On Wednesday, June 12, 2013, the House will consider H.R. 634, the Business Risk Mitigation and Price Stabilization Act of 2013,under a suspension of the rules. The bill was introduced on March 7, 2013 by Reps. Michael Grimm (R-NY), Austin Scott (R-GA), Gary Peters (D-MI), and Mike McIntyre (D-NC) and referred to the Committees on Financial Services and Agriculture, which held mark-ups and reported the bill by a recorded vote of 59-0 and by voice vote, respectively.

H.R. 634 amends the Dodd-Frank Act to clarify that the Act’s margin requirements do not apply to the end-users of derivatives.  The bill also stipulates that the bill is to be implemented through a modified regulatory process, precluding the regulatory process from starting de novo.

Derivatives are contracts whose value is linked to changes in another variable, such as the price of a physical commodity.  Derivatives have been historically used by businesses, large and small, to manage risk.  End-users trade in derivatives to hedge business and economic risk.

Most derivatives today are no longer based on a physical commodity, but are linked to variables such as interest rates, stock prices, currency valuations, or indices.

The Dodd-Frank Act sought to regulate “over-the-counter” derivatives in a similar way to equities and futures markets.  Under the Act, derivatives dealers and financial institutions are required to post margin as a way to help cover potential losses and prevent the sort of situation present in the 2008 financial crisis.[1]

However, derivative end-users, the firms trying to manage their risk rather than speculate for profits, don’t pose systemic risk.  Furthermore, forcing end-users to post margin, in the form of cash or government securities, could cause harmful effects for the economy and consumers.  If end-users are posting margin, those funds are unavailable for investment in jobs and expansion.  Further, if end-users are required to post margin, some end-users may abandon the derivatives market, stop hedging risk, accept volatility and pass along increased costs to the their customers, the American consumer.   Though Congress never intended for end-users to be subject to the margin requirements[2], some regulators have interpreted the statute as new authority to regulate end-users as well.

H.R. 634 clarifies this oversight by specifically exempting end-users from the margin requirements under Dodd-Frank.  A similar bill (H.R. 2682) passed the House in the 112^th Congress on March 26, 2012 by a recorded vote of 370-24 (Roll no. 128).

CBO estimates that, “we estimate that the net cost to the SEC would be negligible, assuming appropriation actions consistent with that authority.”[1] 

Further, “enacting H.R. 634 would affect direct spending and revenues; therefore, pay-as-you-go procedures apply…[however,] we estimate that the effect on direct spending and revenues would be insignificant.”[2]