Energy interests seek more tweaks, flexibility in CFTC capital rules

Washington — Energy sector interests are urging the US Commodity Futures Trading Commission to allow more flexibility in upcoming capital requirements for swap dealers in an effort to maintain a diverse set of counterparties in commodity swaps markets.

A proposed capital rule pitched by the commission in 2016 drew energy sector warnings that it would create substantial barriers for entry for companies other than banks to act as swap dealers in commodity markets.

The CFTC in December re-proposed the rule to take in more comments in light of market and regulatory changes and to get feedback on a long list of CFTC questions about possible adjustments to the rule.

The propose rule is meant to assure that swap dealers and major swap participants face adequate capital requirements. As part of efforts to avoid a one-size-fits-all approach, the proposal would give firms engaged in mostly non-financial activities the ability to show they were meeting requirements based on the tangible net worth of the companies.

With comments on the latest proposal due March 3, groups such as the Natural Gas Supply Association and Commercial Energy Working Groups welcomed the steps toward flexibility but backed still further tweaks.

They urged the CFTC to allow other forms of collateral such as letters of credits or liens provided by commercial end users. In making that pitch, the CEWG, representing commercial firms engaged mostly in physical delivery of energy commodities, said drafters of the Dodd-Frank Act took care to ensure regulators not impose requirements that would punish those trying to hedge their own commercial risk.

NON-CASH COLLATERAL

The Natural Gas Supply Association, in comments filed jointly with the National Corn Growers Association, agreed, saying "non-cash collateral allows for recognition of the value of the commercial market participant's assets, making it an effective method for satisfying credit requirements without unnecessarily setting aside capital from a productive use."

NGSA also said changes were needed to provide access to some of the flexibility the CFTC envisioned. As proposed, the method for establishing the ability to use the tangible net worth approach "does not work," it said.

"[T]he proposed requirement that an entity have no more than 15% of consolidated assets or revenue related to or derived from 'financial in nature' activities risks denying the availability of the more suitable nonbank model alternative, the tangible net worth approach, to nonbank entities," NGSA said. It suggested an existing definition in the Commodity Exchange Act would be more workable.

To increase flexibility for non-financial swap dealers when structuring their businesses, CEWG suggested the analysis about whether an entity is a non-financial swap dealer should be done at the ultimate parent level, an idea also backed by NGSA. CEWG also urged that financial hedges be excluded from threshold tests for financial activities.

Energy interests also sought extended time for financial reporting requirements, the ability to use internal risk models without prior written approval, and the ability to use international financial reporting standards.

LEGAL RISK FOR RULE

Of note, when the CFTC reopened the proposal for comment in December, Democratic commissioners raised doubts about whether the CFTC could legally proceed straight to a final rule, because of the range of possible policy options the commission floated in questions.

The nonprofit group Better Markets, in its comments, worried that more than 140 questions "with undisclosed and perhaps unknowable consequences" appear to open the door to lower capital requirements than proposed three years earlier.

Final rules arising solely from the re-proposal's questions and requests for comments would "violate even the minimal procedural requirements" under the CEA and Administrative Procedure Act, the group contended.