Coalition for Derivatives End-Users
Briefing of House Committee on Agriculture Staff
January 29, 2013
<Presentation Title/Client Name>
Coalition Comments on Proposed Rules
•
•
The Coalition for Derivatives End-Users has submitted comments on proposed rules:
–
CFTC & SEC joint advance notice of proposed rulemaking on Definitions Contained in Title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
–
Treasury request for comments on Determination of Foreign Exchange Swaps and Forwards
–
CFTC proposed rule on Process for Review of Swaps for Mandatory Clearing
–
CFTC advance notice of proposed rulemaking on Protection of Cleared Swaps Customers Before and After Commodity Broker
Bankruptcies
–
CFTC proposed rule on Real-Time Public Reporting of Swap Transaction Data
–
CFTC proposed rule on Swap Data Recordkeeping and Reporting Requirements
–
CFTC & SEC joint proposed rule on Further Entity Definitions
–
CFTC proposed rule on End-User Exception to Mandatory Clearing of Swaps
–
CFTC proposed rule on Core Principles and Other Requirements for Swap Execution Facilities
–
CFTC proposed interpretive order on Antidisruptive Practices Authority
–
CFTC proposed rule on Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps
–
Prudential Regulators’ proposed rule on Margin and Capital Requirements for Covered Swap Entities
–
CFTC proposed rule on Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
–
CFTC & SEC joint proposed rule on Further Product Definition
–
CFTC proposed rule on Clearing Exemption for Swaps Between Certain Affiliated Entities
–
CFTC proposed interpretive guidance on Cross-Border Application of Certain Swaps Provisions of the CEA
–
BCBS/IOSCO consultation on Margin Requirements for Uncleared Derivatives
–
Prudential Regulators’ proposed rule on Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule
Limited time to comment has limited the Coalition’s ability to comment on every rule proposal that affects end-users.
2
<Presentation Title/Client Name>
New Derivatives Regulation under Title VII:
Extraordinary Changes
Execution
Voice & Manual Systems
Electronic Trading
Clearing
Central Clearing
Bilateral Risk Management
Margin
Negotiated Margin Agreements
Required Margin Collection
Reporting
Limited Transparency
Swap Data Repositories
3
<Presentation Title/Client Name>
Overview of Swaps Market Under the Dodd-Frank Act
Background
• A swap is the exchange of cash flows between counterparties.
– e.g., an interest rate swap (the most common type of swap) is an agreement between two
parties to exchange interest rate cash flows (e.g., fixed rate for floating rate), calculated
on a notional principal amount, at specified intervals (i.e., payment dates) during the life
of the agreement.
Fixed Rate Payments
(e.g., 5% fixed payment on $100 million)
PARTY A
PARTY B
Floating Rate Payments
(e.g., 3-month LIBOR on $100 million)
– Asset classes include: interest rate, credit, equity, foreign exchange and other commodity.
• Title VII of the Dodd-Frank Act granted jurisdiction of the swaps market to the CFTC and the
SEC, with the CFTC having jurisdiction over the vast majority of the swaps market.
• As a result of Title VII and the CFTC’s regulations, all swaps must be reported to swap data
repositories (“SDRs”) and many swaps will be subject to clearing, execution and margin
requirements.
4
<Presentation Title/Client Name>
Overview of Swaps Market Under the Dodd-Frank Act
Clearing
• When a swap is executed, the two counterparties can send the trade to the clearinghouse
(through a clearing member) and the clearinghouse will assume the legal risk of making
payments on the trade (essentially guaranteeing the payments to each of the counterparties).
• The swap counterparty is required to have an account with a “clearing member” firm and
deposit margin in the account with the clearing member firm. The clearing member firm then
interacts directly with the clearinghouse.
• The margin that must be required to clear a swap is required by clearing rules and not by
margin rules.
• CFTC determines which swaps must be cleared. At this time, interest rate swaps and credit
default index swaps are required to begin clearing in March 2013.
• Title VII explicitly provides an exception for end-users to the mandatory clearing requirements.
Execution
• Standardized swaps will be required to be executed on a swap execution facility (“SEF”) or a
designated contract market, as opposed to traditional bilateral contracts.
• The CFTC has not yet finalized rules for SEFs or for which swaps are required to be executed
on a trading platform.
