CFTC Should Narrow Swap-Dealer Rule, Bipartisan Lawmakers Say

The U.S. Commodity Futures Trading Commission should narrow its regulation determining which companies will face the highest capital and margin costs under Dodd-Frank Act derivatives rules, Republican and Democratic lawmakers said.

The agency, which is writing rules for the global swaps market, should exclude from a dealer definition rule companies that use the transactions to hedge volatile prices in their products’ raw materials, said Senator Debbie Stabenow of Michigan, the Democratic chairwoman of the Senate Agriculture Committee, and Representative Frank D. Lucas of Oklahoma, the Republican chairman of the House Agriculture Committee.

“We would urge the commission to consider that many commercial end-users, particularly those with inherent physical commodity price risk, actively trade in swaps to facilitate hedging of those risks, and to otherwise anticipate changing market prices,” they wrote in a letter today to CFTC Chairman Gary Gensler. “These entities do so for their own trading objectives and not for the benefit of others, and the final rule should clarify that these activities do not constitute ‘swap dealing’ and will not require swap dealer registration.”

The CFTC and Securities and Exchange Commission are preparing to complete the swap-dealer regulation, which will lead banks, hedge funds and possibly energy companies to face higher capital and margin requirements. The dealer regulation is among the most contentious rules the agencies have yet to finish. The CFTC has delayed a series of scheduled votes on the regulation since January.

Energy Companies

Shell Energy North America LP and Vitol Inc. are among energy companies that have told the CFTC they use swaps and other derivatives to hedge risks tied to oil, natural gas and other underlying assets.

Gensler said March 2 that the commission should limit the costs on commercial companies without creating a loophole for BP Plc and other energy firms.

“In the past some entities were left out of regulation just because of what they called themselves,” Gensler said. “I think it would be a mistake to end up with this era’s Enron loophole, and something that might be a loophole for others.”

In 2000, certain electronic markets were excluded from commission oversight under the so-called Enron loophole, named for the energy company that collapsed in late 2001.

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