Dodd-Frank's Derivatives Rules Could Cost Main Street $1 Trillion

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The new financial regulation bill is advertised as a crack down on Wall Street excess, but if one provision is left as is, it could cost Main Street companies as much as $1 trillion. The rule would expose so-called "end-users," which are non-financial firms that use derivatives to hedge, not speculate, to new margin requirements on their derivatives. The bill that Congress may pass tonight or tomorrow still includes the provision.

Tuesday night, as the conference committee was revising how the new bill would be paid for, Sen. Saxby Chambliss (R-GA) brought up this concern about the legislation that had previously gone unnoticed. In the Senate's initial offer, end-users would have been fully exempt from margin requirement costs. The House changed the language, however, and that change was accepted. Unfortunately, the provision's meaning changed as well, leaving Main Street firms on the hook for these costs. The Senate side of the conference committee held a vote to revise the language last night, which tied 6-6, so failed without a majority.

This International Swaps Dealers Association released a statement about this issue yesterday, saying:

A change in the wording of the financial reform bill now being finalized in the US Congress could cost US companies as much as $1 trillion in capital and liquidity requirements, according to research by the International Swaps and Derivatives Association, Inc. (ISDA). About $400 billion would be needed as collateral that corporations could be required to post with their dealer counterparties to cover the current exposure of their OTC derivatives transactions. ISDA estimates that $370 billion represents the additional credit capacity that companies could need to maintain to cover potential future exposure of those transactions. If markets return to levels prevailing at the end of 2008, additional collateral needs would bring the total to $1 trillion.

So the cost might not get all the way to $1 trillion, but it would certainly be in the hundreds of billions. That's an awfully big burden to place on Main Street, so it's no wonder that some in Congress are concerned. But most Democratic conferees were uncomfortable opening back up the language yesterday, at the risk of delaying the bill a few days. They said that this issue could be taken care of in a technical amendment once the bill passes. If it isn't, then the rule will put a serious strain on U.S. companies.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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