Swaps Margin Votes Near

After months of fretting, non-financial companies that use over-the-counter swaps should find out this week what regulators are proposing in terms of margin requirements, which are expected to affect at least some corporate end-users.

In fact, Tuesday will be jam-packed with margin-related events. At a Commodity Futures Trading Commission (CFTC) meeting at 9:30 ET Tuesday morning, the commission is set to vote on a proposal that is expected to exclude corporate end users from margin requirements.

At a meeting that begins half an hour later, the Federal Deposit Insurance Corp. (FDIC) will vote on a proposal to require banks it regulates to subject at least some corporate customers to collateral requirements on swaps trades. Other banking regulators, including the Federal Reserve, are expected to follow the FDIC's lead and issue similar proposals.

Tuesday afternoon, the Senate Committee on Banking, Housing and Urban Affairs will address the issue, listening to top regulators as well as swap industry executives. Earlier this month, the committee chairman, Tim Johnson (D-S.D.), and the heads of three other congressional committees with jurisdiction over derivatives sent a letter to the CFTC, the Fed, the Securities and Exchange Commission and Treasury expressing their support for an end-user exclusion from margin requirements.

CFTC chairman Gary Gensler has stated his support for a corporate exclusion--a stance expected to be reflected the CFTC's proposal. However, the CFTC regulates only nonbank financial institutions, which typically deal in energy and agricultural swaps.

Companies that are hedging interest-rate and currency risks--two of the biggest over-the-counter derivatives markets--use bank counterparties, whose regulators are expected to require them to impose margin requirements on corporate customers if the swaps are not cleared by a registered clearing agency.

The requirements, however, are expected to be limited to circumstances in which the corporate customer's net mark-to-market derivatives exposure exceeds specified thresholds.

"This is where the only silver lining shows up," says Luke Zubrod, director at Chatham Financial. "So even though the [banking] regulators believe they are required to impose margin, given the legislative text, their proposal will attempt to reflect that end users don't contribute meaningfully to systemic risk."

Tom Deas, treasurer at FMC Corp. and president of the National Association of Corporate Treasurers, says for corporate users, a continuing concern is "when at the very time companies could least afford demand on their liquidity--during a crisis--the [regulators] would lower that threshold."

Deas will represent corporate end users at the Senate hearing.


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