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Coalition Wants CFTC Guidance on 'Notional Amount'

A coalition of energy groups and other stakeholders on Thursday called on the Commodity Futures Trading Commission (CFTC) to provide the industry with guidance to calculate the "notional amount" of certain commodity swaps, a prerequisite to determine which entities will be subject to or exempt from the new regulations under the Dodd-Frank Wall Street Reform and Customer Protection Act.

"Getting the notional amount right is essential to successful implementation of the de minimis test. Notional amount must be appropriately assessed or it could undercut all the Commission's hard work in setting a hedging exemption and clearing exclusions for end-users," said Jenny Fordham, vice president of markets for the Natural Gas Supply Association (NGSA).

Companies trading less than an aggregate gross notional amount of $8 billion in swaps annually will not be subject to the Dodd-Frank Act, the CFTC said in April when it passed the rule. The de minimis level of $8 billion is expected to remain in effect during the phase-in period and then fall to $3 billion after the CFTC conducts a study on the swap markets (see NGI, April 23). Companies below that notional threshold will be be exempt from clearing their swaps under Dodd-Frank.

The de minimis threshold initially started at $100 million when the CFTC approved the proposed rule on swap dealers in December 2010 (see NGI, Dec. 6, 2010).

In their letter to the CFTC, the NGSA and other coalition members -- the American Petroleum Institute, Commodity Markets Council, Edison Electric Institute, Electric Power Supply Association and the Independent Petroleum Association of America -- wrote that they are seeking "certainty" from the Commission on how to calculate the notional amount of swaps.

"The Commission's rules 'do not prescribe any particular methodology for calculating the notional amount or effective notional amount.' Instead, the Commission 'contemplates the use of industry standard practices' to calculate notional amounts," the group said.

"The coalition understands that most of its members plan to continue calculating the notional amounts of their swaps based on the methodology [that they're using now] unless they receive contrary instructions or guidance from the CFTC. The coalition would...welcome the opportunity to participate in an industry technical conference if the Commission desires further discussion of the notional amount calculation."

The coalition told the CFTC that it believes "it is plain that the notional amount of a commodity swap should be the absolute value that results from multiplying the quantity term of a swap by its nominal, i.e., named or facial price...As an example, the notional amount of a basis swap, for which payments are based on the price differential between two locations, should equal the absolute value of the product of the contract quantity times such price differential."

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