Energy companies, airlines and other end-users would be mostly exempt from having to put up costly collateral when using uncleared swaps to hedge their business risks, under a proposal issued by U.S. bank regulators on Tuesday.
The board of the Federal Deposit Insurance Corp said so-called “commercial end users” would not have to post initial margin for normal hedging activities, such as swings in commodity prices or fluctuations in interest rates.
They may, however, have to post margin if they use uncleared swaps for speculative trading.
“We believe the impact on commercial end users will be minimal,” said an FDIC official.
The FDIC’s proposal largely matches a proposal considered by the Commodity Futures Trading Commission on Tuesday.
The FDIC proposal lays out margin requirements for end users and major swap dealers, which include JPMorgan, Bank of America, Citigroup, Goldman Sachs and HSBC.
The margin requirement is part of last year’s Dodd-Frank financial reform law that lays out broad changes to the roughly $600 trillion over-the-counter derivatives market.
The idea is that banks and speculative traders should have to post collateral when engaging in risky, customized derivative trades that could sour and harm the financial system.
FDIC Chairman Sheila Bair said collecting margin on uncleared swaps — those that don’t go through a clearinghouse — could have helped avoid problems during the 2007-2009 financial crisis.
“I think it is imperative that the dealers collect margin,” Bair said during the FDIC board meeting.
The FDIC’s proposal will give swap dealers two options for determining the initial margin that will have to be posted on an uncleared swap trade.
The first option is to use a standard table that regulators will create and the second would be based on how much the trade could be impacted over 10 days of economic stress.