial Services subcommittee, wrote a Dec. 15 letter asking Geithner to make clear in writing whether end- users are exempt.
Bachus and Lucas also urged regulators to exempt foreign- exchange swaps and forwards from the clearing and trading requirements other swaps will face under Dodd-Frank. The law leaves that determination to be made by the Treasury secretary.
The foreign exchange market is “stable”, and it is “vital” that such derivatives are excluded, Bachus and Lucas said in their letter. A coalition of 20 financial firms, including Deutsche Bank AG and UBS AG, urged Treasury to grant the exemption.
Swaps and other derivatives are financial instruments whose value is based on an underlying security or benchmark, such as a stock option. Companies may use them to hedge risks and other investors employ them to bet on markets.
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