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End-Users May Face Swap Margin Requirements as CFTC, FDIC Split

U.S. regulators proposed two sets of rules for margin requirements in swap transactions that may force airlines, large manufacturers and other commercial end-users to set aside money to reduce risk in certain trades.

End-users would escape margin requirements in swaps with non-bank dealers or major swap participants under a proposal approved today by the Commodity Futures Trading Commission. A joint proposal released by the Federal Deposit Insurance Corp., Federal Reserve and three other regulators could force end-users to post margin in swaps with banks.

The proposals “couldn’t be further apart,” said Scott O’Malia, a Republican CFTC commissioner who cited the “lack of harmonization” in voting against his agency’s proposal. Both measures were released for public comment.

The Dodd-Frank Act requires agencies including the CFTC, Securities and Exchange Commission and the Fed to establish margin requirements as a way of limiting risk in the $583 trillion global swaps market. Lawmakers sought safeguards after largely unregulated trades exacerbated the 2008 credit crisis.

Had they been in place in 2008, the rules would have prevented financial firms from amassing large uncollateralized or under-collateralized positions similar to those that toppled Lehman Brothers and forced a bailout of American International Group Inc., FDIC chairman Sheila Bair said.

Explicit Exemption

Commercial end-users -- companies such as airlines, utilities and manufacturers that use derivative to hedge risk -- have lobbied for two years for an explicit exemption from having to post margin, arguing that such a requirement would divert capital from hiring workers or investing in their businesses. Dodd-Frank left it to regulators to determine whether end-users would need to post margin in swaps that aren’t settled by a central clearinghouse.

The Coalition for Derivatives End-Users, including farm manufacturer Deere & Co. and brewer MillerCoors, has met with bank regulators, the CFTC and members of Congress on the issue.

“It is disconcerting to see this divergence among the regulators,” Thomas Deas, president of the National Association of Corporate Treasurers, said in an e-mail after the votes. “Being subject to a margining framework with certain exemptions subject to future revision makes us especially nervous.”

The CFTC’s three-tier proposal requires margin payments in swaps between non-bank dealers, major swap participants and smaller financial entities. The proposal includes an exemption for trades with non-financial commercial end-users.

The joint-agency proposal would require swap dealers to calculate a credit exposure limit for a commercial end-user and collect initial and variation margins when an exposure exceeds the limit. Those limits would be determined between the bank and the end-user rather than by regulators.

The proposal may lead some end-users to post margin, particularly when there are large swaps used for speculative, rather than hedging purposes, according to an FDIC official who described the proposal to reporters before the vote.

The bank regulators looked to minimize the impact on end-users by not setting a minimum threshold for the size or type of transaction that would require margin, Bair said.

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