House and Senate Pass Bill Amending End-User Margin Requirements
Commentary by Bob Zwirb and Steven Lofchie
The House and Senate voted to pass the Terrorism Risk Insurance Program Reauthorization Act of 2015 (H.R. 26), a bill that would, among other things, exclude end-users from CFTC and SEC margin requirements applicable to swaps.
Specifically, the bill would amend the Commodity Exchange Act and Securities Exchange Act to exempt swaps from prudential rules governing margin requirements for swaps not cleared by a registered derivatives clearing organization. The bill calls for the amendment to be implemented through an interim final rule, bypassing the standard Administrative Procedure Act notice and comment process. If signed into law, this amendment would be the first substantive amendment to the Dodd-Frank Act enacted by the new Congress.
See: H.R. 26.
Commentary
Although one of the principal purposes of exempting end-users from mandatory clearing with respect to their swaps used for hedging purposes is to allow end-users to avoid margin requirements set by central clearing counterparties, the Dodd-Frank Act does not provide an express carve-out for such parties. Moreover, notwithstanding a written statement at the time by Senators Dodd and Lincoln that Dodd-Frank "does not authorize the regulators to impose margin on end-users," it was never clear that regulators required to be responsible for the safety and soundness of registrants would provide an exemption for trades with end-users, particularly when the statutory basis of the Lincoln letter was so uncertain. More recently, the CFTC under new Chairman Timothy Massad's leadership, attempted to alleviate these concerns by proposing a rule that would impose margin requirements for uncleared swaps only upon swap dealers, major swap participants, and financial end users, but not commercial end-users. See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 Fed. Reg. 59898 (Oct. 3, 2014) (CFTC Proposed Rules). The congressional action would appear to clarify this issue once and for all by codifying the exemption within the statute.
Commentary
It is an unfortunate demonstration of the extent to which financial regulation has become politicized that this amendment is being attacked as a give-away to the bank when, in fact, Senate Democrats acknowleged in open statements on the floor that it was their poor drafting of Dodd-Frank that had resulted in language that required end-users to post margin. The mistake was not corrected during the prior Congress for reasons that were not related to regulatory policy; there seems no reason not to correct the mistake now.