Bipartisan Alarm Sounds on Capitol Hill over Proposed Derivatives Rules

Federal regulators are continuing to field an array of questions and concerns from lawmakers surrounding the implementation of Dodd-Frank’s derivatives provisions (Title VII) – and it’s not just coming from House Republicans.

In a letter sent on Tuesday to Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila Bair, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and acting Comptroller of the Currency John Walsh, New York’s two Democratic Senators and 16 of New York’s 29 Representatives expressed concerns that a proposed rule applying margin requirements to derivatives between non-U.S. subsidiaries of U.S. entities and non-U.S. counterparties would create a significant competitive disadvantage for U.S. firms operating internationally.

The letter, signed by 12 Democrats and 6 Republicans, went on to state that “disparate treatment of U.S. firms will only encourage participants in the derivatives markets to do business with non-U.S. firms,” and asked that U.S. regulators work with their international counterparts to ensure that the international regulations “perfectly mirror the U.S. rules.” Senate Agriculture, Nutrition and Forestry Committee Chairwoman Debbie Stabenow (D-MI) expressed similar concerns during a Senate hearing on March 3, stating that “having a different set of rules that govern similar transactions [internationally] could have negative impacts in the markets.”

The New York delegation letter is just the latest in what has been an ongoing congressional debate over Title VII.

Earlier this month, House Republicans introduced H.R. 1573, which would delay any new derivatives rules from going into effect before December 2012. The bill’s chief sponsor, House Agriculture Committee Chairman Frank Lucas (R-OK) said the proposal – which passed the Agriculture Committee early last week, and is expected to go before the House Financial Services Committee when it returns from recess next week -- aims to grant regulators sufficient time to properly impose the new regulations. House Democrats contend that the GOP effort is an attempt to derail Dodd-Frank in case Republicans regain the Senate, the White House, or both following the 2012 elections.

Responding to the House GOP efforts, CFTC Chairman Gary Gensler testified before the Senate Committee on Banking, Housing and Urban Affairs last week that his agency was well on its way towards implementing Dodd-Frank. Gensler said that the proposal phase of the rule-writing is nearly completed, and that the public comment period on the proposed derivatives rules has been extended by thirty days, giving the public the opportunity to comment on the “whole mosaic of rules.” Acknowledging that there have been discussions of altering the implementation timeline for certain provisions of Dodd-Frank, Gensler reaffirmed his and the Obama administration’s view that “the public will not be adequately protected until the agency completes final rules.”

Concerns that the many of the proposed derivates rules could negatively impact commercial “end-users” – businesses who use derivatives contracts to hedge against anything from interest rates and gas prices to crop yields – have been ongoing since the early debates surrounding Dodd-Frank, but Gensler has repeatedly said that the CFTC, which has considerable latitude in determining which businesses will be exempted under the law, does not intend to target legitimate commercial end-users who are making healthy contributions to the market.

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