On March 15, Senator Christopher Dodd (D-CT) presented an updated version of Restoring American Financial Stability, a bill that’s designed to restore stability and bring transparency to the American financial system. Contained within what’s known as “The Dodd Bill” is a section on over-the-counter derivatives. Here, it appears that the more things change, the more they stay the same.

The language in the ‘‘Restoring American Financial Stability Act of 2010,” which is a revised version of the bill Senator Dodd introduced last year, appears to offer end users, including corporations, an exemption from the requirement to move their derivatives transactions to exchanges. However, that’s not actually the case, says Sam Peterson, senior advisor in the government and regulatory advisory practice with Chatham Financial. “Corporate end users still have to meet stringent conditions” in order to keep their derivatives transactions over-the-counter. What’s more, even if a company meets the exemption requirements, the Commodity Futures Trading Commission (CFTC) doesn’t have to allow the exemption, Peterson adds.

The law firm of Sutherland Asbill & Brennan, LLP, put together a comparison of the various proposals that have been made regarding the regulation of derivatives, including the administration’s proposal, the Joint House Bill (H.R. 4173), the original Dodd bill, and the revised Dodd bill. According to this comparison, the new Dodd bill allows the CFTC/SEC to exempt a swap from the clearing requirement if one of the two parties is not a swap dealer or major swap participant (MSP) and doesn’t meet the eligibility requirements of a derivatives clearing organization (DCO) or clearing agency that clears the swap. In addition, the CFTC/SEC must consult with the Financial Stability Oversight Council before providing an exemption.

However, the definition of a major swap participant is so broad that it could cover many corporate users of derivatives, Peterson says. For instance, a party could be considered an MSP if its nonperformance or default on a transaction could create significant losses for the counterparties, he adds. Clearly, if one party defaults on a derivatives transaction, the counterparty is going to be affected. However, in most cases the losses would stop there. “The counterparty might be unhappy, but there’s no domino effect,” Peterson notes.

So, while the stated intent of the revised Dodd bill is to limit systemic risk to the broader financial system, it could end up ensnaring run-of-the-mill corporate users.

At this point, most Capitol Hill watchers predict yet more changes before any derivatives legislation is passed. Several other senators, including Jack Reed (D-RI) and Judd Gregg (R-NH), continue their work on derivatives regulation. In addition, the Senate Agriculture Committee, chaired by Blanche Lincoln (D-AR), is preparing its own bill. Lincoln is said to agree with the need for an exemption for end users of derivatives, Peterson says. One sign of this was her opening statement at the Hearing on Financial Regulation Reform in November, which included the following: “Knowing the importance of cash flow and working capital to businesses, I will be paying as much attention to what they say about clearing requirements and ‘margin’ as I will to how we address systemic risk.”

Peterson says he’s hopeful that a reasonable end user exemption eventually will make its way into any bill that is passed. It just hasn’t happened as quickly as many corporate users would like. ###