Chatham Financial, an interest rate and foreign exchange risk management adviser, has testified before the House Financial Services Committee hearing on derivatives legislation.

Chatham was invited by the committee as an independent expert to testify as a representative of business end users who use derivatives to reduce their interest rate, foreign currency and commodity price risk.

Chatham’s chief operating officer, Dave Hall, testified on the merits and concerns in the currently drafted legislation released by chairman Barney Frank and the House Financial Services Committee.

The drafted legislation recognises and differentiates business end users from large financial institutions. Specifically, this draft focuses central clearing requirements on large market participants rather than on business end users. It also precludes those who use OTC derivatives to prudently manage risk from being subject to higher regulatory thresholds under the definition of major swap participant.

Hall told the committee: “It is an honour and great responsibility to participate in this hearing,” and “given the events in the financial markets in recent years, we applaud the Administration and Congress for considering appropriate changes to our financial regulatory framework, including the area of derivatives.”

Chatham presented five recommendations for improvement to this draft legislation:

1. The first change is to exclude business end users from any margin requirement. “We think that any requirement for business end users to cash collateralize hedging transactions would create an extraordinary and unnecessarily drain on working capital,” said Hall.
2. Second, Chatham stated that the draft should be clarified regarding capital charges so that regulators are instructed to set capital charges based on historic or predicted loss, and not as a penalty to discourage the use of OTC derivatives.
3. Third, the draft bill recognises that systemically significant institutions should be subject to higher standards than those that cannot impose systemic risk. However, as currently written, it is possible that non-systemically significant firms could be subject to the same regulatory burden that applies to large financial institutions.
4. Fourth, Chatham states that the term “major swap participant” which is broadly defined as those having a substantial net position, be defined by legislation versus by regulators which is how the legislation reads today.
5. Finally, Chatham has recommended that the legislation grant regulators the authority to provide exemptive relief where they deem necessary in an effort to address any of the unforeseen consequences that could result from this historic legislation.

In addition to Chatham’s testimony, the House Financial Services Committee also heard testimony, as part of this proceeding, from CFTC chairman Gensler, SEC director Hu and representatives from Cargill, Ohio State University, Prudential Financial, Sifma, Managed Funds Association, Deere, Wholesale Markets Brokers Association and the Americans for Financial Reform.


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