Coalition for Derivatives End-Users Study Highlights Potential Job, Capital Loss from OTC Derivatives Regulations

Overaggressive Regulation Could Cost 130,000 Jobs

WASHINGTON, D.C.—Imposing a three percent margin requirement on over-the-counter (OTC) derivatives held by the S&P 500 companies could cut capital spending by $5.1 to $6.7 billion and cost 100,000 to 130,000 U.S. jobs, according to a new study from the Coalition for Derivatives End-Users.

The survey highlighted the potential impact of ambiguity in the Dodd-Frank Act that could cost U.S. jobs and reduce working capital for American businesses while also exposing them to greater risk. The findings include:

• Nearly 61% of survey participants reported that proposed regulations would have a moderate to significant impact on the level of working capital required to operate their business.
• The vast majority of survey participants (73%) indicated that fully collateralizing their derivatives positions would impact job creation, research and development, acquisitions, and/or business investment and expansion.
• A majority (68%) indicated that potential higher costs from derivatives legislation would cause them to hedge less – an unintended consequence that would add volatility to business outcomes and the economy at large.
• 46% of respondents indicated that they would evaluate the ability to move offshore as a result of OTC restrictions and regulations in the United States.

“The ambiguities in Dodd-Frank and the proposed regulations could cause hundreds of American companies to take their capital and jobs somewhere else,” said David Hirschmann, president and CEO of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “Beyond the impact this will have on businesses, the higher costs of using derivatives also hurts consumers by increasing price volatility.”

“End users of derivatives had nothing to do with the financial crisis. These regulations broadly impact the U.S. business community, imposing a potentially costly, one-size-fits-all approach on a very diverse set of economic participants,” said Larry Burton, executive director, Business Roundtable. “Business accounts for more than 80 percent of American jobs; we need policies that will allow the private sector to drive recovery and expansion by making America’s companies more competitive, not by adding needless regulatory weight.”

“FEI members have experienced first-hand the importance of access to over-the-counter derivative markets to companies who need to hedge risk in order to conduct everyday business practices, such as researching and developing new products,” said Marie Hollein, president and CEO, Financial Executives International. “The survey results reflect what end-users have been communicating all along -- that imposing burdensome margin requirements on American businesses will reduce capital spending and equal job loss.”

“Customized derivatives are critical to real estate companies seeking to mitigate everyday business risks involved in the ownership, development and operation of commercial properties,” said Steven Wechsler, President and CEO of the National Association of Real Estate Investment Trusts. “If the cost of risk management is dramatically increased by applying regulations more appropriate to banks and others whose business is trading derivatives, real estate companies will be hurt and the recovery may suffer a serious setback.”

The survey also showed that many firms are uncertain about whether and how they will be subjected to different requirements. For instance, nearly half of firms are unsure whether central clearing and trading requirements would apply to them (44%) or whether they will be required to post collateral for hedges that have not been centrally cleared (49%). This uncertainty explains why 50% of respondents are not sure whether they will be capable of disclosing the impact of Dodd-Frank on their next financial statement.

The survey was conducted using an online survey tool by the U.S. Chamber of Commerce, Business Roundtable, Chatham Financial, and the National Association of Corporate Treasurers from November 3, 2010 until January 7, 2011. The companies that participated employ more than 2.5 million people in industries that span almost every sector of the American economy including manufacturing, healthcare, telecommunications, energy, real estate and retail.