When the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010, many corporate treasurers were satisfied that they had obtained an exemption from its derivatives provisions. Now, three years later, they have begun to reconcile with a different reality. They are engaging legal resources in evaluating their regulatory status, re-documenting their transactions, and working in new ways with their boards of directors. As they take these steps, treasurers are becoming increasingly aware that they are just beginning a journey that could extend for years.
Cross-border, margin, and Basel III regulations are not yet complete, which is creating uncertainty about their true regulatory impact. Additionally, it is becoming clear that navigating new regulations is not merely a compliance exercise. Corporate treasurers need to re-evaluate how regulations will impact their risk management strategies, operational processes, and systems. Rather than being outside of Dodd-Frank’s reach, corporate treasurers are finding themselves in the splash zone of the act’s enormous market changes.
As regulators labor toward harmonizing their approaches domestically and internationally, corporate treasurers must begin working through the practical implications of the current proposals. In the absence of clear and final guidance, many are assuming that their transactions will be subject to both U.S. and European laws, as well as rules in some other jurisdictions such as Singapore, Japan, Hong Kong, and Australia, which are largely lagging behind the U.S. and Europe. Such an approach dictates understanding the requirements imposed by each regime and, for every derivatives transaction, comparing the requirements in each rule category for the jurisdictions the transaction falls under. When treasurers identify which regime’s requirements have the highest standards and nearest-term compliance deadlines for each rule or rule category, they can prepare to comply with the most stringent demands in each category, a “worst of all worlds” scenario.
Consequently, companies working through the Coalition for Derivatives End-Users are encouraging the U.S. Congress to pass legislation that would preclude regulators from imposing margin requirements on derivatives transactions executed by non-financial end users. On June 12, the House of Representatives voted by a margin of 411-12 for a bill (H.R. 634) focused on the needs of non-financial end users. A significant question is whether the Senate will take up the same legislation in a body that has heretofore been highly resistant to Dodd-Frank legislative changes of any kind. A companion bill (S. 888) was introduced by a bipartisan group of Senators on May 7.