Two AFP members also testified before the House Financial Services Committee during Wednesday’s derivatives hearing.
Dave Hall, COO for Chatham Financial Corp., the largest independent advisor and service provider to businesses who use derivatives, testified that any derivatives legislation should be directed at trading activity between systemically significant institutions. Hall offered five recommendations:
• Margin. “Any requirement for business end users to cash collateralize hedging transactions would create an extraordinary and unnecessary drain on working capital,” Hall said. “We believe this draft should also recognize this cash burden by excluding end users from any margin requirement. For trades with business end users, we believe credit terms (e.g., margin, collateral) should be negotiated by the two parties.”
• Capital Charges. Regulators should be instructed to set capital charges “based on historic or predicted loss, and not as a penalty to discourage the use of OTC derivatives,” he said.
• Systemic Significance. The draft legislation currently could make non-systemically significant firms subject to the same regulatory burden that applies to large financial institutions. “Removing the burden for smaller, non-systemically significant swap dealers will encourage competition and reduce prices for business end users,” he said.
• Major Swap Participant. “We believe this term should be defined by legislation,” Hall said. “If it is not, we would like to see the intent be clear that this definition should target systemically significant institutions.”
• Exemptive Relief. Regulators should have the authority to provide “exemptive relief” where they deem necessary, Hall added.
Steven Holmes, Director of Treasury Operations for Deere & Company, raised three concerns. “First, we are concerned that regulators will be ceded too much authority to determine what companies are subject to higher regulatory thresholds associated with being a major swap participant and higher margin requirements imposed on end-user companies,” he said. “Second, we are concerned about the capital requirements for non-centrally cleared transactions with end-users. We believe that capital charges should be levied solely based on risk of loss and not as a means of forcing companies to centrally clear transactions.”
Holmes added that the draft’s definition of “substantial net position” creates a high degree of uncertainty and gives regulators too much authority to determine which end-users are covered.
AFP is soliciting volunteers to provide guidance and input for comment letters to federal agencies and Congressional Committees on OTC derivatives. If you are interested, please contact Jeanine Arnett, Government Relations Manager at 301-961-8853 or jarnett@afponline.org.