The Senate voted 93-4 Thursday to reauthorize the Terrorism Risk Insurance Act (TRIA) for six years. The legislation, which is expected to be signed into law by President Obama, includes a provision exempting “end-users”– non-financial institutions, such as farms, ranches, manufacturers, small businesses, etc.– from certain inadvertent regulations imposed by the 2010 Dodd-Frank Wall Street reform law.
In a 2011 policy brief, The Risks of Over-Regulating End-User Derivatives, PPI Senior Fellows Jason Gold and Anne Kim warned policymakers to be wary of these unintended requirements as they implemented the law and called on Congress to rectify the issue:
No one doubts that the abuse of some forms of exotic derivatives contributed to the systemic risk that led to the 2008 crisis. But derivatives are an important tool used by major American manufacturing and service companies (“end users”) to manage and protect against risks—not create them. These derivatives contribute little—if anything—to systemic risk.
Federal agencies are nonetheless contemplating regulations that could put the conventional derivatives companies use to hedge against risk in the same categorical box as the speculative trades or trades done by systemically risky firms, even though Congress did not intend for this to occur.
Subjecting these derivatives to the same limitations as riskier speculative trades—such as by imposing “margin” requirements and other overly tough regulations—would unnecessarily burden American companies. It would tie up capital that would otherwise be directed to investment and hiring, drive up the cost of producing goods and services, and ultimately cost American jobs. Ironically enough, the result would be to create more potential risk for the economy, not less.
As we emerge from the worst recession in generations, policymakers are confronted with the dual task of implementing regulations that promote private sector economic growth while also mitigating systemic risk. Sensible regulations to deal with end-user derivatives and the companies that use them are an important piece of meeting this challenge.