The CFTC’s no-action letter grants Honeywell, and end users generally, relief from being required to report inter-company hedging transactions between centralised treasury units and operating affiliates around the world. Tens of thousands of transactions annually, in Honeywell’s case, would have had to have been reported to a Swap Data Repository (SDR) on a transaction-by-transaction basis within 24 hours of the transaction occurring.
Honeywell treasury played a similar role, including testifying before the US House Committee on Agriculture, that resulted in the introduction of HR 634 in Congress, a bill that would, if enacted, exempt non-financial end users from margin requirements on hedging transactions with banks.
Honeywell treasury worked in close conjunction with, and was represented by, the Coalition for Derivatives End Users (CDEU), which represents hundreds of end user companies and industry organisations that use derivatives predominantly to manage risks. Honeywell’s government relations department provided, and continues to provide, significant support, on-the-ground resources and strategic advice for this project.
Honeywell Treasury played a leading role in obtaining significant Dodd-Frank regulatory reporting relief, and is currently striving to obtain legislative relief on margin requirements, that will not only benefit Honeywell, but will significantly benefit commercial end users in general. Working with the CDEU, Honeywell met with the CFTC and members of the US House and Senate numerous times and testified before the US House Committee on Agriculture.
Jim Colby, Assistant Treasurer, explains: “Honeywell treasury involvement was critical in facilitating a detailed understanding of the regulatory and legislative impact of Dodd-Frank on commercial end users. With compliance deadlines for end users looming, Honeywell was very concerned with the direction in which certain rules appeared to be heading.”
The first area of concern was the CFTC’s requirement for companies to report inter-company hedging transactions, transactions that do not create systemic risk, to SDR’s on a trade-by-trade basis within 24 hours of the trade occurring. This requirement would add enormous unnecessary costs to the activities of sophisticated companies employing a centralised treasury unit model, a model in which affiliates around the world hedge with a centralised treasury unit, which in turn nets the exposures and hedges the net exposure externally with banks. Tens of thousands of inter-company trades are netted down to external trades representing a small fraction of that number (a 75% reduction in the case of Honeywell). Reporting such a large volume of internal transactions would add tremendous expense and complexity to a company’s hedging activities without providing a corresponding benefit to the safety of financial markets.
The second area of concern relates to margin requirements. In approving the Dodd-Frank Act, Congress made clear that end users were not to be subject to margin requirements. Nonetheless, regulations proposed by the Prudential Banking Regulators (PBR) could require end users to post margin. This stems directly from what they view to be a legal obligation under Title VII. While the regulations proposed by the CFTC are preferable, they do not provide end users with the certainty that legislation offers. According to a CDEU survey, a 3% initial margin requirement could reduce capital spending by as much as $5.1 to $6.7 billion among S&P 500 companies alone and cost 100,000 to 130,000 jobs.
“To shed some light on Honeywell’s potential exposure to margin requirements, we had approximately $2 billion of hedging contracts outstanding at year-end that would be defined as a swap under Dodd-Frank,” recalls Colby.
“By taking a leadership role in educating US regulators and legislators on the negative impacts of Dodd-Frank on commercial end users, as well as actively supporting proposed legislative relief, Honeywell has expanded and redefined the role of treasury.”