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External Meetings: Definitions Meeting with Coalition of Derivatives End Users

4/7/2011 2:00 PM
II. Definitions

XI. End-user Exception
CFTC Staff:
Mark Fajfar

Steve Seitz

Lee Ann Duffy

Christopher Cummings

Steve Kane
Lael Campbell (Constellation Energy)

Larry Burton (BRT)

Tom Quaadman (Chamber of Commerce)

Dorothy Coleman (National Association of Manufacturers)

Kirk Freeman (NAREIT)

Christina Crooks (Financial Executives International)

Ed Perry (IBM)

Tammy Evans (IBM)

Clay Thompson (Caterpillar)

John Rauber (John Deere)

Renuka Gupta (GE)

Sally Engberg (Forest City)

John Chung (Inland)

Tim Reimer (MillerCoors)

Vikas Huria (Ford)

Tiffany Silvey (Energy Future Holdings)

Sam Peterson (Chatham Financial)

Joe Siu (Chatham Financial)

Pam Brown (Chatham Financial)

Luke Zubrod (Chatham Financial)

Michael Bopp (Gibson Dunn)

David Duncan (Gibson Dunn)

Josh Kans (SEC)

Richard Grant (SEC)

Peter Curley (SEC)
Constellation Energy


Chamber of Commerce

National Association of Manufacturers


Financial Executives International



John Deere


Forest City




Energy Future Holdings

Chatham Financial

Gibson Dunn
  • The Coalition of Derivatives End Users (CDEU) made the following points regarding the various definitions:~(1) Eligible Contract Participant (ECP) – non-ECP entities that currently use swaps in reliance on the line of business exception in the swaps policy statement include special purpose entities formed to hold real estate and farmers; the swaps are predominantly interest rate swaps and agricultural swaps (including trade options).  While the interest rate swaps would be with regulated entities, the ag swaps may be with ag companies such as grain elevators; all of the swaps would qualify as hedging commercial risk.  Most of the non-ECP users would qualify as accredited investors, or the real estate SPEs would qualify as ECPs if a look-through were allowed.~(2) De minimis for swap dealer – the exception was intended by Congress to allow a reasonable level “customer-facing” swap activity that would not be regulated as swap dealing.  If this were not allowed, swap dealing would be too concentrated at major banks.  For CDEU, how the de minimis threshold is measured is less important than where the threshold is set.  0.001% of the total US swap market is one measure that would be reasonable.  ~(3) Proposed definition of swap dealer – among the diverse members of CDEU there were several views of the swap dealer definition.  Generally, there is a preference for a “traditional” definition and a belief that the proposed “accommodating demand” test is ambiguous and not workable when it is unclear which swap party is accommodating the other.  It is unclear whether this concern is shared by the members of CDEU whose business does not focus on physical commodities.  CDEU believes that speculative or proprietary use of swaps is not dealing, and in addition there are other uses of swaps that are not dealing.~(4) Swaps between affiliates – should be ignored for determining if a person is a swap dealer, and “affiliate” should be defined as any persons under common control (since the purpose of centralized hedging is to consolidate decision-making about swaps, control is the relevant issue).  For the major swap participant (MSP) definition, CDEU asserted that swaps between members of an accounting consolidated group should be ignored; an issue is to avoid double-counting swap positions.~(5) Substantial position for MSP definition – the final rule should provide details of how non-cash collateral and cross-collateralization will be accounted for.  For example, in proposed rule 1.3(sss)(2)(i), what exactly is “collateral,” when exactly is collateral “posted” and how is the connection between collateral and a swap position established.  Corporate, non-financial entities have difficulty interpreting and applying the concepts drawn from the Basle principles; it is difficult to implement an automated system to run the calculations.~(6) Captive finance companies in MSP – reiterated points made by John Deere representative at recent Congressional testimony – the exception should include financing of implements and attachments as well as labor costs that are incidental to the primary purchase.

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