As Congress crafts legislation to impose new oversight on complex instruments blamed for hastening the financial crisis, a major sticking point has emerged over companies that use the derivatives to hedge risk.
Some lawmakers want to exempt so-called "end users" of derivatives from new capital and other requirements in the overhaul legislation. A potent coalition of about 170 companies that use derivatives _ including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. _ has been lobbying Congress to say that regulation of derivatives without exceptions could severely increase costs for corporate America.
That could mean higher costs passed on to consumers and imperiled jobs, they contend.
"We are concerned that imposing clearing, margin and capital requirements on end users would significantly increase our cash requirements and costs," Ford Vice President and Treasurer Neil Schloss testified.
Echoes of support came from several members of the Senate Agriculture Committee at a hearing Wednesday.
"This has some very, very serious consequences" for farmers and other businesses, said Sen. Mike Johanns, R-Neb.
Sen. Debbie Stabenow, D-Mich., said it would be a hardship for manufacturing companies to have to divert sorely needed working capital to put up as collateral under the new requirements.
But Gary Gensler, chairman of the Commodity Futures Trading Commission, told the panel that if Congress decides to exempt some end-user transactions, the exception should be "explicit and narrow."
Broader exemptions could allow financial market players such as hedge funds, for example, to benefit from them, Gensler says.
The value of derivatives hinges on an underlying investment or commodity _ such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.
Companies of all kinds use derivatives to hedge against risks _ airlines ensuring against spikes in fuel prices, for example. At the same time, derivatives have become a growing vehicle for financial speculation and ballooned into a sprawling $600 trillion market. Regulators say they pose a threat to the stability of the financial system.
Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of the derivatives market. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last year.
The subsequent $180 billion taxpayer bailout of the insurance conglomerate damaged manufacturers and the economy. Tough new oversight of an unregulated global derivatives market is needed to prevent another crisis, Gensler said.
Sen. Blanche Lincoln, D-Ark., the Agriculture Committee chairman, may draft a bill to regulate derivatives. At the same time, Senate Banking Committee Chairman Christopher Dodd, D-Conn., has proposed a derivatives measure with exemptions for end users that are narrower than those in the House legislation.