By STEVE BINDER
Illinois Correspondent
 
WASHINGTON, D.C. — When federal legislators crafted new regulations designed to help prevent a meltdown in financial markets, they crossed an important line when it comes to the use of derivatives.

At least that’s the perspective now for some lawmakers. New rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act due to take effect later this year call for costly margins to apply to all commercial users of derivatives contracts, including financial institutions.

The worry is that applying margin requirements to commercial users hedging against real business risks will hurt job creation and capital investment at a time when the economy needs both.

“During the debate over the Dodd-Frank Act last year, Democrats and Republicans agreed that the use of derivatives by commercial end-users did not pose a risk to the larger economy,” said U.S. Rep. Gary Peters, a Michigan Democrat who is part of a bipartisan group that has proposed to change the derivative rule.

“In states like Michigan, manufacturing companies use these contracts to lock in fixed prices and interest rates, allowing them to better plan and manage their cash flow,” Peters continued. “This narrowly crafted bill clarifies what Congress clearly intended – commercial end-users who are not engaged in harmful speculation should not be required to divert capital away from job creation.”

The other lawmakers sponsoring House Resolution 2682 include Reps. Austin Scott (R-Ga.), Michael G. Grimm (R-N.Y.) and Bill Owens (D-N.Y.).
The elimination of the coming rules would free users of derivatives such as farm cooperatives, hospitals and manufacturers from meeting costly margins that would have applied.

“At the end of the day, this needs to be about jobs,” Scott said. “While we must enact measures that will lessen the chances of another financial crisis, we must also incentivize American companies to continue to use derivatives responsibly so that they can continue to provide American jobs and compete in the global market.”

The bill was introduced last month and was immediately assigned to the House’s Subcommittee on Capital Markets and Government.

“Although Dodd-Frank was meant to provide a stronger market structure for Wall Street firms, many small community banks, manufacturers and farmer cooperatives could be caught in the wave of regulations that were never intended for them,” Scott added.

“These end-users use derivatives to manage risk, and Congress never intended for them to be subject to the same margin requirements as large financial firms.”