A coalition of five energy associations Friday urged the Commodity Futures Trading Commission (CFTC) not to lower the $8 billion de minimis threshold of swap dealing activity that a market participant can engage in before it is required to register with the CFTC as a “swap dealer” and become subject to the new Dodd-Frank rules.
“We understand that the CFTC may be considering changing the rules issued jointly with the SEC [Securities and Exchange Commission] in the spring of 2012 that established a de minimis threshold of swap dealing activity in which a swap market participant can engage before the entity is required to register with the CFTC as a ‘swap dealer.’
“We are concerned that such action not be taken without a public notice, an opportunity for comment and a full consideration of the impact that such a change would have on the markets for physical commodity swaps and the ability of commercial end-users to hedge or mitigate commercial risks,” wrote the American Gas Association, Independent Petroleum Association of America, Electric Power Supply Association, Edison Electric Institute and the National Rural Electric Cooperative Association.
In April 2012, the CFTC and the SEC set the de minimis level at $8 billion (see Daily GPI, April 19, 2012). It is expected to remain in effect during the phase-in period and then fall to $3 billion after the CFTC conducts a study on the swap markets. The agency said it plans to prepare the study two and a half years after data starts to be reported to swap data repositories. Nine months following the study, the CFTC may end the phase-in period. If not, it will terminate automatically five years after data starts to be reported to the repositories.
The threshold initially started at $100 million when the CFTC approved the proposed rule on swap dealers in December 2010 (see Daily GPI, Dec. 2, 2010). If this had been approved, a greater number of market participants would have been classified as swap dealers and become subject to the Dodd-Frank requirements.
The energy groups urged the CFTC not to unilaterally reduce the threshold below $8 billion, saying it would result in commercial end-users being misclassified as swap dealers, which they said was not the intent of Congress in Dodd-Frank.
“These entities [commercial end-users] did not get us into this crisis and should not be punished for Wall Street excesses…Congress does not intend to regulate end-users as major swap participants or swap dealers just because they use swaps to hedge or manage their commercial risks associated with their business,” wrote former Sen. Chris Dodd (D-CT), one of the architects of Dodd-Frank, and former Sen. Blanche Lincoln (D-AR), a key contributor to the bill, in a letter to their House counterparts after passage of the Dodd-Frank conference report in the Senate. Congress took up the legislation following the 2008 financial crisis on Wall Street.
“Lowering the de minimis limit and potentially misclassifying end-users as swap dealers would do nothing to increase the CFTC’s ability to monitor for manipulation, excessive speculation and system risk in energy markets. What it would do, however, is reduce a commercial end-user’s ability to hedge its commercial risks, and impose unnecessary costs that will ultimately be borne by electric and gas consumers in the form of higher prices,” the five energy associations told the CFTC.
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