Warm Southern Breeze

"… there is no such thing as nothing."

Feds OK Big Business Tax Exemptions; No Regulations Allowed

Posted by Warm Southern Breeze on Wednesday, April 13, 2011

Note: In a later paragraph, the article’s author used the declarative and active voice, rather than the passive voice in reporting what the lobbyists claim. Thus, it made the clause seem as if the assertion WILL BE true, rather than reporting the concern as an opinion of those expressing the idea.

Companies using derivatives as hedge get exemption

The Associated Press, April 12, 2011, 4:00PM ET

WASHINGTON – Companies that trade derivatives solely to guard against volatile price swings won’t have to meet new federal collateral requirements.

The Commodity Futures Trading Commission advanced the exemption Tuesday as part of new regulations for derivatives, investments whose value depends on the future price of some other investment.

The rules, which were included in last year’s financial regulatory law, require banks and businesses that trade derivatives to put up millions of dollars to cover their losses. The aim is to cut down on the kind of risky trades that contributed to the 2008 financial crisis.

But airlines, oil companies and farmers are among hundreds of businesses that won’t be required to do so, if they use derivatives to control unforeseeable costs, such as extreme weather that damages crops.

Also Tuesday five other regulatory agencies, including the Federal Deposit Insurance Corp., the Federal Reserve and the Treasury Department‘s Office of the Comptroller of the Currency, advanced collateral and capital requirements for the banks and other financial institutions they oversee.

Lawmakers blamed the $600 trillion derivatives market for hastening the financial meltdown, and added new regulations when it passed the financial overhaul last year.

The rules proposed Tuesday apply to derivatives traded outside of clearinghouses. Clearinghouses settle derivatives trades and their member firms must back them, so collateral is always required. Regulators expect that the majority of derivatives trades will occur in clearinghouses.

More than 200 major U.S. companies that use derivatives, including Ford Motor Co., Boeing Co., General Electric Co. and Shell Oil Co., have lobbied in coalitions for an exemption from the collateral requirements. Powerful lawmakers from both parties have supported the exemption and pressed regulators to adopt it.

Consumers could be hurt without the exemption, the companies and lawmakers say. Companies would have to divert sorely needed working capital to provide the collateral, and that could mean higher costs passed on to consumers. It could also force many to hold back on hiring.

One challenge is figuring out who qualifies for the exemption. Some businesses, like international food company Cargill Inc., trade derivatives both to hedge against price swings and also to speculate for financial gain. That highlights a challenge for regulators, who are still working through the parameters of the exemption.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: