Excellent statement Wednesday from Craig Reiners, director of risk management for MillerCoors LLC before the House Financial Services Committee’s hearing, “Assessing the Regulatory, Economic and Market Implications of the Dodd-Frank Derivatives Title.”

Reiners was testifying on behalf of the Coalition for Derivative End-Users — to which the National Association of Manufacturers belongs — about the use of derivatives by manufacturers to manage risk . Excerpt (with our paragraph breaks):

MillerCoors uses derivatives for the sole purpose of reducing commercial risk associated with our business. At MillerCoors, we brew beer, and our commitment to our customers is to produce the best beer in the United States and to deliver it at a competitive price. In order to achieve these goals, we must find a way to mitigate and prudently manage our inherent commodity risks. I believe the prudent use of derivatives offers end-users of physical commodities the critical risk management tools to provide a necessary degree of predictability to our earnings. The derivatives our organization has approved for use provide the tools to manage volatility intrinsic to commodities, which allows us to manage cash flow expectations within reasonable parameters. Our single largest commodity exposure is to aluminum. Our agricultural risks include malting barley, corn and hops. Our energy risk portfolio includes coal, natural gas, deregulated electricity and diesel fuel. This annual commodity spend of over $2.8 billion must be prudently managed.

In order to properly manage this significant risk, we created a strict Board-approved commodity risk policy that clearly forbids speculation. This policy allows us to use OTC swaps to precisely match the timing and prices of our complex manufacturing and distribution process. For example, we exactly match our OTC swaps for aluminum with our actual use of cans over the same time frame. This risk management technique allows us to prudently manage our costs and reduce price volatility.

We have used this risk management process both prior to and since the inception of MillerCoors with no adverse consequences. In fact, we would create significantly more price volatility in our business by not hedging our business risks. We believe that end-users generally share the concern that if the cost of hedging our risks rises significantly, entering into swaps may no longer be economical. The result could be a reduction in risk mitigation through hedging, which, ironically, could increase risk and exposure to market volatility.

Sen. Mike Johanns (R-NE) and 12 other U.S. Senators recently wrote a letter to the Securities and Exchange Commission urging the SEC to make sure that new regulations not limit the legitimate use of derivatives as a risk-management tool. The Coalition had encouraged Senators to join the letter, noting the potentially painful economic effects of overregulation:

A Business Roundtable survey from last year demonstrated that the imposition of a 3% initial margin requirement on S&P 500 companies alone would drain $269 million in liquidity per company and could reduce capital spending by $5 to $6 billion per year, causing a loss of 100,0000 to 120,000 jobs. Expanding this data to include non-S&P 500 companies and to account for variation margin requirements would substantially increase job losses.

News coverage …

• Washington Post, “Corporate groups, Republicans call Dodd-Frank derivative rules bad for business“
• Politico, “Business aims at derivatives rules“
• Wall Street Journal, Corporate Groups Attack Unintended Consequences Of Dodd-Frank

The House of Representatives appointed conferees Wednesday to H.R. H.R. 4173, the Wall Street Reform and Consumer Protection Act, i.e., the financial regulation bill. The conference committee work will begin in earnest next week, and the National Association of Manufacturers and other business groups are still very concerned about proposed language on derivatives.

The Wall Street Journal reports today, “Democrats Spar Over Derivatives Rules“:

WASHINGTON—Democratic efforts to swiftly steer a financial-overhaul bill into law stumbled as House and Senate leaders clashed over how best to regulate the $600 trillion derivatives market.

The question, while highly technical, is a central component of the bill and would have wide-ranging consequences for U.S. businesses that use the complex financial instruments to protect themselves from fluctuations in currencies, interest rates and commodity prices.

The Journal notes the NAM letter sent Thursday to the conference committee highlighting manufacturers’ views on the legislation, emphasizing the need to preserve the ability of end users to use derivatives to manage risk. The broad point:

The National Association of Manufacturers (NAM) – the nation’s largest industrial trade association – appreciates and supports the efforts of policymakers to improve transparency, accountability and stability in our nation’s financial system. As you work to craft a compromise version of the Wall Street Reform and Consumer Protection Act (H.R. 4173), we urge you to focus on strengthening the U.S. financial system and avoiding new regulations that could be costly and could hinder job creation for manufacturers and other non-financial companies that had nothing to do with the financial crisis.

