4/13/2011 Risk Rule Riles Main Street - WSJ.

com

Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or
customers, use the Order Reprints tool at the bottom of any article or visit www.djreprints.com
See a sample reprint in PDF format. Order a reprint of this article now

MARKETS APRIL 13, 2011

Risk Rule Riles Main Street

U.S. Wants Car Makers, Brewers to Back Derivatives Bets With Cash; Cost at Issue
By VICTORIA MCGRANE

U.S. manufacturers, energy producers and other corporations are balking at a proposed rule they fear would
drive up the cost of hedging against price swings in the commodities they depend upon, renewing a high-stakes
debate over whether the regulation of derivatives should extend beyond the financial industry.

EXPERIENCE WSJ PROFESSIONAL Caterpillar Inc., MillerCoors, Ford Motor Co. and other
companies outside finance fought hard last year to avoid being
Editors' Deep Dive: Financial Regulation
Watch regulated under a framework created by Congress to oversee
the $583 trillion derivatives market, part of the Dodd-Frank
DOW JONES COMMENTARY
Regulators Eye Margin Requirements for financial overhaul. At the time, lawmakers said nonfinancial
Swaps Market companies wouldn't have to meet the potentially costly
NATIONAL MORTGAGE NEWS
requirement to back up their derivatives trades with cash or
Dodd-Frank Compliance Provisions to Affect
Servicers other assets as collateral.
DOW JONES CAPITAL MARKETS REPORT

…wsj.com/…/SB10001424052748703518704576258… 1/4
4/13/2011 Risk Rule Riles Main Street - WSJ.com
SEC, CFTC to Get Funding Increases Under But the new rule, unveiled by the Federal Reserve, Federal
Budget Deal
Deposit Insurance Corp. and other bank regulators, said banks
Access thousands of business sources not would have to impose such requirements on their corporate
available on the free web. Learn More clients if their exposure to these trades grew too risky. The
regulators' goal is to prevent the kind of cascading panic that
accompanied the collapse of American International Group, a
sprawling financial concern felled by largely unregulated derivatives bets.

Regulators have repeatedly sought to assure corporations that they won't be overburdened by the derivatives
rules. But the corporate world fears anything less than an iron-clad exemption could be a wedge to heavier
regulation in the future.

Companies that use the complex financial instruments to hedge against risks—such as fuel prices or interest
rate fluctuations—say the new rule would eat up cash that could otherwise go toward creating jobs or making
investments. Some argued that the move violated Congress's intent when it passed the financial revamp last
year.

Regulators don't expect any actual change in the amount of

collateral that bank dealers extract from corporate
counterparties as a result of the rule, said people familiar with
regulators' thinking. Dealers don't require any collateral on the
majority of derivatives trades with corporate end users, and the
rule enables them to continue the status quo, regulators
believe.

Corporations say they are nervous about the broad framework

Getty Images
even if the current rule wouldn't affect the trades they make
Airlines often hedge oil prices. today, because regulators could change the parameters or
indirectly pressure banks to lower the threshold.

"We fear that at the very time end users would be under the most credit constraints and find cash the tightest—
…wsj.com/…/SB10001424052748703518704576258… 2/4
4/13/2011 Risk Rule Riles Main Street - WSJ.com
namely during times of financial turmoil—that the regulators would exercise their rule-making authority to
tighten the margin exemption and sweep up more end users," said Tom Deas, treasurer for Philadelphia-based
chemical company FMC Corp.

Derivatives covered in the new set of rules are known as swaps: private financial contracts between two parties
to exchange one asset or liability for another in the future. Airlines, for example, use swaps to hedge oil price
fluctuations.

Craig Reiners, director of risk management at beer giant MillerCoors LLC, said the derivatives rules were
designed to reduce threats to financial stability, whereas companies such as his "pose no systemic risks." If end
users aren't shielded, the rules "would have a very harmful effect on our risk-management of the business and
for that matter ultimately the cost of a six-pack of beer." MillerCoors uses over-the-counter derivatives to
hedge against price volatility in areas such as aluminum, hops and energy.

The Coalition for Derivatives End-Users, an umbrella group for firms including Caterpillar Inc., Ford Motor
Co., MillerCoors, Boeing Co., Duke Energy Corp. and Procter & Gamble Co., argues that regulators
"misinterpret" the law and don't have the authority to impose such requirements. It also said the proposals
could "divert working capital from productive uses at the costs of economic growth and jobs, or send a vibrant,
secure swaps market overseas."

The Dodd-Frank financial overhaul sought to bring such trades

More
into the open to better judge the risks they pose to the broader
ISDA Names New Chairman as Swaps Rules
Loom economy. It requires most derivatives to be traded on
exchanges or similar electronic systems and routed through
clearinghouses.

The law exempted end users from the clearing requirement. For trades that aren't cleared, companies and other
market players must post margin, or cash collateral.

Tuesday's rule from the nation's top bank regulators said any bank selling derivatives would have to come up
with a limit for its corporate clients based on their credit profile. A healthier company would have a higher limit
…wsj.com/…/SB10001424052748703518704576258… 3/4
4/13/2011 Risk Rule Riles Main Street - WSJ.com
than a riskier one. If the company exceeds that limit, the bank would be required to collect cash or other
collateral from the company to put aside in case the trades go bad.

Luke Zubrod, a director with Chatham Financial, a consulting firm advising the end-user coalition, said banks
and their customers today can agree to dispense with providing collateral. If the rule is approved as written, a
wide range of companies could find themselves subject to the new requirements.

Regulators said the new rules won't hamper nonfinancial companies using derivatives in the natural course of
business, provided they don't engage in speculative bets as AIG did. FDIC Chairman Sheila Bair said regulators
need to strike a balance between protecting those users and the lax regulation of derivatives that many say
fueled the financial crisis of fall 2008.

"We do not want to blow up the healthy and needed parts of the market," said Ms. Bair said.

The draft rule unveiled Tuesday is open for public comments until June 24, after which regulators may choose
to revise it.

—Alan Zibel and Jamila Trindle contributed to this article.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright
law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit
www.djreprints.com

…wsj.com/…/SB10001424052748703518704576258… 4/4