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CFTC, businesses clash on derivatives rules

Sept. 21, 2010, 12:38 p.m. EDT

CFTC, businesses clash on derivatives rules
By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) — The chief of the Commodity Futures Trading Commission clashed Tuesday with corporate executives worried the agency will draft rules based on the Dodd-Frank Act that would force many companies to hold significantly more collateral in hedging accounts.

At issue is a provision in the financial-reform law, named for Sen. Chris Dodd and Rep. Barney Frank, that would require the CFTC and other regulators to write rules defining what kind of corporation will considered a “major swap participant.”

Companies so designated would have to have higher capital cushions and new business conduct standards so they can continue to hedge their operational risks.

The CFTC, the agency tasked with writing rules as stipulated under Dodd- Frank, said it will hold an open meeting Oct. 1 on the first series of proposed rules involving derivatives. In addition to major swap participants, the CFTC will write rules requiring roughly 200 financial institutions at the center of the $450 trillion derivatives market to hold more capital and register with the agency as swap dealers.

All of this has many executives worried that it will drive companies to divert a large amount of working capital into their hedging accounts.

Thomas Deas, treasurer for chemicals manufacturer FMC Corp. (NYSE:FMC) , said the National Association of Corporate Treasurers estimates that if its non-financial members are required to post collateral against their over-the-counter swaps hedging transactions it would require them to hold $269 million, on average, as collateral against their swaps trades.

Deas, who is president of the treasurers group, added that such capital requirements could lead to a loss of 100,000 to 120,000 jobs within the ranks of S&P 500 companies.

“That’s money that is not available for growing our businesses, research and development and other activities,” Deas told a gathering at the U.S. Chamber of Commerce. “We are seeking a clear exemption not only for clearing but margining for end-users.”

However, CFTC Chairman Gary Gensler said he expects most end-user corporations to be exempted from the major-swap-participant category.

Gensler, noting that the rules have yet to be written, argued in defense of the major-swap-participant provision in the statute by pointing to the collapse of hedge fund Long Term Capital Management in the late 1990s. This, he said, serves as an example of a failed company that may not have had such a sweeping impact on the economy if it had been more heavily regulated.

“They said they were hedging their business, their business was investing,” Gensler said of Long Term Capital Management, now defunct.

“That was a systemic issue to the American public,” he said. “What Congress is saying is that even if you are not a swaps dealer, you might be so substantial that it is important to be regulated like a swaps dealer.”

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