A coalition of energy groups has expressed its opposition to the Commodity Futures Trading Commission’s (CFTC) proposed models for protecting customer collateral, citing the increased costs that are likely to result from some of the approaches.
In November the agency adopted an advanced notice of proposed rulemaking seeking comments on a number of the CFTC’s proposed options for protecting the margin collateral posted by customers clearing swaps transactions (see NGI, Nov. 22, 2010). The CFTC proposed a range of so-called segregation models to shield customer collateral, including:
Rather than supporting one of the CFTC’s models, the coalition said it backed the omnibus model for collateral segregation, which Risk-net said was a long-standing industry practice for designated clearing organizations to hold customers funds collectively in an omnibus account. “The existing omnibus model…has served the derivatives market well in protecting against both individual and systemic risk while allowing transaction costs to remain at a reasonable level,” said the coalition, which is composed of natural gas and electric entities.
The group includes the Natural Gas Supply Association, American Gas Association, Edison Electric Institute, Independent Petroleum Association of America and Southwestern Energy. The members “make extensive use of swaps and futures to manage the commercial risks associated with their businesses,” the coalition told the CFTC in a Jan. 18 letter.
“The potential cost increases associated with some of the collateral segregation models underscore the importance of properly exempting energy end-users from the [Dodd-Frank Act’s] mandatory clearing requirement,” the coalition said. It further pointed out that energy users do not present the systemic risk that collateral segregation models are intended to address. Rather, the group said, “because of the physical nature of their asset bases, energy end-users can be particularly sensitive to the kind of increased cash margin requirements that may result under some of the proposed segregation models.”
The coalition had reservations about mandatory individual account models, saying that “adopting an individual account model would unnecessarily increase risk management costs when the current model’s ability to serve the derivatives market well has been recently tested and proven.” Despite its concern about imposing mandatory individual account segregation, the group expressed support for offering individual segregated accounts as a market option while still providing a pooled account to clients choosing to continue to operate under the omnibus model.
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