If one were to distill the purpose of the Dodd-Frank Act to three words, they probably would be to “reduce excessive risk.”  Putting aside the interminable debate about whether the law is achieving its objective, there is at least one example where Dodd-Frank unnecessarily increases risk – the requirements imposed on derivatives end-users.

Dodd-Frank was specifically drafted to cover traders and speculators in derivatives.  But, in the frenzy leading up to the passage of the act it became apparent that the language to achieve this objective also covered the end-users of derivatives.  End-users, however, don’t use derivatives to take risk or speculate.  In fact, they use them for just the opposite – as a tool to reduce risk business risk.

In January, Congress passed and the president signed into law an important amendment to Dodd-Frank that removed the requirement for end-users to post margin when entering into a derivatives trade.  (See this statement from the Coalition for Derivatives End-Users.) This was a very important fix, but it did not solve the entire problem for many end-users.

Some end-users that have many subsidiaries and affiliated companies consolidate all their derivatives needs into one organization commonly referred to as a “Centralized Treasury Unit” or CTU.  There are many benefits of CTUs, including the ability to net trades so that the company can go to “the street” with fewer trades, the ability to have fewer agreements with trading counterparties and – this is a big one, especially for those who believe in strong corporate governance – the ability for management and the board to assess the overall derivatives risk profile of the company.

The problem?  Well, under Dodd-Frank, CTUs are technically considered “financial institutions” and, therefore, generally subject to the full panoply of Dodd-Frank requirements placed on derivatives traders and speculators.  If this is not fixed, it will be much more costly to operate a CTU and, therefore, push companies to take on more risk by reducing the amount of derivatives trading they do to hedge their risk.

Today, the Senate Agriculture Committee held a hearing on this anomaly, “Regulatory Issues Impacting End-Users and Market Liquidity.” For those House and Senate members who are either interested in reducing regulatory burdens on companies or promoting risk-reducing activities – or both, here is an opportunity to come together and improve the effectiveness of Dodd-Frank.