A natural gas producer group and a corn growers association have called on the Commodity Futures Trading Commission (CFTC) to adopt a two-step approach for identifying which entities should fall under the category of swap dealer.
The designation is critical because it will determine which entities will and will not be subject to the clearing and exchange trading requirements under new regulatory reforms approved by Congress. The Commission has come under attack for taking its time to define “swap dealers,” even from its own people (see NGI, Nov. 15).
In a letter to the CFTC last Tuesday, the Natural Gas Supply Association (NGSA) and the National Corn Growers Association (NCGA) recommended that as a first step the CFTC should follow the Securities Exchange Commission’s (SEC) approach to distinguishing dealers from traders through the use of the SEC’s “intermediation” concept.
This would enable the CFTC to “filter out parties who are making transactions simply to satisfy a customer” from the designation of swap dealer, said Jenny Fordham, vice president of markets for NGSA. “Although not all the activities used to identify dealers in the securities market translate precisely to the commodity swaps market, the concept of intermediation converts extremely well and provides a clear-cut workable approach for the CFTC to follow,” she said.
As for the second step, the NGSA and NCGA said the CFTC should determine whether an entity qualifies for the de minimis exclusion under the Dodd-Frank Wall Street Reform Act by evaluating the level of “dealing” transactions relative to total swap transactions. If the proportion of dealing relative to total swap transactions is small, the entity falls under the de minimis exclusion from the designation of swap dealer. The CFTC has held a series of meetings since October to implement the reforms under the Dodd-Frank Act, which President Obama signed into law in July (see NGI, July 26).
In order to implement the definition of swap dealer, the agency has to ensure that both the Dodd-Frank Act’s general exception and de minimis exemptions are properly applied, the two groups said. “The general exception [from a swap dealer designation] applies to entities entering into swaps for their own account (e.g., traders). A de minimis exception allows for the exclusion from a swap dealer designation of entities that engage in a de minimis quantity of swap transactions, ‘with or on behalf of’ their customers,'” the NGSA and NCGA told the agency.
“The two exceptions are essential because they allow entities that use swaps to hedge or mitigate commercial risks, such as those risks that stem from the production of energy and agricultural commodities, to avoid being designated as swap dealers, a designation that would preclude eligibility for the end-user clearing exception. Entities designated as swap dealers would be required to transact their swaps on an exchange or to clear such transactions, subjecting them to costly margin and clearing expenses,” they said.
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