CONGRESSWOMAN ELISE STEFANIK
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.
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, 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 112th 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.”
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.”