The final rules under the Dodd-Frank Act to be issued in the near future would make clear that only parties that “make markets for others on a routine basis,” would be subject to rules governing swap dealers, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler told a congressional committee last Wednesday.
Gensler said there are only six or eight “large international oil companies which have set up as a regular business to provide that liquidity and risk management to others,” plus a few companies “in the electric power area” that have set up separate operations to routinely hedge risks for others, which would find themselves in the swap dealer category. Their activities could be described as “market making,” which would qualify them as swap dealers or major swaps participants.
“For these folks the dealer part of their business should be regulated,” he said. Gensler pointed out that some of these companies are registered as dealers with the International Swaps and Derivatives Association.
The great bulk of nonfinancial companies or commercial commodity buyers and sellers that seek simply to hedge their own products or purchases “are not swap dealers” and would not be forced to bring their swaps into central clearing. For instance, even financial transactions by a refiner seeking to hedge oil going through its refinery would be exempt, the CFTC chief noted.
A number of energy trade groups have hotly contested a final rule proposed by the CFTC which would define a “swap dealer” as an entity that holds itself out as a dealer in swaps; makes a market in swaps; regularly enters into swaps with counterparties as an ordinary course of business for its own account; or engages in activity causing itself to be commonly known in the trade as a dealer or market maker in swaps (see NGI, Dec. 6, 2010).
The groups said the definition is too broad and would catch a number of otherwise exempt commercial entities in the swaps dealer net (see NGI, Feb. 20). They had sent a letter of protest to the White House, and the final rule, which had been scheduled for a vote at a CFTC meeting last week, was pulled from the docket.
Gensler’s testimony Wednesday made clear the net would only catch a few big fish which had set up operations to cover swaps activities beyond their own direct needs.
Gensler told the House Agriculture Committee that he expects the rule on exemptions for commercial end users would be issued by the CFTC soon, and the bulk of the rule-writing work would be completed by this summer, although a few rules might not be finished until later this year.
The CFTC then can move on to setting up to monitor companies under the new rules. To do that Gensler estimated it would be necessary to add staff to the agency to bring it up to 1,000 employees from the current 700.
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