The American Gas Association (AGA) has called on the Commodity Futures Trading Commission (CFTC) to limit collateral requirements for creditworthy end-users, such as natural gas utilities and their counterparties.

In comments filed with the Commission Tuesday, the gas utility group wrote that "based on their relatively high equity capital structures, ownership of long-term assets and cost-recovery mechanisms, gas utilities are able to negotiate with financial counterparties to take hedging positions up to a specified limit without having to post [cash] margin or collateral.

"The Commission should, therefore, permit such gas utilities to continue to be able to enter into swap transactions using their unsecured credit as noncash collateral...The Commission should recognize that the counterparty risk associated with the use of swaps by gas utilities is relatively low," said the AGA, which represents 195 utilities.

"Many gas utilities rely on their strong credit profiles to use unsecured credit for their hedging transactions instead of cash collateral," the utility association said.

"Gas utilities reduce the cost of hedges for their customers by relying, in part, on their strong financial profiles to obtain unsecured credit for their hedging transactions instead of posting cash collateral. Typically, entities owning gas utilities maintain a capital structure that is approximately 50% equity and 50% debt, and own large quantities of tangible assets (i.e., gas distribution systems and other energy facilities) that are recorded on their books at historical cost and financed through long-term debt," the group said.

The Dodd-Frank Wall Street Reform Act requires that swaps be cleared on a registered exchange or designated swap execution facility. However, end-users who use swaps to mitigate bona-fide commercial risk are exempted from clearing under the law.

The AGA has urged the CFTC "to make certain clarifications to ensure that this commercial end-user exemption is indeed as robust as intended" by Congress, and that gas distribution utilities are not considered swap dealers or major swap participants. "AGA further believes that the benefits accruing to an end-user under the exemption should be preserved when the end-user enters into a financial transaction with a swap dealer or major swap participant.

"In other words, an end-user that is using swaps to hedge a commercial risk and otherwise qualifies for the end-user exemption should not be subject to the clearing or margin requirements solely by virtue of entering into a transaction with a swap dealer or major swap participant. In addition, swap dealers and major swap participants entering into uncleared transactions with creditworthy end-users should not be penalized for doing so by having their capital or margin requirements increased. The cost of those requirements would be passed on to end-users, including gas utilities, and ultimately to their customers," the AGA told the CFTC.

The AGA also asked the Commission to define or explain the activities that would be considered "hedging or mitigating commercial risk." And it said the Dodd-Frank Act has left it up to the CFTC and prudential regulators to determine the types of noncash collateral that would be acceptable for preserving the financial integrity of swaps markets and the stability of the U.S. financial system.

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