While the National Association of Manufacturers has made the investment-discouraging derivatives provisions of the financial regulation bill its focus of attention, S. 3217, other sections of the bill would also add uncertainty and increase the costs of doing business in the United States. The Washington Post, among others, caught up on those provisions over the weekend. For example, there’s the corporate governance language, which would allow special-interest groups like organized labor and environmentalists to force their political agendas upon stockholders.

“CEOs from far and wide band against financial bill provision“:

A rush of chief executives from a wide swath of industries has been coming through Washington over the past three weeks, talking to lawmakers about a long-debated issue called “proxy access,” which would make it easier for shareholders at all publicly traded companies — not just banks — to nominate board directors. Opponents say the rule has nothing to do with overhauling Wall Street and doesn’t belong in the legislation.

“This is our highest priority,” said John Castellani, president of the Business Roundtable, which represents 170 chief executives. “Literally all of our members have called about this.”

The NAM and other business groups signed a joint letter to Congress last month sharply opposing the provisions.

The consumer protection provisions of the financial regulation bill also represent a major expansion of government control over the economy, directly through the federal government as well as indirectly — and potentially even more damaging — through state attorneys general and their political allies in the plaintiffs’ bar. The Post’s story, “Lawmakers, financial firms push to limit state power on consumer protection,” reports on the efforts by Sen. Tom Carper (D-DE) to rein in the most harmful elements in the bill.

Carper said he shares the White House’s goal of establishing a new consumer protection bureau to guard against fraud and deceptive practices.

“All my amendment says is that we should make that bureau do its job. This is the cop on the beat that we need,” Carper said. He warned that if state regulators are also allowed to pursue cases against national banks, this would cause confusion as consumer protection rules are interpreted differently by dozens of separate governments.

Carper’s amendment, which would limit the ability of state attorneys general to enforce federal law against national banks, has more than a dozen sponsors on both sides of the aisle. It could come up for debate early next week.

Sen. Carper’s amendment is S.Amt. 3949, and the text is available here.

The NAM has also opposed Sen. Specter’s amendment to expand liability in securities fraud litigation to parties not involved in the fraud, i.e., his attempt to overturn the U.S. Supreme Court’s ruling in Stoneridge v. Scientific Atlanta. On Thursday, Sen. Specter (D-PA) urged his colleagues cosponsoring the amendment to come to the Senate floor in support of it, but according to the Congressional Record, none did. The Senate is expected to vote on amendments this evening, but it seems safe to say the Specter amendment will not be considered until after the results of the Pennsylvania primary election on Tuesday. If Senate Majority Leader Reid files cloture on the entire 1,400-page bill today, as reported, then the Stoneridge amendment may be stone dead. That would be good.

The Senate yesterday rejected an amendment sponsored by Sen. Saxby Chamblis (R-GA) and Sen. Richard Shelby (R-AL) to exempt manufacturers and other business end-users from the financial reform bill’s onerous regulations on derivatives. The vote was 39-59.

The restrictions as now contained in the bill go far beyond regulations meant to control hyper-risky speculation. By restricting the legitimate, necessary use of derivatives to manufacturers and others, the legislation will sow more uncertainty in the U.S. business and investment climate. As NAM Vice President Dorothy Coleman said in a statement:

Without this exemption, the cost of managing risk for manufacturers and other companies will increase by millions — and in some cases billions — of dollars, limiting their ability to drive economic growth and job creation.

Manufacturers of all sizes use customized over-the-counter (OTC) derivatives to manage the cost of borrowing or other risks of operating their businesses, including fluctuating currency exchange, interest rates and commodity prices. These risk management tools help businesses keep operations going, invest in new technologies, build new plants and retain and expand workforces – especially in a challenging economy.

The NAM had sent a Key Vote letter to Senators explaining these points. Anti-Wall Street populism IS anti-business populism, and it’s winning the day.

Too much of the news coverage on the vote was framed in terms the proponents wanted — a blow against speculation as conscientious Democrats overcame the special interest pleas of Wall Street lackey Republicans. One report, for example, cast the dispute this way: “The U.S. Senate voted on Wednesday to reject a Republican measure that would have weakened proposed new rules for the unpoliced $615 trillion over-the-counter derivatives market.” So the legislation is “strong,” seeking to control an “unpoliced” market and the amendment sought to “weaken it.” The New York Times headline did the same, “Senate Beats Back Efforts to Ease Regulation Bill.” Thank goodness they beat it back!

