Swaps Regulation - End-User Exception to Mandatory Clearing - Comment Letters

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Gavel.png FINAL RULE: This page refers to the proposed rule on the end-user exception to mandatory clearing. The CFTC Final Rule: End-User Exception to the Clearing Requirement for Swaps was approved at the CFTC Open Meeting, July 10, 2012.
Dodd-Frank Timeline, End-user Exception to Mandatory Clearing of Swaps, CFTC
Final Rule Issue Effective Date Compliance Date
July 19, 2012 September 17, 2012 April 10, 2013
Dodd-Frank Timeline, End-User Exception to Mandatory Clearing of Swaps, SEC
Proposal Date Comment Deadline Reopened Comment Period Deadline
December 21, 2010 February 4, 2011 July 22, 2013

Comment letters addressing the end-user exception to mandatory clearing of swaps.

Note: The CFTC received 1306 letters regarding the rule proposal. However, virtually all of the letters were from members of a group called Americans for Financial Reform, who submitted the identical letter. A copy of the AFR letter can be found at the bottom of the CFTC Comment Letters section.

Contents

CFTC Commment Letters

SIFMA - February 22, 2011

End-User Exception to Mandatory Clearing of Swaps
February 22, 2011

Summary of points from the comment letter:

  • Congress, when enacting Dodd-Frank, "acknowledged that clearing may not be suitable for every transaction or every counterparty."
  • An exception to the clearing requirement may be critical to municipal market borrowers’ ability to access the interest rate swap market.
  • Borrowers should be eligible to elect to use the end-user exception to mandatory clearing.
  • SIFMA supports the CFTC’s position that the question of whether an activity is commercial should not be determined solely by an entity’s organizational status as a for-profit company, a non-profit organization, or a governmental entity.
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American Bankers Association - February 22, 2011

End-User Exception to Mandatory Clearing of Swaps
February 22, 2011

From the comment letter:

"ABA believes that treating small banks and savings associations (together, banks) the same as other end users is essential. The vast majority of banks that use swaps do so in order to manage the risks of their ordinary banking activities and to meet regulatory expectations for asset-liability management. They use swaps to hedge their own business risk and to accommodate customer risk management needs."

"We also recommend raising the asset threshold for defining small banks. As noted by the SEC, providing these entities with an exemption would not undercut the statutory mandate for centralized clearing because their swap activity is not significant relative to the overall market. For example, setting the asset threshold at $30 billion or less would affect a mere 0.10% of the swaps market for banks."

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Dairy Farmers of America - February 22, 2011

End-User Exception to Mandatory Clearing of Swaps
February 22, 2011

From the comment letter:

"DFA and other agricultural cooperatives, by our very nature, operate in a manner that reduces farm-level business risk and promotes business prosperity for family farms across the US. Our businesses and our member-owners were not the cause of the financial crisis that undermined all of our economic opportunities. Instead, we were among the victims. As such, we urge the Commission to bring the right balance that supports our continued and collective efforts that have made the US agricultural sector a strategically important component of our national economy, and the marvel of production growth and efficiency, worldwide. To this end, we ask that:

  • forward contracting programs continue to be excluded from regulation under the Dodd-Frank Act;
  • agricultural cooperatives continue to be treated as end-users for purposes of the end-user clearing exception; and
  • margining requirements not be imposed on swap dealers with respect to swaps entered into with end-users who elect not to clear the transaction because it is likely that swap dealers will pass this obligation through to end-users.
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Coalition for Derivatives End-Users - February 22, 2011

End-User Exception to Mandatory Clearing of Swaps
February 22, 2011

From the comment letter:

"The Dodd-Frank Act directs the Commission to carve out a robust exception from mandatory clearing requirements for end-users. Without a well-defined exemption, many endusers of derivatives will be forced to divert working capital away from productive use to margin accounts. They might also have to move their hedging practices overseas to stay competitive or forgo hedging altogether—leaving them exposed to the volatility and price uncertainty that over-the- counter (“OTC”) derivatives have effectively helped mitigate. As the drafters of the Dodd-Frank Act explained, the CFTC, the Securities and Exchange Commission (“SEC”), and the prudential regulators “must not make hedging so costly it becomes prohibitively expensive for end users to manage their risk.” Distinguishing between end-user and more risky swaps should be a foundational component of the new derivatives regulatory regime."

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Philip Morris - February 22, 2011

End-User Exception to Mandatory Clearing of Swaps
February 22, 2011

From the comment letter:

"It is unclear under the end-user clearing exception whether PMF would be deemed the sort of affiliate acting as an "agent" of PMI and its other affiliates that qualifies for the end-user clearing exception. If PMF is not such an affiliate, PMF could potentially be ineligible for the end-user clearing exception, which would:

  • severely limit PMI's ability to effectively hedge or mitigate commercial risks across the entire family of PMI affiliates,
  • result in increased costs,and
  • negatively affect the ability of the entire corporate group to effectively manage its working capital as well as its exposures and risks.

Such results would run counter to the Dodd-Frank Act's intent.

