In a letter to CFTC Chair Gary Gensler, House and Senate oversight committee chairs expressed concern that the breadth of the proposed rule further defining swap dealers will result in the registration of many entities that Congress never intended to be regulated as dealers. Senator Ag Committee Chair Debbie Stabenow (D-MI) and House Ag Committee Chair Frank Lucas (R-OK) advised the CFTC that the final swap dealer regulations should not be overly broad and should not impose significant new regulations on entities that Congress did not intend to be regulated as swap dealers. The final CFTC rule further defining swap dealing should clearly distinguish swap activities that end users engage in to hedge or mitigate the commercial risks associated with their businesses, said the chairs, including swaps entered into by end users to hedge physical commodity price risk from swap dealing.
In providing an exemption for hedging activities, said the oversight chairs, the CFTC should be consistent when defining hedging across regulations, such that the definition of hedging or mitigating commercial risk as proposed in the major swap participant definition and in the end user clearing exception. In addition, the oversight chairs urged the CFTC to consider that many commercial end users, especially those with inherent physical commodity price risk, actively trade in swaps to facilitate the hedging of those risks and to otherwise anticipate changing market prices. These entities do so for their own trading objectives and not for the benefit of others, noted the legislators, and the final CFTC regulations should clarify that these activities do not constitute swap dealing and will not require swap dealer registration.
The oversight chairs posited that enhancing transparency in the derivatives markets and mitigating systemic risk are critical to ensuring the safety and soundness of the financial system. Thus, Dodd-Frank Title VII requires that all swaps be reported and gives the CFTC additional authority to collect data to facilitate its surveillance of and enforcement authority over large trader positions. At the same time, most swaps will be mandated for central clearing, a critical component of reducing systemic risk. Moreover, entities that do not engage in swap dealing, but take positions that are so substantial they pose a threat to the stability of the financial system must be designated and regulated as major swap participants. The chairs asked that the CFTC recognize that the swap dealer designation is not its singular means for overseeing entities in the swaps market. The activities of non-swap dealers will be subject to the authority and oversight of regulators and cannot rise to a level of systemic significance without drawing additional regulatory oversight.
It is also critical that businesses have access to the credit they need to fuel the economic recovery. Hedging against the risks businesses face, such as rising commodity prices or interest rates, is an important component of their ability to secure credit. Recognizing this, Congress provided an exception for credit institutions offering swaps in connection with loans from designation as swap dealers. This provision ensures that the credit flow can continue between businesses and small to mid-size lenders and farm credit institutions.
While applauding the CFTC’s efforts to ensure that any exclusion is not abused, the oversight chairs believe that the loan exclusion can be narrowly defined to reflect commercial lending realities. They share the concerns that the Comptroller of the Currency voiced in his July 1, 2011 comment letter to the CFTC that the Commission’s interpretation of the loan exclusion may interfere with risk management in connection with commercial credit. The oversight chairs ask that these issues be dealt with in the final regulations.