DealBook: Lawmakers Challenge Derivatives Rules

Win Mcnamee/Getty Images Senator Debbie Stabenow, Democrat of Michigan and chairwoman of the Senate Agriculture Committee.

A growing number of lawmakers are pressuring regulators to water down a series of new rules for the derivatives industry.

The lawmakers, Republicans and Democrats alike, argue that some proposed rules could force Wall Street’s derivatives business overseas. They also say that regulators are ignoring a crucial exemption to the rules spelled out in the Dodd-Frank financial regulatory law.

The law excused airlines, oil companies and other nonfinancial firms known as end-users from new restrictions, including a rule that derivatives must be cleared and traded on regulated exchanges. The firms use derivatives to hedge against unforeseen market changes, say a rise in fuel costs or interest rates, rather than to speculate.

“We are concerned that recent rule proposals may undermine these exemptions, substantially increasing the cost of hedging for end-users, and needlessly tying up capital that would otherwise be used to create jobs and grow the economy,” Senator Debbie Stabenow, Democrat of Michigan and chairwoman of the Senate Agriculture Committee, and Representative Frank D. Lucas, her Republican counterpart in the House, said in a letter this week to regulators.

Regulators have not promised any changes, although they now are agreeing to slow the pace of their rule-writing.

The Federal Reserve and other regulators announced on Thursday that they would grant the public two additional weeks to weigh in on the controversial new proposals. The comment period, which was supposed to expire on Friday, was extended until July 11.

The decision comes a week after the Commodity Futures Trading Commission, under pressure from lawmakers, announced a six-month delay for certain derivatives rules.

Some proposals, unveiled in April, would require banks to collect upfront margin from so-called commercial end-users that enter into derivatives trades. Regulators and consumer groups defend the rules as necessary curbs on the derivatives industry, which played a central role in the financial crisis.

“The Dodd-Frank Act was intended to and should to bring real change to the derivatives market,” Americans for Financial Reform said in a recent letter to the commodities agency.

But companies like Shell Energy and United Airlines contend that the collateral payments would tie up precious corporate funds. Ms. Stabenow and Mr. Lucas called the proposed rules “overly restrictive.”

Over the last several months, lawmakers have stepped up their attacks on several new derivatives rules.

Representative Spencer Bachus of Alabama, chairman of the House Financial Services Committee, wrote to regulators in December to say that imposing margin “requirements on companies that engage in the hedging of legitimate business risks would therefore defeat the purpose of the end-user exemption and contravene Congressional intent.”

The lawmakers have joined a chorus of complaints from bankers and corporate executives.

Barry Zubrow, JPMorgan Chase’s chief risk officer, told the financial committee last week that the “draconian” margin requirements could “effectively end” Wall Street’s overseas derivatives business.

His boss, JPMorgan’s chief executive, Jamie Dimon, has been even harsher. Mr. Dimon said earlier this year that the Commodities Futures Trading Commission’s new derivatives rules “would damage America.”

The concerns, bankers and lawmakers say, stem from confusion over Dodd-Frank’s borders.

Under Dodd-Frank, derivatives rules do not apply in foreign countries unless there’s a “direct and significant connection with activities” in the United States. It remains unclear whether regulators will enforce the rules on United States banks that book a derivatives deal through a foreign subsidiary.

“There continues to be a lack of clarity regarding the territorial scope of Dodd-Frank,” Ms. Stabenow and Mr. Lucas wrote.

Foreign regulators, meanwhile, have been slower to act. The European Commission, the European Union’s executive body, may take until 2012 or later to complete its own derivatives regulations. Until then, bankers say that Dodd-Frank will enable big European banks to poach their business.

“We recommend that all of the agencies implementing Dodd-Frank be mindful of recognized principles of international law,” Ms. Stabenow and Mr. Lucas said. “While robust oversight is necessary, this proposal could put U.S. firms at a direct and significant competitive disadvantage outside the United States.”

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