CFTC and SEC derivatives rulemaking efforts have become increasingly more difficult, in part because of a growing number of disenchanted lawmakers - Republicans and Democrats alike.  These Congressional leaders are demanding that regulators water down some of the new rules.  They argue that some proposed rules could force Wall Street’s derivatives business overseas.  They also say that regulators are ignoring a crucial exemption to the rules spelled out in the Dodd-Frank Reform Act. 

Dodd-Frank intended for airlines, oil companies and other nonfinancial firms - i.e., "end-users" - to be excused from new restrictions, including a rule that derivatives must be cleared and traded on regulated exchanges.  The firms use derivatives to hedge against unforeseen market changes, say a rise in fuel costs or interest rates, rather than to speculate.

But Senator Debbie Stabenow (D-MI) who chairs the Senate Agriculture Committee, and Representative Frank Lucas, her Republican counterpart in the House say that "recent rule proposals may undermine these exemptions, substantially increasing the cost of hedging for end-users, and needlessly tying up capital that would otherwise be used to create jobs and grow the economy.”

Regulators haven't promised any changes, although they now are agreeing to slow the pace of their rule-writing. 

The Federal Reserve and other regulators announced on Thursday that they would grant the public 2 additional weeks to weigh in on the controversial new proposals.  The comment period was supposed to expire today, Friday, but was extended until 7/11.  That decision came one week after the CFTC, also under pressure from lawmakers, announced a 6-month delay for certain derivatives rules.

Some proposals, unveiled in April, would require banks to collect upfront margin from so-called commercial end-users that enter into derivatives trades.  Regulators and consumer groups defend the rules as necessary curbs on the derivatives industry, which played a central role in the financial crisis.  “The Dodd-Frank Act was intended to and should to bring real change to the derivatives market,” Americans for Financial Reform recently said.  But companies like Shell Energy and United Airlines contend that the collateral payments would tie up precious corporate funds.  Ms. Stabenow and Mr. Lucas called the proposed rules “overly restrictive.”

Representative Spencer Bachus of Alabama, chairman of the House Financial Services Committee, wrote to regulators in December to say that imposing margin “requirements on companies that engage in the hedging of legitimate business risks would therefore defeat the purpose of the end-user exemption and contravene Congressional intent.”

Bankers, Corporate Execs Add to Chorus of Complaints.  Barry Zubrow, JPMorgan Chase’s chief risk officer, described the margin requirements as "draconian" and said they could "effectively end" Wall Street’s overseas derivatives business.  His boss, CEO Jamie Dimon has been even harsher, saying earlier this year that the CFTC's new derivatives rules "would damage America."

Many of the concerns - from bankers and lawmakers alike - stem from confusion over Dodd-Frank’s borders.   Under Dodd-Frank, derivatives rules do not apply in foreign countries unless there’s a “direct and significant connection with activities” in the U.S.  It remains unclear whether regulators will enforce the rules on U.S. banks that book a derivatives deal through a foreign subsidiary.

Foreign regulators, meanwhile, have been slower to act. The European Commission, the European Union’s executive body, may take until 2012 or later to complete its own derivatives regulations. Until then, bankers say that Dodd-Frank will enable big European banks to poach their business.

For further details, go to:   [Dealbook, 6/23/11]