Comment Text:
The staff of the Commission has invited a representative of BOK Financial Corporation ("BOK") to participate in the June 16, 2011 pubic round-table discussion of the definition of "swap dealer", "security-based swap dealer", "major swap participant", major security-based swap participant" and "eligible contract participant" as used in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The purpose of this comment is to provide certain information concerning BOK, its representative who will be participating in the round-table discussion, and BOK's position on the applicable definitions.
BOK. BOK is a national bank and wholly-owned subsidiary of BOK Financial Corporation, a $24 billion regional financial holding company. BOK has full-service banks located in eight states: Oklahoma, Texas, Arkansas, Missouri, Kansas, Colorado, New Mexico and Arizona, and provides riskless principal derivatives transactional services primarily to small- and medium-sized agricultural and energy producers in its eight-state service area. BOK Financial Corporation is the largest financial holding company in the United States that did not take TARP assistance funds.
BOK will be represented in the public round-table discussion by a lawyer from its General Counsel office, Steve Walton. Mr. Walton advises BOK on its derivatives activities and related regulatory responsibilities.
BOK Position on the "Swap Dealer" definition. BOK's position on the proposed definition of "swap dealer" is outlined in the two comment letters, one dated January 31, 2011 of Mr. Stanley Lybarger, CEO of BOK, and the other dated February 18, 2011, of Stacy Kymes, Executive Vice President. In summary, BOK currently engages in riskless principal trading of swaps on behalf of its clients, a practice that is common in the banking industry, and has been permitted by bank regulators for decades for well-capitalized and well-managed banks that have risk management policies and procedures approved by their primary bank regulators as appropriate for this activity.
Riskless principal trading, which involves entering into a direct derivatives trade with a bank client if and only if the mirror of that trade is available in the derivatives market and is in fact entered into by the bank, involves no risk to the banks engaging in the activity other than credit risk (the sort of risk that banks are specifically organized to evaluate and manage), and BOK is unaware of any bank that has incurred significant losses associated with riskless principal trading, either during the 2008-09 market disruption or otherwise. BOK directs the Commissions' attention in this regard to the conclusions of the 2011 Financial Stability Oversight Council Volcker Rule report, which characterized riskless principal derivatives transactions as "agency" rather than dealer transactions, as involving "very little risk" to and also as presenting "minimal opportunity for impermissible proprietary trading."
BOK is concerned that a bank's engaging in riskless principal derivatives trading could be considered a dealer activity under the "swap dealer" definition if that definition is given an expansive reading. BOK believes that a bank's engaging in riskless principal derivatives transactions with its clients is better characterized as a brokerage rather than a dealer activity, and directs the two commissions to the decisions of the US Office of the Comptroller under the Glass-Steagall Act (which Act permitted bank's brokerage activities but forbad certain dealer activities), in which the OCC consistently found that riskless principal derivatives transactions conducted by national banks constituted brokerage and not dealer activities.
BOK further notes the substantial need for it and other national banks to obtain clear guidance on the application of the swap dealer definition to the foregoing activity. If a national bank becomes a "swap dealer" (other than in connection with dealing in interest rate and foreign exchange derivatives), it potentially becomes ineligible for "federal assistance" (as defined in the Dodd-Frank Act), which could preclude the bank from using the Federal Reserve discount window and invalidate FDIC insurance for its deposits. The use of the Federal Reserve discount window, and the assurance to customers of FDIC insurance for deposits, are essential for any bank to conduct business. As a result, the risk to a bank from being characterized as a swap dealer (other than in connection with dealing in interest rate and foreign exchange derivatives) is so acute that banks will necessarily avoid market and economically beneficial conduct such as riskless principal derivatives transactions with clients if there is any risk that such activity would be characterized as "swap dealing."
BOK has proposed that the CFTC and SEC clarify the proposed definitional rules by including an exception from characterization as a swap dealer by revising proposed Rule 1.3(ppp)(2), Exceptions, to read as follows:
"(2) Exceptions. The term “swap dealer” does not include a person that--
(a) enters into swaps for such person’s own account, either individually or in a fiduciary capacity, but not as part of regular business; or
(b) is an insured depository institution that enters into swaps in customer-driven transactions permitted by its Prudential Regulator and wholly offsets the commodity and market risks of such transactions through risk mitigation activities permitted under 15 U.S.C. §8305 [Section 716(d)(1) of the Dodd-Frank Act]."
BOK has also commented on the proposed rules governing the "in connection with originating a loan" exception from the swap dealer definition. We refer the Commissions to Mr. Kymes' February 18, 2011, comment letter in this regard. We understand from the staff, however, that this particular exception from the swap dealer definitional regulations will not be on the agenda for the June 16 roundtable, and therefore does not offer here any additional comment on that matter.
