The Commodity Futures Trading Commission's $25 million swaps threshold level for trades involving "special entities," such as publicly owned utilities, will drive non-bank firms out of the natural gas and electricity markets, leaving trading to big banks like J.P. Morgan, Bank of America and Goldman Sachs, said a major producer group Monday.
The current special entity de minimis threshold would label a non-bank a swap dealer if it engages in a transaction of more than $25 million with a public utility, making it subject to the regulations under the Dodd-Frank Walls Street Reform Act. This could cause an exodus of non-banks from the natural gas and electricity markets, and "stands to further reduce liquidity in what is a naturally illiquid market for utility operations-related swaps," wrote the Natural Gas Supply Association (NGSA) and the National Corn Growers Association (NCGA) in a letter to the CFTC (see Daily GPI, May 30).
The two groups expressed their support for a petition filed in July by the American Public Power Association, the Large Public Power Council (LPPC), the American Public Gas Association, the Transmission Access Policy Study Group and the Bonneville Power Administration. The petition asked the CFTC to exclude utility operations-related swaps from the special entity $25 million sub-threshold.
As defined by the five energy groups, utility operations-related swaps are swaps entered into by utility special entities to hedge or mitigate commercial risks "intrinsically related to the electric or natural gas facilities that the utility special entity owns or operates, or [to] its electric or natural gas operations, or to the utility special entity's supply of natural gas and/or electric energy to other utility special entities, or to its public service obligations...to deliver electric energy or natural gas service to utility customers."
The LPPC represents 24 of the largest public power systems in the nation. The majority of LPPC's utility operations-related swaps are executed with non-bank firms in the regional electric and natural gas industry that are prepared to offer the necessary customized arrangements. But the $25 million de minimis threshold is expected to drive many of the non-bank firms away from trading with municipal firms in order to avoid being designated as a swaps dealer.
"These [non-bank] counterparties may be discouraged from entering into hedging swap transactions with special entities. Constraining the ability of these counterparties to participate in the market will impair special entities' ability to mitigate risk and will likely concentrate the market among entities capable of meeting swap dealer obligations," such as the big banks, said the NGSA and NCGA.
"In the interest of facilitating the use of...hedging tools and maintaining liquidity and participation in the utility operations-related swaps market, NCGA and NGSA...request that the Commission grant the petition."
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