• Title VII explicitly provides an exception for end-users to the mandatory execution
requirements.
5
<Presentation Title/Client Name>
Overview of Swaps Market Under the Dodd-Frank Act
Reporting
• All swaps, whether cleared or uncleared, must be reported to an SDR,
including internal transactions related to the risk management activities
within a particular company.
• Most swap data will be publicly disseminated (on an anonymous basis) for
those that want to view or use the data.
Margin for Uncleared Swaps
• Title VII requires that swap dealers be required to collect margin (i.e.,
collateral) with respect to swaps with certain counterparties.
• Collecting margin on swaps is aimed at reducing systemic risk.
• Congress has communicated repeatedly both throughout the legislative
process and in the text of the Dodd-Frank Act that end-users should not be
subject to margin requirements.
6
<Presentation Title/Client Name>
Implementation Timeline
Expected in first half of 2013:
Trading, Execution and Block Trade Requirements
Cross-Border Guidance • Margin Requirements
• Definition of “swap” is effective
• Becomes unlawful for ECPs to enter off-exchange swaps
• Reporting and Recordkeeping rules become final
• Treasury excludes FX from “swap” definition
• Swap Dealer Registration
• Some SD/SMP Reporting and Recordkeeping effective
• Obtain Unique Identifier Numbers
• End-User Reporting and Recordkeeping
• External business conduct standards
• Financial end-users must clear IR and credit
default swaps
• Nonfinancial
end-users
must elect
clearing
exception
Oct
2012
Nov
Dec
Jan
2013
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
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<Presentation Title/Client Name>
How Do End-Users Use Swaps?
• End-users do not use derivatives to take on risk for speculative investment purposes
and therefore do not meaningfully contribute to systemic risk.
• End-users use swaps to hedge or mitigate commercial risks associated with their
companies’ operations.
• The use of swaps to hedge risk benefits the global economy by allowing a range of
businesses – from manufacturing to health care to agriculture to technology – to
improve their planning and forecasting and offer more stable prices to customers.
• Imposing undue regulatory burdens on end-users could increase costs and reduce
liquidity that would prevent end-users from using the derivatives markets efficiently
or may cause end-users to stop using derivatives altogether.
– Either result is contrary to the clear objectives of Congress who have created
exemptions that would allow end-users to continue managing risks in the swaps
markets effectively and efficiently.
8
<Presentation Title/Client Name>
Centralized Hedging Units
Enhances safety and efficiency for a broad range of end-users
• Creates scale and efficiency while reducing risk
Bank
Bank
A
• Centralizes expertise and consolidates execution
B
Bank
C
Traditional swaps »
• Presents single/limited number of faces to the market
Matched
affiliate trades »
• End-user transaction platform
ABC Corp
US Affiliate
• Does not create or increase systemic risk
ABC Corp
Deriv. Unit
ABC Corp
US Affiliate
ABC Corp
UK Affiliate
ABC Corp
Asia Affiliate
Common control
Additional benefits arise in a default scenario
Centralized Model
• ISDA contracts consolidated with one entity
• Netting permits a single exposure or credit
with the bankruptcy estate
• Facilitates settlement and resolution
Streamlined resolution … less risk
De-centralized Model
• All ISDA contract counterparties settle
separately
• Some entities would owe the bankruptcy
estate …others become unsecured creditors
• Netting not possible … multiple claims
More complicated … greater risk
Treating inter-affiliate trades like external swaps would push
firms back to a decentralized model … increasing risk.
9
<Presentation Title/Client Name>
Centralized Hedging Units
• The Dodd-Frank statutory language limits to those centralized hedging units
“acting on behalf of the person as an agent” which the CFTC has interpreted
to not include swaps executed by centralized hedging units acting as
principal.
– Such swaps between the centralized hedging unit (as principal) and a
third party would not be eligible for the end-user exception because the
centralized hedging unit is considered a “financial entity”
• Many end-users that use a centralized hedging unit model execute trades on
a principal basis to:
– Reduce risk (i.e., fewer external transactions), reduce costs, reduce
duplication, centralize oversight of swaps activities, enable netting
• Treating these two forms of execution differently can create a competitive
disadvantage and would discourage end-users from using this proven risk
mitigation technique.
10
<Presentation Title/Client Name>
Centralized Hedging Unit Acting as Agent/Principal
Agent
ABC Hedging
Unit
Affiliate
(Financial)
ABC Corp.
