Rules for derivatives pit U.S. business against U.S. Treasury.

• Author: Barlas, Stephen
• Position: Regulation

The Obama administration's implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act's provisions on derivatives has set off a political slugfest, with U.S. Treasury Secretary Timothy Geithner and other federal regulators in one corner and business financial executives in the other. What is surprising, and maybe ultimately the knock-out blow, is that despite the sharply partisan atmosphere on Capitol Hill on many other issues, for this one both Republicans and many Democrats appear to be in the corporate corner.

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Sen. Richard Shelby (R-Ala.) highlighted the bout on April 12 at hearings in the Senate Banking Committee when he asked Thomas C. Deas Jr., vice president and treasurer of FMC Corp., a hearing witness that day, whether he agreed with Geithner that derivatives "only benefit Wall Street, not Main Street."

"No, sir, I don't," Deas responded. "We are manufacturing goods consumed in the U.S. and derivatives help us offset risks we couldn't otherwise control." Deas was representing the National Association of Corporate Treasurers and has been a leading lobbyist for the Coalition of Derivatives End-Users, of which Financial Executives International is also a member.

The Obama administration's implementation of Dodd-Frank's exemption for clearing and margin requirements for nonfinancial users of derivatives is a major sticking point with business, especially the margin requirements. The Federal Reserve, Federal Deposit Insurance Corp. and other banking regulators proposed a rule on margins on April 12. It was roundly criticized within the business community.

A week prior to the Senate Banking hearing, Sen. Tim Johnson (D-S.D.) and another Democratic Senate committee chairman had written to Geithner, Federal Reserve Chairman Ben Bernanke and other federal banking regulators pleading with them to prohibit margin set-asides for commercial end users of derivatives who are hedging business risks. But that plea fell on deaf ears.

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"The letter sent by Sen. Johnson and others reaffirmed congressional intent and admonished regulators to ensure that end users were not subject to such requirements," explains Deas. "However, the prudential regulators' proposal indeed subjects virtually all end users to margin requirements."

The Obama administration, however, did pull its punch on one issue. In late April, the Treasury Department announced its decision to exempt foreign exchange (FX) swaps and forwards from the definition of "swaps"--meaning they do not have to be cleared, nor is margin an issue.

This was welcomed by the mostly large multinationals that do extensive exporting...