U.S. firms cry out for relief from swap rules

Fri Dec 10, 2010 8:14pm GMT

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* CFTC has proposed exemptions for derivatives users

* SEC to meet Dec. 15 to consider similar exemptions

By Christopher Doering and Rachelle Younglai

WASHINGTON, Dec 10 (Reuters) - U.S. companies on Friday told regulators they should not be forced to set aside funds to help manage their derivatives as doing so would divert vital cash needed to grow their operations.

Representatives from firms including Morgan Stanley (MS.N), and Chesapeake Energy (CHK.N), said they support new measures to reduce market risk but margin and capital requirements could curtail economic growth by curtailing investments in items such as new oil wells.

"We think it's more important to keep the money in the business than someone else's pocket," Jim Heis, a risk management director with Noble Energy (NBL.N), said at a roundtable hosted by regulators. "We feel that imposing margin requirements would divert capital away from capital drilling program," he said.

Elliot Chambers, assistant treasurer with Chesapeake Energy, told the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission posting cash to counterparties rather than expanding "would be disastrous" for the long-term health of the business.

U.S. regulators are scrambling to implement dozens of proposals as part of a broader push to overhaul the $600 trillion over-the-counter swaps market mandated under the Dodd-Frank financial law enacted in July. The market was blamed for aggravating the global economic crisis.

The new law allows "end-users" such as manufacturers that use swaps to hedge "commercial risk" to be exempt from mandatory clearing requirements. The bill prohibits most financial entities from receiving a clearing exemption.

"This particular set of rules that we're required to adopt may be as challenging as any we're going to grapple with," said John Ramsay, the SEC's deputy director of the trading and markets division.

The CFTC, which is working with the SEC to draft dozens of rules to tighten oversight of the OTC market, proposed on Thursday a rule for end users.

It said they could be exempt if at least one party to the swap transaction is not a financial entity, information is provided on how the firm meets its financial obligations associated with entering into non-cleared swaps, and the swap is being used to hedge or mitigate commercial risk.

The SEC is expected to meet Dec. 15 to consider similar exemptions for end users.

Steve O'Connor, a managing director with Morgan Stanley, said the margin requirements could be especially hard for those not used to having to post margin.

"It could put a new demand for financial resources on those end users," he said. "There is a trade off between cost to the end user and systemic reduction angle."

(Additional reporting by Rachelle Younglai; Editing by Andrew Hay)

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