U.S. Senators Mike Crapo (R-Idaho), Mike Johanns (R-Nebraska), Richard Shelby (R-Alabama), ranking member of the Committee on Banking, Housing and Urban Affairs, David Vitter (R-Louisiana), Patrick Toomey (R-Pennsylvania), Jerry Moran (R-Kansas) and Mark Kirk (R-Illinois) today filed a Dodd-Frank amendment to S. 1619, the China Currency legislation. Dodd-Frank gave the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) a mandate to write new rules for the over-the-counter derivatives market, but the Senators say the regulators have undertaken the effort without giving sufficient consideration to how those rules will affect Main Street businesses and the overall economy, in addition to how they will interact with one another or affect the international derivatives landscape.
The amendment forces the regulatory agencies to take into account economic impact and international competitiveness concerns on business and carefully examine how the new rules interact with each other, extending the deadline for such rule changes for one year, to July 16, 2012. In July, the U.S. Court of Appeals for the District of Columbia Circuit struck down the SEC's proxy access rule--the first rule finalized under Dodd-Frank for failing to adequately consider the economic effects of the rule.
"End-users from manufacturing to energy to farming rely on financial risk management tools like over-the-counter derivatives to conduct regular business," Crapo said. "This amendment provides certainty for Main Street businesses by providing American companies with a clear exemption from excessive margin requirements that without change will lead to a higher cost of doing business. In addition to rationalizing the rulemaking process to reduce unnecessary costs caused by regulatory uncertainty, it encourages greater international coordination and harmonization to get the rules right rather than rushing them through and potentially harming the competitiveness of US markets. At a time when our economy continues to suffer from severe unemployment, it is critical that new regulations are thoughtfully crafted, supported by robust economic analysis, and promote safe economic growth."
"This amendment is critical to preventing unnecessary regulations and restoring certainty for Main Street businesses that had nothing to do with the financial crisis," Johanns said. "Dodd-Frank shortsightedly takes a valuable risk management tool away from our job creators, who in order to expand and hire must be able to appropriately manage their risks and protect their investments responsibly. Small businesses must not be held responsible for something they had nothing to do with, and our economy cannot be negatively impacted by overreaction."
"Both the CFTC and SEC have made a habit of missing deadlines and failing to do their homework when rushing to complete the requirements of the Dodd-Frank Act," Moran said. "This commonsense legislation will direct the regulators to work together on a plan to improve consistency and clarity in the rulemaking process. Main Street business should not be regulated like Wall Street financial institutions, and should be eligible for a robust end-user exemption."
"This amendment protects our ability to efficiently buy malting barley, hops and other ingredients used to brew our beers," said Kris Smelser, MillerCoors Regional Manager of the Burley, Idaho, grain elevator. "We appreciate his work to protect farm jobs in Idaho and many other major agricultural states."
"Over-the-counter derivatives play an important role in the U.S. financial markets and the overall economy," said Stephen O'Connor, Chairman of the Board of International Swaps and Derivatives Association, Inc. (ISDA). "It is vital that any new regulatory policies create level playing fields across borders for all market participants. Policy differences across jurisdictions may lead to increase costs, decreased liquidity, a reduction in growth capital, the erosion of US competitiveness and the loss of jobs in the U.S. financial markets. ISDA supports legislation that attempts to resolve the concerns of market participants regarding the extraterritorial application of OTC derivatives regulations."
Specifically, the amendment would accomplish the following:
1. Extends the July 16, 2011 deadline for Title VII of the Dodd-Frank Act to July 16, 2012. Both agencies have missed statutory deadlines and are certain to miss more. This amendment provides the proper statutory room for thorough and careful rulemaking.
2. Removes the unnecessary regulatory uncertainty. The amendment t requires the SEC, CFTC and the prudential regulators to jointly publish a schedule outlining the order in which the agencies will consider and implement the final rules. Affected market participants will be able to weigh in and be heard about how the rules should be adopted and implemented. Agencies will have to work together to come up with a coordinated schedule for proceeding with rulemaking and implementation. The agencies will have to take into consideration economic impact, international competitiveness, the interactions of the rules with one another and the implications of inconsistencies in the approaches taken by the different regulators.
3. Provides the SEC and CFTC with exemptive authority to facilitate orderly implementation of the derivatives rules consistent with the public interest.
4. Provides end-users with a clear exemption from margin requirements and modifies the definition of major swap participant to prevent Main Street businesses that are using derivatives to hedge business risks from being regulated like swap dealers. American manufacturing companies, energy producers, and farming groups have testified before Congress that if they were subject to margin requirements there will be enormous negative implications on how companies manage risk and the costs to them would be significant and in some cases insurmountable. Many businesses use over-the-counter derivatives to minimize the impact of commodity price, interest rate, and exchange rate volatility in order to maintain stability in earnings and predictability in operations.
5. Exempts transactions among different parts of a company from clearing and trading requirements so that businesses can effectively and efficiently manage their risks.
6. Requires the SEC and CFTC to give greater consideration to international developments in the derivatives markets. The legislation expands and extends a joint SEC-CFTC study on international swap regulation. It also sets clear bounds on the overseas application of the derivatives requirements, while allowing regulators to stop systemically dangerous transactions intended to evade U.S. requirements.
7. Creates an SEC office of derivatives to administer rules, coordinate oversight and monitor the developments in the market.