Sunday, June 16, 2013

House Passes Legislation Codifying Dodd-Frank Derivatives End User Exemption and Ending Indemnification

The House of Representatives has passed by an overwhelming bipartisan vote of 411-12 H.R. 634, the Business Risk Mitigation and Price Stabilization Act, which codifies an exemption for non-financial end users that use derivatives in their commercial businesses from the margin requirements of the Dodd-Frank Act. The House also passed, by a strong bipartisan vote of 420-2, the Swap Data Repository and Clearinghouse Indemnification Act, H.R. 742, which would ensure that U.S. and foreign regulators can share necessary swaps data to increase market transparency and facilitate global regulatory cooperation.

The Dodd-Frank Act requires swap data repositories and clearing organizations to make data available to foreign regulators. But, under Dodd-Frank, this data-sharing can happen only if foreign regulators agree to indemnify the U.S. entity and U.S. regulators for any corresponding litigation expenses that might arise. Foreign regulators have been unwilling or unable to agree to such indemnification agreements under their own legal structures. Agriculture Committee Chair Frank Lucas (R-Okla) has noted that some jurisdictions don’t have the concept of indemnification, so the indemnification provisions prevent the necessary data-sharing. To ensure that U.S. and foreign regulators have access to derivatives data, H.R. 742 would eliminate the indemnification provisions that would otherwise impede the necessary data-sharing arrangements.

Last year, the SEC recommended that Congress consider removing the indemnification requirement added by the Dodd-Frank Act. The indemnification requirement interferes with access to essential information, said Ethiopis Tafara, then Director of the SEC Office of International Affairs, including information about the cross-border OTC derivatives markets. In removing the indemnification requirement, Congress would assist the SEC, as well as other U.S. regulators, in securing the access it needs to data held in global trade repositories.

H.R. 634 ensures that end users can continue to use derivatives to hedge business risk, such as the cost of fuel. There is a broad consensus that Congress never intended for nonfinancial end-users to be required to post margin under Dodd-Frank. Legislative history indicates that Dodd-Frank intended to exempt end-users from margin requirements. However, there is regulatory uncertainty around the issue because, while the SEC and the CFTC would exempt end-users from margin, the Federal Reserve has issued regulations that would capture many end-users.

House Ag Committee Ranking Member Collin Peterson (D-Minn) said that the legislation was needed because the banking regulators, unlike the SEC and CFTC, ignored the will of Congress and required end-users to post margin. Rep. Mike McIntyre (D-NC) said that true end-users use derivatives to protect from losses and ensure stability and not to engage in speculation, adding that H.R. 634 will not apply to the major financial institutions. This is a critical bill, he emphasized, to ensure that the intent of Congress is not ignored

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