Of course, what the Senate “beat back” was an important tool in risk management by major U.S. employers, businesses that do not use derivatives to speculate. Maybe the headline should have read, “Senate Beats Back Efforts to Preserve U.S. Competitiveness.”

P.S. Yay for The Hill, “Manufacturers concerned about derivatives provisions.”

The National Association of Manufacturers today sent a Key Vote letter to the U.S. Senate expressing the NAM’s support for the Chambliss/Shelby Substitute Amendment (SA 3816) to S. 3217, the super-expansive Restoring American Financial Stability Act, the financial regulation bill. Excerpt:

NAM members believe strongly that any derivatives reform effort should ensure business end-users’ continued access to OTC derivatives, providing them with greater financial certainty and allowing them to allocate resources to core business activities. In addition, we have called for clear exemptions from central clearing, bilateral margining and exchange-trading requirements for business end-users to avoid drawing large amounts of capital from business operations, including job creation.

We have serious concerns, however, that the current end-user exemption in S. 3217 (and in the pending Dodd Substitute) is not strong or clear enough. In addition, other provisions in the derivatives title could effectively eliminate the exemption for many companies and, in some cases, subject them to capital and margin requirements or higher costs.

Key votes, developed by a committee of NAM member companies, are used to determine a member of Congress’ rating on manufacturing-related measures.

Sen. Richard Shelby (R-AL) has issued a statement on the negotiations over the financial regulation legislation, “Shelby: Negotiations with Dodd Reach Impasse.” Excerpt:

This bill still contains a sprawling new consumer protection bureau that will find and force its way into facets of our economy that had nothing to do with the housing crisis. This massive new bureaucracy would have unchecked authority to regulate whatever it wants, whenever it wants, however it wants. I am aware of no other arm of the federal government this powerful, yet so unaccountable. In my negotiations with Chairman Dodd, I have consistently supported strengthening consumer protections. I have also advocated for a sensible and meaningful role for safety and soundness regulators in this new agency’s operations. Unfortunately, despite my demonstrated willingness to propose compromise solutions, this sensible step has proved to be a bridge too far.

Also included in this legislation are critical provisions relating to derivatives. These provisions, which Democrats developed on their own behind closed doors, were only very recently inserted into the bill. In fact, I was not provided the opportunity to share my views on a single aspect of the derivatives provision. While I firmly believe we must end the casino-like atmosphere on Wall Street, I also believe we must protect Main Street’s ability to create jobs and grow the economy. In my judgment, the provisions as currently drafted would have far-reaching and devastating effects on these businesses and our economy, increasing the cost of nearly every product we use and negatively impacting job growth.

 The bill is S. 3217, Restoring American Financial Stability Act of 2010.

 UPDATE (4:10 a.m.): Senate Republican Leader Mitch McConnell issues a statement, “Key Agreement Reached on Closing Bailout Loopholes.” It appears that a cloture vote will now pass, and debate on the legislation — with its many economy-damaging provisions — moves forward.

(Hat tip: Daniel Foster, The Corner.)

Yesterday, Shopfloor commented on the Senate Agriculture Committee’s vote on derivatives legislation that would generally preserve manufacturers’ and other commercial end users’ access to this important risk management tool.

The measure is expected to be included in the broader financial services reform legislation set for debate in the Senate next week.

However, as Roll Call [subscription] reports today, the derivatives plan — as do many other provisions — faces opposition, and its inclusion in the final bill is uncertain:

Senate Agriculture, Nutrition and Forestry Chairman Blanche Lincoln (D-Ark.) appears to be fighting an uphill battle to get her piece of the financial regulatory reform bill into the larger package before it hits the floor, possibly next week.”

She added that she is determined to make sure her legislation, or a compromise she approves of, makes it into the underlying bill and does not get set up for near-certain failure as a stand-alone amendment.

Marketwatch, “Senate committee approves controversial derivatives bill“:

WASHINGTON (MarketWatch) — Big commercial banks would be forced to shed lucrative derivatives trading operations under provisions of controversial, sweeping legislation to regulate the $450 trillion derivatives market that was approved Wednesday by the Senate Agriculture Committee.

