Rep. Grimm’s Business Risk Mitigation and Price Stabilization Act Passes Key House Committee with Bipartisan Support

Nov 30, 2011 Issues: Economy and Jobs, Financial Services

WASHINGTON, DC –Today, Representative Michael G. Grimm’s (R-NY) Business Risk Mitigation and Price Stabilization Act of 2011 (H.R. 2682) passed the House Committee on Financial Services without opposition. Rep. Grimm’s legislation is a bipartisan bill to clarify that true derivatives end-users are exempt from the margin requirements applied by Dodd-Frank to many derivatives contracts. The exemption will allow end-users to continue to use derivatives to maintain low and stable prices for consumers and will free up capital that can be used to create jobs and keep American companies competitive.

“American companies are the backbone of our nation, which is why we must keep them strong and help them grow,” said Rep. Grimm. “At a time when unemployment is at 9%, we must do all we can to remove the barriers to job creation, rather than put more up. My legislation removes the margin requirements on true end-users in order to free up capital to be used for job creation and to help our companies remain competitive in the global economy. I am thrilled that it has passed the Financial Services Committee and I encourage my colleagues to move it quickly through the House.”

True end-users are companies that use derivatives to manage an actual business risk - generally to hedge against fluctuating prices, currency rates, or interest rates - and not to speculate.  This bill clarifies that end-users employing derivatives to hedge legitimate business risk are exempt from posting margin, consistent with Congressional intent of Dodd-Frank. 

Forcing true end-users to post margin can have several negative consequences: 1) the costs of hedging could be become so high that they stop hedging, resulting in a detrimental rise in prices for consumers; 2) capital will be restricted that would otherwise be used for job creation or reinvestment to make American companies more competitive in the global economy; and 3) high costs of hedging could drive business overseas to foreign derivatives markets.

According to the U.S. Department of Commerce’s Bureau of Economic Analysis, every $1 billion in capital spending creates approximately 19,643 jobs.  In a study done by Keybridge Research, a 3% margin requirement on OTC derivatives could be expected to reduce capital spending by $5.1 to $6.7 billion per year, leading to a loss of 100,000 to 130,000 jobs. 

The bill was initially introduced on July 28, 2011 by Rep. Grimm with Reps. Gary Peters (D-MI), Austin Scott (R-GA), and Bill Owens (D-NY) as original cosponsors.  It has been sent to the House Committee on Agriculture, which it must also pass before being sent to the House floor for a vote.