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Industry Groups Urge CFTC to Fix Swaps Rules

Several energy industry trade associations including the American Petroleum Institute (API) and the American Gas Association (AGA) joined other entities to urge the Commodity Futures Trading Commission (CFTC) amend swaps rules enacted by the Dodd Frank Financial Reform Act, arguing the rules in their current form pose a significant financial burden to the industry.

Comments by API and AGA were among several posted by CFTC, including 35 on Tuesday, from a 60-day public comment period that began in March, when Acting CFTC Chairman Mark Wetjen announced the agency was looking to improve its regulation of swaps transactions (Proposed Rule No. 79 FR 16689).

Stephen Comstock, director of tax and accounting policy for API, said CFTC should fix problems with the current swaps rules before adopting new ones, and should limit the swaps data collected to just what is specifically needed by CFTC to do its job.

"[Our] members and other market participants are experiencing many technical and operational challenges associated with the Part 45 swaps data reporting requirements," Comstock said. "These technical and operational difficulties faced by reporting counterparties are further exacerbated by a lack of uniformity and standardization of the protocols and methodologies adopted by the swap data repositories [SDRs]. As a consequence, the compliance burden and costs incurred by market participants who report to multiple SDRs has markedly increased."

Comstock said "several data points currently submitted by reporting counterparties simply are not relevant to the commission's market oversight responsibilities, and the commission is unable to utilize in any meaningful way the swap data currently being reported to SDRs...API recommends that the commission reconsider the scope of swaps data that is actually needed for its swap market oversight role and streamline Part 45 to require market participants to report only the data needed to fulfill these responsibilities."

In a separate statement, AGA’s Arushi Sharma, regulatory affairs counsel, said the association wants CFTC to issue a limited re-proposal of the Part 45 final rule, giving nonreporting end users a "safe harbor" for relying on their counterparties' reporting on swaps transactions. Part 45 compliance requirements for nonreporting entities are unclear, AGA argues, as are the status of physical energy contracts, the latter of which imperils local distribution companies (LDCs).

"In the absence of a safe harbor, AGA does not believe that the commission can minimize reporting burdens on non-reporting end-users as was intended by the Part 45 rule reporting hierarchy," Sharma said. "Additionally, AGA believes the commission should reconsider the extent of reporting counterparties' obligations to ensure SDR database accuracy, given that these entities do not have the ability to determine database controls."

Three energy executives issued a joint statement. Russell Wasson, director of tax finance and accounting policy for the National Rural Electric Cooperative Association (NRECA); James Cater, director of economic and financial policy for the American Public Power Association (APPA); and Noreen Roche-Carter, chair of the tax and finance task force for the Large Public Power Council (LPPC) said regulatory uncertainties could lead to nonfinancial energy commodity transactions being "reported once, twice or not at all." APPA, LPPC and NRECA collectively form the NFP Electric Associations.

"Two counterparties negotiating a bilateral natural gas or electricity transaction, acting in good faith and represented by experienced lawyers, reading the commission's rules, interpretations and guidance, might not be able to agree on an answer to the question: Is the transaction we are about to execute a 'swap'?" the NFP executives said.

To remedy the problem, NFP requested that CFTC "sequence and prioritize any further rulemaking in such a way that, within the 'Other Commodity' asset class of swaps and particularly for nonfinancial energy and energy-related transactions, regulatory certainty is provided regarding which transactions are to be reported as 'swaps.'

"[This should be done] before the commission proposes amendments to its rules as to what data (and what level of data granularity) is to be collected and the frequency of the commission's data collection activities about those 'swap' transactions."

Last week, CFTC made a trio of moves designed to remedy problems encountered by the energy industry from Dodd-Frank (see Daily GPIMay 27). The agency issued a proposed rule amendment to amend the definition of a swap dealer; scheduled a public roundtable in June to discuss position limits for physical commodity derivatives; and issued a no-action letter providing some regulatory relief to members of designated contract markets and swap execution facilities.

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