The vote was 13-8 with all Republicans opposed except for Sen. Charles Grassley, R-Iowa. The committee has 12 Democrats and nine Republicans.

The bill establishes a clearinghouse and collateral requirements for trading in derivatives, and has important exemptions for many businesses, such as manufacturers, airlines, and other commercial “end users.” Marketwatch quotes Dorothy Coleman, the NAM’s top tax policy person: “We are encouraged that the bill approved this morning by the Senate Agriculture Committee recognizes the importance of these risk management tools to end-users like manufacturers.”

Marketplace also talked to the NAM in this story, “Some industries cheer derivatives vote.”

Committee Chairman Blanche Lincoln’s news release, “Bipartisan Bill Passage will Pave Way to Ending Backroom Wall Street Deals.”

UPDATE (8 a.m.): Wall Street Journal’s piece is good, “Grassley Bucks GOP, Backs Derivatives Curb.” There is, of course, much, much more in the financial reg legislation than just derivatives regulation. The consumer finance protection agency could have huge implications.

The Restoring American Financial Stability Act of 2010 unveiled this afternoon by Senate Banking Committee Chair Chris Dodd (D-CT) raises more questions and concerns for U.S. manufacturers. For one, manufacturers are disappointed that the new proposal does not make it clear that only businesses that are “predominantly engaged” in financial activities are covered by the overall reform.

Even though the thrust of the reform measure is to restore responsibility and accountability in the nation’s financial system, broadly worded definitions in the bill arguably could pull some non-financial companies into the new regulatory regime. Covered companies are defined as those with “substantial” financial activities and the Federal Reserve Board gets to decide who falls into the definition. Manufacturers that engage in routine financial activities as a small part of their main business, e.g., a global manufacturer that manages a foreign exchange trading operation, an equipment manufacturer that provides financing for customers, are concerned that they could be pulled into the systemic risk regulatory regime, drawing needed capital from their businesses and imposing new administrative burdens.

On the derivatives front, manufacturers were pleased to see that the definition of a “major swap participant” excludes OTC derivatives used to hedge business risk. Unfortunately, because it is not clear that business end-users who do not pose risks to the financial system are excluded from the definition, some manufacturers are concerned they could be considered a major swap participant. Another concern for manufacturers are requirements that they post margin on bilateral, customized derivatives contracts. End-users like manufactures do not pose a threat to financial stability and should be able to continue to access OTC derivatives without tying up valuable working capital.

On a brighter note, there may be more changes on the derivatives provisions during the Committee’s markup session, which could happen as early as next week. In comments this afternoon, Sen. Dodd noted that Sens. Judd Gregg (R-NH) and Jack Reed (D-RI) are working on a revised derivatives section that the committee could vote on next week.

• Text of draft legislation
• Summary of draft legislation (13 pages)

Dorothy Coleman is vice president for tax and domestic economic policy at the National Association of Manufacturers.

The U.S. House yesterday by a vote of 304-124 passed an NAM-supported amendment sponsored by Rep. Scott Murphy (D-NY) to H.R. 4173, the Wall Street Reform and Consumer Protection Act, to expand the federal government’s regulation of the financial sector, especially consumer finance. The legislation also further regulates over-the-counter (OTC) derivatives, a tool that manufacturing companies use to manage risk. The National Association of Manufacturers wrote a “Key Vote” letter supporting the Murphy amendment, explaining:

Manufacturers of all sizes use customized OTC derivatives to manage the cost of borrowing or other risks of operating their businesses, including fluctuating currency exchange, interest rates and commodity prices. In today’s challenging economy, these risk management tools help businesses keep operations going, invest in new technologies, build new plants and retain and expand workforces.

Unless amended, H.R. 4173 could unnecessarily subject some end-users to burdensome margin and collateral requirements aimed primarily at those whose activities present risk to the financial system. The Murphy-McMahon-Kratovil Amendment makes clear that end-users do not pose systemic risk, should not be designated as “Major Swap Participants” under the legislation and, therefore, should not be subject to these additional costly requirements. 

Bloomberg also reported on the provision in its story, “House Trims State Powers in Debate on Financial Rules Overhaul.”