Lawmakers to CFTC: keep swap dealer rule narrow

WASHINGTON (Reuters) - Two U.S. lawmakers warned regulators on Thursday not to cast too wide a net over companies that trade swaps as the agency works to finalize rules defining who is designated as a swap dealer.

Chairman of the Commodity Futures Trading Commission Gary Gensler testifies before the Senate Banking, Housing and Urban Affairs committee hearing on Continued Oversight on the Implementation of the Wall Street Reform Act on Capitol Hill in Washington December 6, 2011. REUTERS/Yuri Gripas

In a letter to Commodity Futures Trading Commission Chairman Gary Gensler, the top Democrat and top Republican on the Senate and House of Representatives agriculture committees said they feared an overly broad definition would harm businesses that use swaps to hedge risks, such as oil price moves or interest-rate fluctuations.

“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,” wrote Senate Agriculture Chairwoman Debbie Stabenow and House Agriculture Chairman Frank Lucas.

“The final rule should clarify that these activities do not constitute “swap dealing.”

The 2010 Dodd-Frank Wall Street overhaul law requires the Securities and Exchange Commission and CFTC to jointly impose stringent new regulatory requirements on companies such as Goldman Sachs Group Inc and Morgan Stanley, which deal heavily in derivatives products.

Any company dubbed a swap dealer or major trader of swaps will be required to set aside more capital and margin. Dealers will also be subject to new business conduct standards.

Lawmakers and “end-user” companies such as General Electric Co and Ford Motor Co that use swaps to shield themselves from market risks such as commodity price and interest-rate moves fear regulators may go too far and subject them to the regulations.

Regulators have long since missed a deadline to write the final swap dealer definition rule, but for months now, they have continued to delay a final vote as they struggle to agree on a final definition.

Gensler told reporters earlier this month that regulators are “very, very close” to finishing the rule.

On March 15, the SEC also released its own economic analysis using data on credit derivatives to help inform how the final rule will be crafted. The agency said it would accept comments on the analysis and finalize the rule with the CFTC in the next several weeks.

One area of disagreement between the SEC and CFTC has centered on what threshold should be used to determine which companies will be classified as swap dealers.

Earlier this month, the CFTC and SEC were in talks about setting the threshold at $3 billion, which would be based on the notional value of a company’s annual swaps trade.

Stabenow and Lucas, who each chair the congressional committees that oversee the CFTC, did not make any specific recommendations on how to craft the definition. But they stressed regulators should ensure that credit institutions that offer loans in connection with swaps should not be subjected to the same regulations swap-dealing banks will face.

They noted that it was the intent of Congress to exempt these smaller credit institution from the swap dealer rules.

“This provision ensures that the flow of credit can continue between businesses and small to mid-size lenders and farm credit institutions,” they wrote.

Editing by Andre Grenon