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WASHINGTON (Reuters) - U.S. companies would be largely spared from increases in the costs of using derivatives when they hedge against price fluctuations, under U.S. regulatory proposals issued on Tuesday.
Power companies, airlines and major manufacturers feared that regulators would force them to post collateral, or margin, with a bank when they hedge against risks such as changes in currencies, fuel costs or interest rates -- raising the cost of using swaps to lock in profits.
The proposals, issued by Commodity Futures Trading Commission and the Federal Deposit Insurance Corp for public comment, craft margin exemptions for the small slice of the derivatives market in which companies need highly customized swaps that can't be cleared through exchanges.
The proposals are part of last year's Dodd-Frank reform law aimed at curbing swap speculation of the sort that amplified the devastating 2007-2009 financial crisis, while still letting businesses hedge their risks.
"Corporate end-users are going to be encouraged by the direction that this is heading," said Paul Rowady, a senior analyst at research and advisory firm TABB Group.
But there were sufficient differences between the CFTC's plan and the one issued by the FDIC and other banking regulators, to keep some companies guessing about whether they will be fully exempt from having to post margin when using derivatives.
"I believe commercial end-users and many of the financial end-users will be dissatisfied with the lack of harmonization among the different regulatory bodies," CFTC Commissioner Scott O'Malia said before dissenting in the agency's 4-1 vote to seek public comment.
The CFTC's proposal applies to non-bank swap dealers and offers a clear margin exemption for corporations hedging their business risks.
The bank regulators' proposal applies to banks such as JPMorgan and Bank of America that serve as swap dealers, and does not offer a clear exemption for end users.
The latter proposal could force a corporation to post collateral if the bank selling a derivative found that the corporation was too much of a credit risk.
It is unclear how often banks would have to demand collateral from corporations, but the lack of a clear exemption drew ire from business groups.
"Despite the clear legislative history to the contrary, the regulators continue to misinterpret the Dodd-Frank Act as giving them authority to impose margin requirements on end-users," said a statement from the Coalition for Derivatives End-Users, an industry group.
Profits hang in the balance not only for corporate end-users, but also for the big financial companies that dominate the swaps market, including Citigroup, Goldman Sachs and HSBC. They could be hurt if they can no longer offer margin-free swap trades to corporations.
Nearly a third of all off-exchange derivatives trades last year were not secured by collateral, or margin, said the International Swaps and Derivatives Association.
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