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Independent Community Bankers of America - February 22, 2011

End-User Exception to Mandatory Clearing of Swaps
February 22, 2011

From the comment letter:

  • "Community banks should generally be viewed as “end-users” in that they utilize swaps to manage risks or better serve their customers’ needs."
  • "Most community bank swap transactions will not meet the initial criteria for clearing simply because they are “customized”. The “customization” is done to allow the swap to conform to the risks being hedged."
  • "In reality, the clearing organizations will not be able to accommodate the swaps of community banks for many years. Therefore, implementing an exception to mandatory clearing for community banks makes great sense."
  • "Due to their customized nature, the swaps used by community banks will need to be traded in the over-the-counter market. The very complex derivatives products utilized and created by large financial institutions for use in the OTC market should indeed have higher capital and margin requirements as envisioned by the DFA. However, the customized swaps utilized by community banks are simply interest rate swaps and have very little risk. As such the capital and margin requirements of community bank swaps should be no greater than the capital and margin requirements of cleared swaps."
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Consortium of U.S. Senators - February 18, 2011

End-User Exception to Mandatory Clearing of Swaps
February 18, 2011

The comment letter, which urged the commission to not add any burdens on end-users by limiting exemptions or imposing additional margin requirements, was signed by the following members of the U.S. Senate:

  • Senator Mike Johanns,
  • Senator Thad Cochran,
  • Senator Jon Tester,
  • Senator Pat Roberts,
  • Senator Ron Johnson,
  • Senator John Boozman,
  • Senator David Vitter,
  • Senator Herb Kohl,
  • Senator Mike Crapo,
  • Senator Kay Bailey Hutchison,
  • Senator Roger Wicker,
  • Senator Jerry Moran, and
  • Senator Max Baucus.
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Swaps Regulation - End-User Exception to Mandatory Clearing - Comment Letter - Americans for Financial Reform - February, 2011

Letter submitted by over 1200 members between February 18-22, 2011

Dear Chairman Gensler:

Re: End-User Exception to Mandatory Clearing of Swaps (RIN 3038-AD10)

The big banks and their allies are pushing for changes in the transparency requirements of Dodd-Frank that would throw important trades back into the shadows. Specifically, they are calling for exemptions for a very broad array of companies from the clearing and margin requirements of the act.

Dodd-Frank already contains an exception for legitimate end-users, such as airlines and farmers, who are doing commercial hedging as part of their business from clearing and exchange trading requirements.

We must not broaden this narrow, commonsense exception to include financial and commercial institutions that want to gamble in the derivatives markets. Doing so would allow systemically important companies to enter into risky trades in a market with zero transparency and accountability.

This is exactly the kind of murky shadow banking that led to the meltdown - as every objective observer of our present financial situation well knows. Please implement Dodd-Frank as written and do not give in to the pressure to weaken the legislation in the rulemaking process.

Thank you!

Thanks for your help!

Americans for Financial Reform

SEC Commment Letters

Managed Funds Association - March 24, 2011

End-User Exception to Mandatory Clearing of Swaps
March 24, 2011

In the comment letter, MFA states that the first two priorities of the derivatives market reform should be:

  • "expanding the use of central clearing for liquid ('clearable') contracts; and
  • having trade repositories receive data on both cleared and bilateral swaps."

MFA also attached two documents, listed below, to support its arguments.

  1. "Framework for the Open Items List from Buy-Side Participants of Actions Required for Buy-Side Access to Clearing"
  2. MFA's derivatives reform timeline, as well as a milestones timeline related to OTC derivatives.
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SIFMA - February 22, 2011

End-User Exception to Mandatory Clearing of Swaps
February 22, 2011

Summary of points from the comment letter:

  • Congress, when enacting Dodd-Frank, "acknowledged that clearing may not be suitable for every transaction or every counterparty."
  • An exception to the clearing requirement may be critical to municipal market borrowers’ ability to access the interest rate swap market.
  • Borrowers should be eligible to elect to use the end-user exception to mandatory clearing.
  • SIFMA supports the Commissions' position that the question of whether an activity is commercial should not be determined solely by an entity’s organizational status as a for-profit company, a non-profit organization, or a governmental entity.
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Americans for Financial Reform - February 4, 2011

End-User Exception to Mandatory Clearing of Swaps
February 4, 2011

From the comment letter:

"AFR urges the SEC to require additional disclosures designed to provide a clear picture of financial risks associated with transactions believed to be eligible for the exception. The required 'Financial Obligation Notice' should be strengthened to require information about:

  • the types of collateral provided by the end-user and the impact of posting collateral on the end-user’s ability to meet its financial obligations;
  • whether the collateral requirements are unilateral or bilateral;
  • contractual terms and whether they are triggered by changes in the credit-rating or other financial circumstances of either of the counterparties;
  • whether any 'third-party' guarantor of the end-user’s obligations is a parent or affiliate of the person invoking the end-user exception; and
  • the identity of any collateral agent, custodian or other entity involved in segregating collateral."

AFR also noted the importance of including small banks, savings associations, farm credit system institutions and credit unions in the swaps market participants required to clear.

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Credit Union National Association - February 4, 2011

End-User Exception to Mandatory Clearing of Swaps
February 4, 2011

In the comment letter, CUNA suggests that the $10-billion asset threshold be lowered, although the organization believes it is appropriate for credit unions to be included in the proposed regulation. More specifically: "We think credit unions should be covered only if they have at least $10 billion in assets and transact significant volumes of securities-based swaps, with “significant volume” to be defined by the Commission consistently with the Exchange Act and other relevant regulations."

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References

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