Posted by Jess Sharp on July 21st at 12:00pm
Cross-posted from Chamberpost
Today’s hearing in the House Agriculture Committee will give Main Street businesses a chance to sound the alarm about the reckless pace and outrageous cost of derivatives regulation.
Let’s hope the regulators get the message.
Passage of the Dodd Frank Act kicked off an intense year of regulatory activity across the board, but the most concentrated, transformative effort has taken place in the over-the counter (OTC) derivatives market.
Unrealistic Congressional deadlines have forced regulators into a full sprint, cranking out rules without regard for full consideration or logical sequencing. This leaves companies in the impossible position of, for instance, commenting on proposals that may not even apply to them because definitions and compliance standards are moving through the process out of order.
The need for speed has also pushed the regulators to fudge their cost-benefit analyses. For example, in April, the CFTC Inspector General issued a report pointing out that the CFTC generally employs a “one-size-fits-all” approach to cost-benefit analysis, and that the judgments of the Commission’s economists are often overruled. By whom? The lawyers, of course.
Cutting corners in derivatives rulemaking can have huge consequences, not just for sophisticated players in the financial markets, but also for Main Street companies that use derivatives to hedge business risk. Derivatives provide a way for these companies to lock in commodity prices, interest rates, or foreign currency exchange rates to keep their prices stable. The Chamber, through the Coalition for Derivatives End-Users, is working to preserve these critical risk management tools for manufacturers, agricultural producers, energy utilities, and others.
Despite the clear intent of Congress to shield these companies from the costliest derivatives rules, including margin (collateral) requirements, regulators have refused to concede the point, or even to come to an administration consensus about how they should be treated.
For these end user companies, regulation doesn’t just mean paperwork and compliance costs; it means cash out the door that could otherwise be put to work expanding the business and creating jobs. A survey and analysis conducted by the Coalition found that a requirement to impose initial margin on OTC derivatives could lead to a loss of 100,000 to 120,000 jobs within S&P 500 companies alone.
Perhaps even more shocking was the administration’s own estimate of the economic impact of the margin rules. The Office of the Comptroller of the Currency released an analysis as part of the proposal that concluded banks and other businesses would have to set aside $2.05 trillion in working capital to comply with the new standards.
If that’s not a jobs killer, I don’t know what is.