Today, Americans for Tax Reform sent the following letter to all members of the US Senate urging them to oppose Sen. Dodd’s financial reform package. Specifically, provisions that will regulate over-the-counter (OTC) derivatives.

As Lawrence White, professor of economics at NYU’s Stern School of Business says:

"The silence on Fannie and Freddie is deafening. How can they look at themselves in the mirror every morning thinking that they have a regulatory reform bill and they are totally silent on Fannie and Freddie? It just boggles my mind."

ATR’s full letter is below and click here for the PDF version of the letter.

13 April 2010

Dear Senator:

On behalf of Americans for Tax Reform and millions of taxpayers nationwide, I urge you to oppose Senator Dodd’s financial reform bill. While problematic for many reasons, Senator Dodd’s proposed legislation looks to heavily regulate over-the-counter (OTC) derivative trading, increasing the costs of such transactions.

While Americans everywhere support financial reform that improves transparency, accountability, and stability in the nation’s financial markets, heavily regulating OTC derivatives will do little to improve Americans’ financial security.

The result of a mischaracterization of OTC derivatives has led to unnecessary calls for heavy regulation. Many companies, or end users, utilize OTC transactions to manage risks associated with standard business operations, including fluctuations in interest rates, currency exchanges and commodity prices. In fact, more than 90 percent of Fortune 500 companies employ OTC derivatives trades, the vast majority of which had no role in the recent downturn. 

Senator Dodd’s bill would require OTC derivative transactions to pass through a government monitored central exchange, either the Securities Exchange Commission or another entity. Companies participating in this mandated government exchange would be required to keep high cash margins to back their OTC derivatives.

Requiring OTC derivatives to pass through a clearinghouse and maintain high cash levels will increase the costs associated with OTC derivatives, making it more expensive for a company to insulate itself from risk. Inhibiting OTC trades for end users would unnecessarily lock up capital that a company would have used to invest, grow, and retain and create jobs — effectively removing liquid capital from corporate balance sheets. In order to satisfy new standards set by the Dodd bill, many companies would have to establish new credit lines or sell current assets.  

Should the regulatory burden prove too expensive, companies will simply pass the costs on to consumers? Exelon, on of the nations largest energy distributers, said in recent Congressional testimony that they “could increase the power prices from 5 to 15 percent” were “all trading activity to occur in organized exchanges.” Energy producers are not the only end users that utilize OTC derivatives to reduce risks. Manufacturers, utilities, healthcare companies and commercial real estate owners and developers all could be forced to raise prices as they are heavily involved in the derivative market; effectively raising costs for all consumers

Financial reform is essential and necessary. However, any reform passed should not only improve American’s financial security but be prudent as well – regulating OTC derivatives under the Dodd proposal accomplishes neither.

For more information, contact Federal Affairs Manager Brian Johnson in my office at [email protected] or 202.785.0266.

Grover G. Norquist
cc:    All Members of U.S. Senate