The Commodity Futures Trading Commission (CFTC) should look at the full term of a swap and evaluate the liquidity of the transaction based on that term to determine whether it should be subject to mandatory clearing, a coalition of 10 energy and agriculture groups said.
“If sufficient liquidity is not present for the full term, the swap should not be subject to mandatory clearing,” said Jenny Fordham, vice president of market for the Natural Gas Supply Association (NGSA), a coalition member that represents natural gas producers.
“[We’re] asking for regulatory certainty on how liquidity will be evaluated for swaps,” she said. This is a “pretty important” issue when it comes to making long-term investments in the energy industry, such as energy infrastructure projects that could take years to build, Fordham said. “Right now we really don’t know” which direction the CFTC is leaning.
“To make certain long-term investment decisions, market participants need confidence in the availability and cost of risk management tools. Where swaps are illiquid by virtue of their long terms, even greater reason exists to not subject them to mandatory clearing because doing so would create a disincentive for long-term investment in the economy,” wrote the coalition in a letter to the CFTC Wednesday.
“While the [Dodd-Frank Wall Street Reform and Consumer Protection] statute is clear that trading liquidity is a factor that the Commission must consider in determining swaps subject to mandatory clearing, regulatory uncertainty regarding the manner in which liquidity will be considered in this process persists and must be resolved,” it said.
The coalition’s letter is in response to CFTC Commissioner Scott O’Malia’s July 28 request for the public to comment on how the CFTC should determine which swaps to subject to the mandatory clearing requirement.
In addition to the NGSA, other members of the coalition are the American Gas Association, American Public Power Association, Commodity Markets Council, Edison Electric Institute, the Electric Power Supply Association, National Rural Electric Cooperative Association, the Fertilizer, the National Corn Growers Association and Agriculture Retailers Association.
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