The Federal Reserve proposed collateral requirements for swapstraded between banks, manufacturers, and other firms. The proposal,also scheduled to be adopted today by the Federal Deposit InsuranceCorp. (FDIC) and Office of the Comptroller of the Currency (OCC),seeks to free so-called end users—commercial manufacturers andother non-financial firms that use swaps to hedge businessrisks—from government collateral requirements.

The regulation determines how much collateral is necessary toreduce risk in the market for swaps traded directly betweenJPMorgan Chase & Co., Goldman Sachs Group Inc., BP Plc, andothers, instead of those guaranteed at a clearinghouse. There-proposal is open for public comment before it's completed.

The revised proposal seeks to limit the impact on globalliquidity and smaller companies by freeing firms from having topost the first $65 million worth of collateral. To help end users,the regulators backed off an idea that would have required banks toforce non-financial firms to post collateral if they crossedspecific thresholds of creditworthiness. Banks will instead berequired to collect collateral according to their own assessment oftheir clients' risks.

The rule would also expand the types of assets that are eligibleto meet the new requirements to include U.S. debt, gold, andcertain corporate debt and equities. The rules would be phased inbetween December 2015 and 2019.

U.S. regulators are rewriting their rules, first proposed in2011, to follow a plan laid out last year by a group of globalauthorities that sought to align standards and keep banks fromexploiting differences between countries. The international planwas softened to respond to banks' concerns that the requirementswould force them to set aside the bulk of their high-quality assetsand hurt market liquidity.

The regulations, which also must be voted on in the U.S. by theCommodity Futures Trading Commission (CFTC) and Securities andExchange Commission (SEC), seek to reduce risk in the market afterlargely unregulated credit-default swaps exacerbated the 2008financial crisis and the downfall of American International GroupInc.

The proposal is part of global policymakers' efforts “to reducesystemic risk in derivatives markets,” Federal Reserve Chair JanetYellen said in a statement before the vote.

Regulators have argued that had the rules been in place in 2008,financial firms would not have amassed large derivatives positionswithout the necessary collateral.

'First Line of Defense'

“Margin is really the first line of defense against abreakdown,” Marcus Stanley, policy director for Americans forFinancial Reform, a coalition including the AFL-CIO laborfederation, said in a phone interview yesterday.

Airlines, utilities, and manufacturers that use derivatives tohedge risks have lobbied for four years for an explicit exemptionfrom having to post margin, arguing that such a requirement woulddivert funds from hiring workers or investing in their business.The 2010 Dodd-Frank Act left it to regulators to determine whetherend users would need to post margin on swaps that aren't settled bya central clearinghouse.

The Coalition for Derivatives End-Users, including brewerMillerCoors and technology company Honeywell International, have testified to Congress and metwith regulators to press for an exemption.

“These swaps between non-financial end users who are hedgingcommercial risk and their counterparties don't create risk to thesystem,” Jess Sharp, managing director at the U.S. Chamber ofCommerce's capital markets group, said in a phone interviewyesterday. “These things didn't fail during the financialcrisis.”

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