The U.S. House of Representatives passed a bill this week that exempts corporate end users of derivatives from margin requirements. End users are still likely to face higher costs for uncleared swaps, though, depending on how other Dodd-Frank Act proposals pan out.
The measure, H.R. 2779, sponsored by Reps. Steve Stivers (R-Ohio) and Marcia Fudge (D-Ohio), was approved March 26 on a 370-24 vote. The exemption was removed at the eleventh hour from Dodd-Frank, which has been interpreted by banking regulators as requiring margin for some end users.
The Senate has yet to take up a similar bill to reinstate the exemption. Michael Bopp, a partner at Gibson Dunn & Crutcher and counsel to the Coalition for Derivatives End-Users, says the coalition is still searching for a Senate sponsor.
“The bipartisan vote in the House was much stronger than anyone would have though even three or four months ago,” says Bopp, who's pictured at right. “We think that’s a game changer in terms of this bill’s prospects in the Senate.”
Even if the exemption is signed into law, however, companies accustomed to tailoring OTC swaps to their specific hedging needs may find themselves facing higher costs. Jiro Okochi, CEO of Reval a treasury and risk management software provider, says swap dealers may still want to collect margin for uncleared trades to lower their capital charges or may charge more through additional fees or a wider bid-ask spread.
“What remains to be seen is how severe requirements will be on banks,” Okochi says.
Regulators’ decision on bank capital requirements may not arrive until at least June, when a working group comprising representatives from the International Organization of Securities Commissions and the Basel Committee is expected to release a proposal for swap standards.
Okochi says banks must understand their capital charges to determine what they need to earn on cleared vs. uncleared trades. Some lower-rated end users with higher capital costs may choose to accept the higher costs in order to employ their capital more effectively than posting collateral, while companies with low costs of capital may opt for entering swap-margin agreements or clearing trades.
Instead of going through regulatory hoops to show that clients qualify for the end-user exemption, large banks may focus on the cleared swap business, Okochi says. “Some regional banks may look at this as an opportunity to develop a niche in uncleared trades by making pricing efficient enough to attract end users, and maybe they’ll get some other business such as loans.”
For more on this topic, see Holding Margin Rules at Bay.