From the May 2010 issue of Treasury & Risk magazine

OTC Derivatives Lessons

How does a bunch of nerds in corporate treasuries mobilize to keep their best risk management practices and change the minds of members of Congress? They're doing it now to protect over-the-counter derivatives. It started when a few alert practitioners at companies like Cargill, Chesapeake Energy and 3M, as well as vigilant technology vendors and lobbyists, spotted a provision that would require central clearing of all derivative trades buried in cap-and-trade energy legislation that had passed the House in June 2009. They blew the whistle.

Most treasury staffs are indirectly connected to the power corridors of Washington through trade associations. The problem is most business lobbyists have a limited understanding of how and why corporate hedgers use OTC derivatives, and experts in OTC derivatives have a limited understanding of how to influence legislation. The challenge was to bring them together.

Financial sector lobbyists in Washington are adept at finding areas of common interest, so pulling together a coalition of like-minded groups was a natural response to the issue, explains Cady North, manager of government affairs for Financial Executives International (FEI). Once practitioners were alarmed about what could happen, phones rang, text messages and e-mails flew, and the Coalition for Derivatives End-Users was born, she reports. It had no staff, no offices, no budget, no charter, but it was effective nonetheless.

The first task was bringing treasury pros together with lawmaking pros to help policymakers differentiate hedgers from speculators, reports Luke Zubrod, director of the U.S. public real estate advisory practice at Chatham Financial in Kennett Square, Pa. Chatham was invited to explain to congressional staffers how corporations used derivatives to hedge and what would happen if these tools were taken away, he says. The meetings with staff led to meetings with members of Congress.

During the coalition's campaign, treasury pros flew into Washington to meet with members of Congress, particularly members of the House Financial Services and Senate Agriculture committees, which were debating legislation that would trump the cap-and-trade provisions. "Our message was 'Don't restrict derivatives trading indiscriminately,'" Zubrod says. "We needed to explain that OTC derivatives end users are prudent professionals for whom OTC derivatives are essential tools and that requiring margin accounts would drain money from the productive economy."

The result was an exemption for derivatives end users in the bill that passed the House in December.

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