CFTC: swaps reform won't hit beers in the six-pack

Tue Feb 15, 2011 11:00pm GMT

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* Intent is to spare business from margin requirement-CFTC

* CFTC's Gensler: "focused on the cost of a six-pack"

* Businesses claim swaps rules will kill some 130,000 jobs

By Christopher Doering and Sarah N. Lynch

WASHINGTON, Feb 15 (Reuters) - U.S. financial regulators tried to calm fears on Tuesday that new rules for the $600 trillion over-the-counter derivatives market would raise costs for businesses that use the instruments to hedge risk.

Addressing Republican lawmakers who have balked at the new rules, top derivatives regulator Gary Gensler said margin requirements should focus only on transactions between financial entities rather than those that involve nonfinancial companies.

"We'll get this margin thing right. We understand congressional intent on that," Gensler told the House Financial Services Committee's first hearing since Republicans took control of the House of Representatives in January.

In crafting last year's Dodd-Frank financial law, Congress left it up to regulators to write rules that will dictate which so-called "end users" or companies will have to set aside more capital, or margin, when using derivatives to hedge risk.

Thousands of companies such as heavy equipment maker Caterpillar (CAT.N) and brewer MillerCoors (SAB.L) (TAP.N) are concerned that they will be forced to comply with margin requirements.

They argue that the derivatives they use to hedge against such things as raw materials prices and interest rate changes are not risky and will not destabilize the financial system.

But Gensler said companies such as the beer brewer did not have to worry. "We're aware and focused on the cost of a six pack because we also oversee agricultural markets," Gensler said. "I would say our intention is not to have margin requirements applied to an end user such as MillerCoors," he said.

Fellow derivatives watchdog, the Securities and Exchange Commission also tried to allay concerns that regulators would impose undue costs on companies that depend on the over-the-counter derivatives to hedge business risks.

"We will be mindful both of the importance of security-based swaps as hedging tools for commercial end users and also of the need to set prudent risk rules for dealers in these instruments," SEC Chairman Mary Schapiro told the committee.

REPUBLICANS BERATE REGULATORS

Republican lawmakers, however, were unimpressed with regulators' assurances.

"It is the end users of derivatives who will bear so much of the regulatory brunt of this law," said House Financial Services Committee Chairman Spencer Bachus. "As a result, hundreds of American companies could take their capital and jobs elsewhere," he said.

Scott Garrett, the chairman of the House capital markets subcommittee, said he has been told by industry players that the CFTC's rules could "literally spell the end of the U.S.- based derivatives market."

"Derivatives have been a favorite whipping boy of many critics, but if we continue down this road -- and there's not a lot of time to change course -- there literally may not be a U.S.-based derivatives market to kick around anymore," Garrett said.

Republicans pointed to a study issued on Monday by a coalition of business groups that said the derivatives rules would divert much needed capital away from companies.

The coalition, organized by business groups such as the U.S. Chamber of Commerce, said that imposing a 3 percent margin requirement on swaps used by Standard & Poor's 500 companies could cut capital spending by $5.1 billion to $6.7 billion and cost up to 130,000 jobs.

Federal Reserve Governor Daniel Tarullo called the survey-based study "quick and dirty" and said it assumed that margin would be imposed on all end-users, which he said is incorrect.

(Reporting by Christopher Doering, Sarah Lynch and Roberta Rampton. Writing by Rachelle Younglai; Editing by Tim Dobbyn)

((rachelle.younglai@thomsonreuters.com; +1 202 898 8411)) Keywords: FINANCIAL REGULATION/DERIVATIVES

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