Survey Emphasizes Costs of Dodd-Frank on End-Users

The Coalition for Derivatives End-Users published a survey indicating that margin requirements from Dodd-Frank would adversely impact end-users, emphasizing the costs of margin requirements on end-users and the potential negative impact on employment.  The survey provided a quantitative look into companies’ utilization of Over-the-Counter (“OTC”) derivatives, Centralized Treasury Unit (“CTU”) usage, and the effect a margin requirement would have on companies’ abilities to manage business uncertainty.  Additionally, it considers how companies are impacted by new reporting burdens and inconsistencies created by the divergent approaches of the U.S. and EU reporting regimes. 

The survey is the third report conducted on the likely impact of margin and other derivatives regulations; the previous surveys (which are also linked below) were conducted in 2010 and 2011.

The report analyzes the responses of 43 chief financial officers, or corporate treasurers of both public and private companies from a variety of sectors.  According to the survey, companies utilizing derivatives to mitigate business risk may be forced to reduce capital spending, hindering future business investment.

Key survey findings include:

  • an overwhelming majority (86 percent) of companies indicate that government-imposed margin requirements would adversely impact business investment, acquisitions, R&D and job creation;
  • the median respondent would need $125 million to fully collateralize its OTC derivatives transactions;
  • Four out of five respondents say that a margin requirement will impact capital expenditures, with 37 percent noting the impact will be “significant”; and
  • 91 percent say that a margin requirement will alter their risk-mitigating hedging strategies.

Lofchie Comment:  The survey makes clear that regulation of derivatives inflicts costs on the financial sector and burdens the “real” economy. While the results of the survey are consistent with previously expressed views on Dodd-Frank, additional questions may have elicited more balanced information. For example, end-users should be asked whether (i) they believe that Dodd-Frank has made them or their markets safer and (ii) whether they see any improvements in pricing as a result of Dodd-Frank.

A sobering concern raised in the survey is the impact on unemployment. It is important to remember that the 100,000 potentially lost jobs are those resulting from just one provision of Dodd-Frank; e.g., one page in the original 800-page version of the bill. The total job losses could be far larger than that resulting from any single provision of the bill.

See:  The Coalition for Derivatives End-Users Survey: “The Impact of Margin Requirements on Main Street Businesses.”
See also:  An Analysis of the Coalition for Derivatives End-Users’ Survey on Over-the-Counter Derivatives (February 11, 2011); An Analysis of the Business Roundtable’s Survey on Over-the-Counter Derivatives (April 14, 2010).