CFTC says swaps rules binge won’t cause hangover

(Reuters) – A top U.S. financial regulator rejected fears that new derivatives rules will hurt businesses trying to hedge their costs, saying the price of a six-pack of beer won’t skyrocket because of the reforms.

“We’re aware and focused on the cost of a six pack because we also oversee agricultural markets,” Commodity Futures Trading Commission Chairman Gary Gensler told the House Financial Services Committee on Tuesday.

“I would say our intention is not to have margin requirements applied to an end user such as MillerCoors,” said Gensler, a marathon runner who does not drink alcohol.

Thousands of companies such as brewer MillerCoors and heavy equipment maker Caterpillar, are concerned that they will have to set aside more capital, or margin, when using derivatives to hedge risk.

They argue that the derivatives they use to hedge against such things as raw materials prices and interest rate changes are not risky, and did not, and will not, destabilize the financial system.

In crafting last year’s Dodd-Frank financial law, Congress left it up to regulators to write rules that will dictate which companies will have to set aside more margin for derivatives.

The end-user provision is part of regulators’ larger effort to police the opaque $600 trillion global over-the-counter derivatives market. The rules are still in the proposal stage.

The Dodd-Frank law included provisions aimed at increasing oversight and reducing risk in the privately negotiated swaps market after contracts linked to sub-prime mortgages were blamed for exacerbating the 2007-2009 financial crisis.

The U.S. effort is part of larger global framework calling for standardized derivatives contracts to be traded on exchanges or electronic platforms. It calls for non-standardized contracts to be subject to higher capital requirements.

Despite this international effort, Republicans and U.S. businesses have charged that the derivatives proposals will drive up the cost of business for companies so much that they will take their capital and jobs overseas.

Scott Garrett, chairman of the House capital markets subcommittee, said he has been told by industry players that the CFTC’s rules could “literally spell the end of the U.S.- based derivatives market.”

On Monday a coalition of business groups issued a study saying the derivatives rules would divert much needed capital away from companies.

The coalition, organized by business groups such as the U.S. Chamber of Commerce, said that imposing 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 and cost up to 130,000 jobs.

Federal Reserve Governor Daniel Tarullo, also testifying at the House Financial Services Committee hearing, called the survey-based study “quick and dirty” and said it assumed that margin would be imposed on all end-users, which he said is incorrect.

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