UPDATE 3-Margin rule should focus on banks-CFTC's Gensler

Wed Feb 9, 2011 5:46pm EST

 * Testimony comes ahead of House ag hearing on Thursday
 * Hearing to focus on cost concerns of "end users"
 * Margin requirements aimed at swaps between banks-Gensler
 * CFTC given "unrealistic rulemaking schedule"-CME
 * Senators-avoid hurting economy with the new rules
 (Adds comments from senators)
 By Roberta Rampton and Christopher Doering
 WASHINGTON, Feb 9 (Reuters) - The U.S. futures regulator's
long-awaited rule on margin requirements for swaps should focus
on swaps between banks and not businesses using the instrument
for hedging, its chairman said in testimony released on
 Republican lawmakers at a hearing on Thursday plan to
scrutinize new costs for manufacturers, farmers and other types
of "end user" businesses that use derivatives to hedge their
risks. The upcoming regulation on capital and margin
requirements is a key concern.
 The Commodity Futures Trading Commission is working on the
regulation as part of its detailed and complex plan to take
oversight of the swaps market, worth about $600 trillion
globally. The CFTC will require many swaps to be cleared and
traded on exchanges or other platforms.
 In remarks prepared for the hearing and released by the
House Agriculture Committee, CFTC Chairman Gary Gensler said
margin requirements would be aimed at swap dealers, not end
users, who are exempt from clearing requirements.
 "Proposed rules on margin requirements should focus only on
transactions between financial entities rather than those
transactions that involve non-financial end users," Gensler
 Gensler and other regulators also were warned this week by
a group of 13 U.S. senators to move cautiously on Dodd-Frank
rules to avoid hurting end users or the fragile U.S. economy.
 Failing to do so "could stunt needed economic growth and
produce higher costs for consumers," said the lawmakers,
including Democratic Senators Max Baucus and Jon Tester and
Republican Mike Johanns.
  Prepared testimony:           r.reuters.com/wav87r
  FACTBOX-CFTC rule-making to-do list       [ID:nN18195182]
  Take a Look                                 [ID:nCFTCREG]
 Companies that count on using swaps are worried they will
face added costs for using the contracts, either because of
extra costs faced by banks -- their counterparties -- or
directly from regulators.
 Farmer-owned cooperatives fear they will be deemed "swap
dealers" by the rules, increasing their costs and hurting their
ability to offer risk-management tools to farmers, said Edward
Gallagher of Dairy Farmers of America.
 Ball Corp (BLL.N), a packaging company that uses swaps to
hedge the price risk in turning $3 billion of aluminum into
beverage cans, estimated it would have to tie up more than $400
million in margin if CFTC regulations required such a step.
 "A requirement for end users like Ball Corp to post margin
to its counterparties would have a serious impact on our
ability to invest in and grow our business," said Scott
Morrison, the company's chief financial officer, in written
testimony to the committee.
 Morrison urged Congress to give regulators more time to
develop their rules. The Dodd-Frank law requires most to be
finalized by July.
 "Chairman Gensler has reached out to businesses for input
on a realistic implementation timetable. That is a positive
step and one that we appreciate greatly," he said.
  Last month, the CFTC officially issued its proposal to
prevent big speculators from distorting commodity markets. But
efforts to rein in speculative limits have drawn concern from
commissioners at the agency who are divided as to whether the
CFTC is moving too fast or not quickly enough.
 Terrence Duffy, executive chairman with CME Group (CME.O),
the world's biggest futures exchange operator, said many of the
CFTC proposals so far are inconsistent with the Dodd-Frank law
or go beyond what it requires.
 The law subjected the CFTC to an "unrealistic rulemaking
schedule" that has forced it to meet "unnecessarily tight
deadlines", Duffy said in prepared remarks.
 As a result, the CFTC has not effectively studied the
consequences of its proposals, and has failed to give those
affected enough time to comment and comply.
 Duffy said many CFTC proposals so far are unclear, which
threatens to chill market participation by traders concerned
that legitimate practices will be arbitrarily ruled unlawful.
 "Indeed, the proposed rules are so unclear as to be subject
to constitutional challenge," he said.
 (Editing by Lisa Shumaker and Dale Hudson)

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