Business lobbying groups are ramping up their outreach to preserve over-the-counter trading for derivatives products, arguing they are crucial for companies to hedge their risks against currency fluctuations and commodity spikes. The U.S. Chamber of Commerce is gearing up its lobbying as Congress looks to rewrite rules regulating the transactions of the $20 trillion OTC market in the wake of the government rescue of American International Group, which could not cover the OTC credit default swaps it issued when the counterparties demanded payment. House Agriculture Chairman Collin Peterson pushed a bill through his committee to place curbs on such OTC trades, while critics charge it would effectively shut down the market.
Derivatives can be traded over exchanges such as the Chicago Board Options Exchange; clearinghouses, such as one that has been established by a group of big banks and supervised by the Federal Reserve Bank of New York; and the unregulated OTC market, where there is no central exchange and only agreements between parties. "The question is how do you maximize the benefits that they are trying to achieve there -- which is transparency -- without completely shutting down the very tailored hedges that a lot of companies use?" asked David Hirschmann, president of the Chamber's Center for Capital Markets Competitiveness. "All these things have Main Street implications." The Chamber is researching how their member companies use such OTC products and will take the results to argue to lawmakers that the market should be preserved. Hirschmann could not provide specific examples.
The Securities Industry and Financial Markets Association has produced a study showing how at least 25 blue-chip companies use derivatives help manage risk: AT&T, Caterpillar and 3M in the case of interest-rate swaps; Procter & Gamble and McDonald's in the case of commodity prices. The Chamber is lobbying for most derivative products to be placed on the burgeoning clearinghouse system while providing some exceptions for certain products, such as some currency contracts, that need the extra flexibility of the OTC market. Some OTC advocates note that products such as jet fuel cannot be easily traded on exchanges, and that some OTC contracts extend over years, much longer than those allowed on exchanges. "A number of our companies have a need for very tailored hedges, which are more of the exceptions than the rule. They wouldn't be clearable," said Hirschmann.
Another business lobbyist said her group, surprised by how quickly Peterson moved his bill out of committee, will pick up its advocacy when lawmakers return. "More and more companies are becoming aware of it," the lobbyist said. "I don't think they were really paying that much attention to it." The Peterson bill faces obstacles, as House Financial Services Chairman Barney Frank will take the lead in crafting a revamp of the nation's financial regulatory structure. Frank's bill will take a broader look at the system, and the derivatives component will just be on part of the measure.