Swap market crackdown seeks to spare businesses

By Christopher Doering and Dave Clarke

WASHINGTON (Reuters) - Corporate America would be largely spared from increased costs when seeking to hedge business risks, such as spikes in commodity prices, under U.S. regulatory proposals issued on Tuesday.

Power companies, airlines, and major manufacturers feared that regulators would force them to post costly collateral, as part of a nine-month-old government crackdown on the $600-trillion off-exchange swaps market.

But there were sufficient differences between the Commodity Futures Trading Commission's plan and one issued by the Federal Deposit Insurance Corp, and other banking regulators, to keep some companies guessing about whether they will have to post collateral, or margin, when using derivatives.

"I believe commercial end-users and many of the financial end-users will be dissatisfied with the lack of harmonization among the different regulatory bodies," CFTC Commissioner Scott O'Malia said before dissenting in the agency's 4-1 vote to seek public comment.

The CFTC's proposal offers a clear exemption for corporations hedging their business risks. The bank regulators do not. The latter proposal could force corporations to post collateral if the bank selling a derivative finds that the corporation is too much of a credit risk.

"Despite the clear legislative history to the contrary, the regulators continue to misinterpret the Dodd-Frank Act as giving them authority to impose margin requirements on end-users," said a statement from the Coalition for Derivatives End-Users, an industry group.

Both the CFTC and FDIC plans are aimed at curbing swap speculation of the sort that amplified the devastating 2007-2009 financial crisis.

Profits hang in the balance not only for corporate end-users, but also for the big financial firms that dominate the swaps market, such as JPMorgan, Bank of America, Citigroup, Goldman Sachs and HSBC.

The proposals could be a relief to businesses as diverse as Constellation Energy, MillerCoors and Caterpillar -- all of which use swaps to manage risk.

Companies have argued for a generous exemption because they use derivatives solely to hedge risk. They insist they are not at risk of destabilizing the financial system, and have trumpeted the potential for higher costs.

One study estimated a 3 percent margin requirement on swaps used by Standard & Poor's 500 companies could cut capital spending by $5.1 billion to $6.7 billion.

Joe Siu, a senior adviser for Chatham Financial, said the differences between the CFTC's and the bank regulators' proposals are more nuanced than they might appear.

"At the end of the day, they may have the same effect," Siu said of the two plans. "I wouldn't blow it out of proportion."

The CFTC, which polices derivatives markets, and the FDIC, which regulates banks, are working on implementing scores of post-crisis regulations, including the swaps measures, mandated by 2010's Dodd-Frank Wall Street and banking reforms.

The agencies' proposals were issued for public comment for 60 days, meaning the earliest either agency could finalize their plans would be mid-June. Between now and then, the agencies will come under pressure to make modifications.


Some financial players were hesitant to downplay the lack of unison in the regulators' proposals.

"Some troubling differences in approaches are already apparent," said Randy Snook, executive vice president at the Securities Industry and Financial Markets Association, a lobbying group for the financial industry.

While the CFTC proposal does not require corporate hedgers to post margin for uncleared swaps, the FDIC's proposal requires banks to collect margin from these end-users if credit limit exposures become excessive.

The FDIC's proposal will give banks two options for determining whether they need to demand that corporations post margin on uncleared swap trades. The first option is to use a standard table that regulators will create. The second would be based on how much the trade could be affected over 10 days under stress.

"These and other differences must be addressed before fully implementing new rules," said Snook.

One of the toughest parts of implementing the derivatives reforms required under Dodd-Frank, which Congress left vague in important spots, is teasing apart swap speculation from legitimate hedging by commercial enterprises.

Nearly a third of all off-exchange derivatives trades last year were not secured by collateral, or margin, said the International Swaps and Derivatives Association.

(Reporting by Christopher Doering and Dave Clarke; Additional reporting by Sarah N. Lynch; Writing by Kevin Drawbaugh; Editing by Tim Dobbyn)