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Comment for Proposed Rule 75 FR 80174

  • From: Jason Copping

    Comment No: 26802
    Date: 12/28/2010

    Comment Text:

    Comment on 75 FR 80174
    A Swap and Security-Based Swap Dealing Activity
    1 Comments regarding dealing activities
    2 Application of the Core Tests "Swap Dealers" and Security-Based Swap Dealers reporting risk
    The definitions of Swap Dealer and Security-Based Swap Dealers shall be defined by the Commission and 75 FR 80174 should not contain exceptions to the Commissions definitions.

    C Issues Common to Both Definitions (IV) Application of the definition to new types of Swaps and New Activities

    4 Application of the Swap Dealer Definition to Agricultural commodities
    C Statutory Exclusion for Swaps in Connection with Originating a Loan

    More exceptions. The problem we had was lack of information to assess risk. My idea of a "Swap Dealer" is based on an interview by Charlie Rose of Lloyd C. Blankfein of Goldman Sachs. Mr. Blankfein explains in a nutshell that as a swap dealer customer A wants hedge against price fluctuation in the market for widgets. Customer A asks for a "swap" on the price of widgets at cost plus 10%. Goldman Sachs agrees at the price, because it believes the price widgets will be cost plus 40% at claim date. Goldman Sachs will have to buy the widgets off of Customer A if Goldman Sachs cannot find a customer B before the claim date. What investors need to know is the liabilities or risk of Goldman Sachs.

    The main goal is transparency. Every swap should be registered and given a unique identifier. The swap will be recorded on Customer A's books as an investment, Goldman Sachs' books as a liability, and a central database to allow cross-referencing.

    Once Goldman Sachs finds a Customer B to buy widgets at Customer A's price, then Goldman Sachs would take the swap off the books and Customer B would assume the liability on its books. The database would be updated, too.

    So, when I look at Customer A's books, I will see Customer A has a swap to sell widgets at a price that will allow a 10% return. I can assess the swap by seeing if Goldman Sacs is the buyer, I can check Goldman Sachs to see if it even has the money to honor the swap. Assuming everyone is doing what he or she being paid to do, if Customer B assumes the liability from Goldman Sachs then I can check Customer B. The database can create a cross-reference by allowing queries by swap unique identifier, seller, and buyer. I would query the database for all open swaps for Customer B. If I notice Customer B has $100 dollars of buy orders, but only 50$ in the bank, then a red flag would raised and further analysis of Customer B's plans would be needed to decide if Customer A will get a 10% return.

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