(Nonfinancial)
Hedging Unit can
choose not to clear
swaps
Market-facing swaps
in name of ABC
Corp.
Bank
(Hedging Unit
as agent)
Principal
Internal,
affiliate trades
ABC Corp.
(Nonfinancial)
ABC Hedging
Unit
Affiliate
(Financial)
Hedging Unit must
clear swaps
Market-facing swaps
in name of
ABC Derivatives Unit
Bank
(Hedging Unit as
principal)
11
<Presentation Title/Client Name>
Inter-Affiliate Trades
ABC Corp.
$150 MM Notional
Floating Rate A
Inter-affiliate
trades
matched to
market-facing
swap
ABC Corp
Marketfacing,
arm’s length
swap
$250 MM Notional
Floating Rate A
Affiliate #1
$150 MM Notional
Fixed Rate B
$100 MM Notional
Floating Rate A
ABC Corp
Bank
Deriv. Unit
$250 MM Notional
Fixed Rate B
ABC Corp
Affiliate #2
$100 MM Notional
Fixed Rate B
Common Control
Characteristics of Inter-Affiliate Trades
•
No change in beneficial ownership.
•
Inter-affiliate transactions do not face the market.
•
Reduces demands on an entity’s financial liquidity and operational assets.
•
Inter-affiliate transactions do not create or increase systemic risk.
•
Promotes efficiency in mitigating risk within an entity.
12
<Presentation Title/Client Name>
Relevant Dates for End-User Compliance
Date
Rule/Requirement
Action
April 10, 2013
Reporting and Recordkeeping for all Swap
Market Participants (including all endusers)
End-users must comply with all
reporting and recordkeeping rules
(including with respect to interaffiliate swaps).
May 1, 2013
External Business Conduct Standard
Requirements
End-users must amend existing
swap documentation in order to
continue to trade with swap
dealers.
June 10, 2013
Mandatory Clearing for Financial Entities
(including financial end-users and
centralized hedging units)
Centralized hedging units operating
on behalf of non-financial affiliates
would be required to clear at this
time.
Mid-2013 (expected)
Margin for Uncleared Swaps
Final rules from the Prudential
Regulators and the CFTC that
could impose margin requirements
on end-users.
September 9, 2013
Mandatory Clearing for All Swap Market
Participants (including non-financial endusers)
Non-financial end-users will be
required to either elect the end-user
exception or clear their swaps.
13
Companies and organizations that support various
initiatives of the Coalition for Derivatives End-Users
Companies
3M
Bolton Emerson Americas
DuPont Company
Health Care REIT, Inc.
National Gypsum Company
Superior Graphite Co.
A&D Insight, LLC
Boston Scientific Corporation
DuPont Fabros Technology
Heritage Feeders, L.P.
National Retail Properties, Inc.
Superior Woodcraft, Inc.
Acadia Realty Trust
BP America
Dynegy Inc.
Hersha Hospitality Trust
Nationwide Insurance
Swift Energy Company
AES Corporation
Cabot Corporation
Eagle Rock Energy Partners, L.P.
Hess Corporation
Newfield Exploration Company
Targa Resources, Inc.
Air Products and Chemicals, Inc.
Cargill, Inc.
Eaton Corporation
Hewlett-Packard Company
Nissan North America, Inc.
Teradata Corporation
Alcoa
Caribbean Property Group
Ecolab Inc.
Honda
Novation Partners
The AES Corporation
Allegheny Energy
Caterpillar Inc.
Edison International
Honeywell
Novelis Inc.
The Boeing Company
Allegheny Technologies Incorporated
Chatham Financial
El Paso Corporation
Host Hotels & Resorts, Inc.
Ocean Properties LTD.
The Commonwealth Group
Alliant Energy Corp.
Chesapeake Energy Corporation
Emdeon
Occidental Petroleum Corp.
The Dow Chemical Company
Allstate Insurance Company
CIP Real Estate
Enbridge Energy Company, Inc.
Hyundai Capital America / Hyundai
Motor Finance Company
ONEOK, Inc.
The Durst Organization
AMB Property Corporation
CMS Energy
EnCana Oil & Gas (USA) Inc.
IBM
Peabody Energy
The JBG Companies
AMC Entertainment Inc.
