How the Dodd-Frank Act Could Impact Your Weekend

On a Friday like today, most folks are looking forward to a relaxing, fun-filled weekend away from work and the myriad of regulations with which we have to comply.  Now, it looks like the new financial reform regulations may have an impact on our leisure time activities.  What you say?  How could that be?  Well, according to an article this week in the Wall Street Journal, the Dodd-Frank Act could force companies who use derivatives to hedge commodity price fluctuations to provide cash collateral on the transactions.  If that happens, then the cost will be transferred to the consumer in the form of higher prices.  One company that anticipates price increases is MillerCoors LLC.  Here's what the head of risk management at MillerCoors had to say according to the Wall Street Journal.

Craig Reiners, director of risk management at beer giant MillerCoors LLC, said the derivatives rules were designed to reduce threats to financial stability, whereas companies such as his "pose no systemic risks." If end users aren't shielded, the rules "would have a very harmful effect on our risk-management of the business and for that matter ultimately the cost of a six-pack of beer." MillerCoors uses over-the-counter derivatives to hedge against price volatility in areas such as aluminum, hops and energy.

So, as you head out to a sporting event or simply plan to kick back with a cold beverage in your back yard this weekend, beware of the possible negative and unintended impact to your wallet as a result of financial reform.

Shining the Light on Derivatives

New rules are imminent for derivatives trading activities and are aimed at addressing the lack of transparency into counterparty risk that contributed to the current economic crisis.  The Obama administration is moving forward with a plan to require certain derivatives to be traded via a central clearinghouse and others to be traded on open exchanges.  Here is an excerpt from yesterday's press release from the U.S. Treasury.

As the AIG situation has made clear, massive risks in derivatives markets have gone undetected by both regulators and market participants. But even if those risks had been better known, regulators lacked the proper authorities to mount an effective policy response. Today, to address these concerns, the Obama Administration proposes a comprehensive regulatory framework for all Over-The-Counter derivatives.  Moving forward, the Administration will work with Congress to implement this framework and bring greater transparency and needed regulation to these markets. The Administration will also continue working with foreign authorities to promote the implementation of similar measures around the world to ensure our objectives are not undermined by weaker standards abroad.

This is a step in the right direction, but the details and timing of such changes remain to be seen. Also, it may require a great deal of coordination among several different regulatory bodies.  That may hamper what is on the surface a simple, straightforward plan.