Democrats have taken steps to ease concerns raised by Warren Buffett about Wall Street reform’s impact on trillions of dollars in existing derivatives as legislation nears the finish line.
On Wednesday, the day the House passed the overhaul legislation, key Senate Democrats wrote a four-page letter clarifying the legislation’s impact on the $600 trillion derivatives market that many blame for exacerbating the financial crisis.
“Congress recognized that the capital and margin requirements in this bill could have an impact on swaps contracts currently in existence,” the senators wrote. “We provided legal certainty to those contracts currently in existence, providing that no contract could be terminated, renegotiated, modified, amended or supplemented (unless otherwise specified in the contract) based on the implementation of any requirement in this act.”
The letter comes near the end of a months-long debate over how existing derivatives would be regulated. The House approved the legislation Wednesday on a 237-192 vote.
The Senate still needs to hold a final vote on the 2,300-page bill. Buffett, the billionaire investor and founder of Berkshire Hathaway, was among many who sought to exempt existing contracts from new requirements.
Omaha-based Berkshire Hathaway reached out to Sen. Ben Nelson (D-Neb.), among others, expressing concern that the requirements would go too far if they applied retroactively.
“When Berkshire Hathaway — one of America’s most successful businesses that had nothing to do with the economic crisis we’re in — tells us they will be similarly adversely affected, of course I will listen,” Nelson said in late April.
Nelson said he did not seek an explicit amendment on the issue. When the Senate Agriculture Committee passed its version of the legislation, lawmakers included a provision exempting existing swaps from new margin requirements. The legislation was then combined with the Banking Committee’s version and the provision was removed amid media reports on the exemption.
The Business Roundtable, U.S. Chamber of Commerce and National Association of Manufacturers lobbied against the requirements applying to existing contracts.
The associations argued companies could face “a sudden and substantial financial and liquidity burden.”
Nelson voted several times earlier this year against ending debate on the Senate’s version of the bill. He said in a statement in late April that his vote was not because of Berkshire Hathaway’s concern. He wound up supporting the Senate’s version of the bill in May.
Still, the issue remained unresolved.
As the legislation headed toward a June conference process, lobbyists and financial lawyers ramped up their case, though their work was overshadowed by concerns about other provisions in the bill. They argued it raised constitutional questions and threatened to rip up already signed legal contracts.
In a June 9 letter, the American Bar Association’s Business Law Section wrote that applying the requirements retroactively “would result in unjust economic and other adverse consequences.” The International Swaps & Derivatives Association (ISDA) said that at the end of 2009, there were roughly 172,000 derivatives contracts that had a total of $3.2 trillion in collateral to hedge risks in the market.
Other derivatives contracts do not have margin requirements.
The Bar Association’s section suggested a four-word change to the legislation to make it clear the bill’s margin and collateral requirements would not apply retroactively.
House and Senate lawmakers in the conference rewrote the section of the bill, but they did not make the change lobbyists and lawyers were urging.
That left the industry uncertain about how or whether margin requirements would apply to pre-existing contracts. The Dodd-Lincoln letter this week clarified the bill and left Nelson, industry analysts and lawyers relieved.
“The mandate to establish variation margin left open the question of whether the regulators could apply such requirements to pre-existing swaps,” said Dan Crowley, partner in the Washington office of K&L Gates. “That could have had devastating consequences for issuers. We are extremely pleased by this clarification that the new margin requirements apply only prospectively.”
Nelson was glad lawmakers finally sided with his original aim.
“Sen. Nelson is pleased that Sens. Dodd and Lincoln agree that financial reform and government regulators should not disrupt existing derivatives contracts executed in good faith,” said Jake Thompson, Nelson’s communications director.
Berkshire Hathaway did not respond to requests for comment.