CNL Financial Group
Energy Future Holdings Corp.
Jungs Station Associates
PepsiCo, Inc.
The Procter & Gamble Company
Ameren Services
Columbia Sussex Corporation
Entertainment Properties Trust
Kansas City Power & Light Company
Portland General Electric
The Timken Company
American Adhesive Coatings Company
Conoco-Phillips
EOG Resources, Inc.
KBS Real Estate Investment Trust, Inc.
Principal Financial Group
The Walt Disney Company
American Electric Power
Community Health Systems
Exelon Corporation
Kelly-Moore Paint Co., Inc.
Prudential Financial, Inc.
Thomas Properties Group, Inc.
American Residential Communities
Compass Minerals
First Capitol Ag
Kerzner Istithmar Limited
Public Service Enterprise Group
Timberlane Village Associates
Anadarko Petroleum Corporation
ConAgra Foods, Inc.
FMC Corporation
Kilroy Realty Corporation
Puget Sound Energy
Time Warner
Applied Materials, Inc.
ConGlobal Industries
Ford Motor Company
Legacy Partners Residential, Inc.
Quadrangle Development Corporation
Toyota
ARAMARK Corporation
Constellation Energy
Forest City Enterprises, Inc.
Lexmark International, Inc.
Questar Corporation
UM Holdings Ltd
Archer Daniels Midland Company
Cordillera Energy Partners III, LLC
Formation Capital
LINN Energy
Regency Centers Corporation
United Technologies Corporation
Ashford Hospitality Trust
Craton Capital Management, LLC
FPL Group
Lockheed Martin
Rolls-Royce North America
Vectra Management Group
Associated Estates
CSC
Gavilon, LLC
Loews Corporation
Ryder System, Inc.
Vermeer
Atmos Energy
Cummins Inc.
General Electric Company
Sealed Air Corporation
Volvo
Avista
Cybex International Inc.
General Mills
Marlin Steel Wire Products, LLC
Shell Energy North America
W. R. Grace
Ball Corporation
Daimler
General Motors
Medtronic, Inc.
Siemens
Walker Center Associates, LLC
Bayer Corporation
Dean Foods Company
GID Investment Advisers LLC
Microsoft Corporation
Simon Property Group
Wal-Mart Stores, Inc.
Black Diamond Minerals, LLC
Deere & Company
Glimcher Realty Trust
Mid-America Apartment Communities,
Inc.
Simons Petroleum, Inc.
Weingarten Realty Investors
Black Hills Corporation
Devon Energy Corporation
Golden Living
Southern Union Gas Services, Ltd.
Whirlpool
Blyth, Inc.
Dominion
Goodrich Corporation
MidAmerican Energy Holdings
Company
Southwestern Energy Company
Whiting Petroleum Corporation
Bobrick Washroom Equipment, Inc.
Donahue Schriber Realty Group L.P.
Hampshire Real Estate
MillerCoors
Sprinkle Financial Consultants LLC
Xcel Energy
Douglas Emmett
HCA Inc.
MVP Management Corporation
St. Mary Land & Exploration Co.
Xerox Corporation
Duke Energy
HCR ManorCare
National Grid
Strategic Hotels & Resorts, Inc.
Zilber Ltd
McDonald’s Corporation
Zimmer, Inc.
Organizations
Aerospace Industries Association
of America, Inc.
American Gas Association
Commodity Markets Council
American Petroleum Institute
Edison Electric Institute
Agricultural Retailers Association
American Soybean Association
Financial Executives International
American Forest & Paper
Association
Associated Industries of
Massachusetts
Independent Petroleum
Association of America
American Cotton Shippers’
Association
Association for Finance
Professionals
Independent Petroleum
Association of Mountain States
American Farm Bureau Federation
Business Roundtable
Mississippi Manufacturers
Association
National Association of Corporate
Treasurers
National Corn Growers
Association
Texas Independent Producers and
Royalty Owners Association
National Association of
Manufacturers
National Council of Farmer
Cooperatives
Texas Oil & Gas Association
National Association of Real
Estate Investment Trusts
National Grain & Feed
Association
The Information Technology
Industry Council
National Association of Wheat
Growers
Natural Gas Supply Association
The Real Estate Roundtable
National Mining Association
U.S. Chamber of Commerce
Texas Pipeline Association