AFR’s Talking Points on HR 1610


  • The Financial Crisis Inquiry Commission (FCIC) report made clear that unregulated derivatives markets played a critical role in the financial crisis of 2008.
  • HR 1610 would create major loopholes in the Dodd-Frank derivatives rules. It would prevent regulators from requiring derivatives speculators to reserve enough cash to back up their derivatives bets.
  • The bill amends Sections 721 and 761 of Dodd Frank by adding the word “net”.  As a result, a company with systemically significant derivatives exposures could escape regulation as a major swaps participant (MSP) as long as it claimed its derivatives positions were hedged, regardless of any counterparty credit risk involved. This would restrict the ability of regulators to perform oversight of major derivatives participants.
  • But as we learned during the financial crisis, counterparty failure can quickly lead such hedges to become ineffective, particularly in turbulent market conditions when they are most important. For example, the bailout of AIG occurred because AIG’s failure caused major banks to lose the derivatives hedges they had maintained with AIG.
  • The bill also amends sections 731 and 764 of the Dodd-Frank Act to exempt companies that are not specifically designated as major swaps participants (MSPs) or swaps dealers (or certain types of hedge funds or commodities pools) from all margin requirements.
  • This amendment is totally unnecessary. Regulators have already exempted transactions by non-financial companies hedging commercial risk from new margin requirements.
  • The amendment is also drafted in a convoluted way that exempts numerous purely financial companies – ranging from real estate investment trusts (REITs) to investment funds with five or fewer unaffiliated shareholders – from any margin requirements. Banks not been designated as swaps dealers would also be exempt.
  • If this amendment were made, companies engaged in purely speculative derivatives bets would also not have to post margin, so long as they had not been designated as major swaps participants. (Recall that the first part of this legislation greatly weakens the power of regulators to designate MSPs).
  • It is unclear what, if anything, this has to do with exempting producers of actual physical goods and services from posting margin on their legitimate hedging transactions.