Comment Text:
Re: Further Definition of “Swap,” Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping; Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant” -- RIN 3038-AD46
Compass Bank, a Federal Reserve member bank (“Compass”) submits the following comments, and requests for clarification and additional guidance from the Commodity Futures Trading Commission (the “CFTC”), relating to the above-reference rules and certain related matters:
Swap Dealer exclusion for swaps in connection with originating a loan. In many cases, insured depository institutions (IDI) utilize mortgage-lending subsidiaries to originate certain types of loans (e.g., tax exempt loans). These arrangements exist for legitimate business reasons (e.g., tax planning) that are unrelated to any attempt to evade compliance with the CFTC’s rules. In addition, in carrying out their functions, mortgage-lending subsidiaries of IDI’s are subject to the same types of prudential regulation and oversight as the IDI itself. It should be clarified that an IDI that approves a loan in accordance with its normal credit approval process is permitted to rely on the “swap dealer” exclusion for swaps an IDI enters into in connection with originating a loan to customers (the “Loan Origination Exception”) even if the loan is funded and booked through a subsidiary.
Aggregation of swaps under Loan Origination Exception. Under the Loan Origination Exception, the CFTC’s rules currently state that if the IDI is not committed under the loan to be the source of at least 10 percent of the maximum principal amount under the loan, then such IDI may not enter into swaps with an aggregate notional amount in excess of the principal amount of the loan committed to be made by the IDI. However, the CFTC’s rule release states that if the IDI is not committed to be the source of at least 10 percent of the maximum principal amount under the loan, the exclusion may apply only if the aggregate notional amount of all the IDI’s swaps with the customer related to the financial terms of the loan is no more than the amount lent by the IDI to the customer. This inconsistency should be addressed and the rules clarified to provide that determinations regarding the maximum notional amount of swaps are determined on the basis of the bank’s loan commitments, not on the basis of the amounts outstanding on a loan. Similarly, the rules currently state that the aggregate notional amount of all swaps entered into by the borrower in connection with the financial terms of the loan at any time cannot be more than the aggregate principal amount outstanding under the loan. Further interpretive guidance should be provided to address how such balancing will be achieved in connection with syndicated credit facilities. Among other things, it should be clarified that “aggregate principal amount outstanding” refers to both funded and unfunded commitments under the credit facility.
Treatment of Syndicated Loans under the Loan Origination Exception. The Loan Origination Exception provisions of the CFTC rules appear to assume that all syndicated loans are structured as loan participations. In fact, in many syndicated transactions each lender agrees to fund a specific loan amount and holds a separate note evidencing the repayment obligation of the borrower. The “lead bank” acts merely as the agent of the other lenders for administrative purposes. In these types of “agented credit facilities,” each IDI providing credit is committed to make 100% of a specified loan amount. In those circumstances, it should be clarified that the IDI is not subject to the 10%-source-of-principal restrictions.
Status of swaps. The rules, as written, state that, for purposes of the Loan Origination Exception, the duration of the swap with the borrower cannot extend beyond the termination of the loan. However, the rules also indicate that it is not relevant to the Loan Origination Exception whether the IDI later transfers, accelerates or terminates the loan, so long as the swap otherwise qualifies for the Loan Origination Exception and the loan was originated in good faith and was not a sham. Further interpretive guidance should be provided to clarify that an IDI can continue to qualify under the Loan Origination Exception if the IDI remains in a swap after the IDI transfers the loan or the loan otherwise terminates. In addition, the rules expressly permit the swap to be put in place up to 90 days in advance of the loan closing. In some circumstances, due to circumstances that cannot reasonably be contemplated at the time the swap is put into place, the loan may not close or fund as planned, in which event the swap would be unwound. It should be clarified that the IDI can rely on the Loan Origination Exception in this situation.
De minimis exception to swap dealer status. As written, the CFTC’s rules require aggregation of affiliate swap dealing activity in determining whether the de minimis exception applies, ostensibly to prevent affiliated entities from dividing their swap dealing activities among multiple entities to avoid registration. The CFTC has received numerous requests from trade associations and other market participants requesting clarification of these requirements and, in particular, relief from aggregation requirements with respect to affiliated entities that are registered as swap dealers or that will register in accordance with the registration deadlines ultimately adopted by the CTFC. We join in those requests for clarification and relief.
Eligible Contract Participant: Determination of amounts invested on a discretionary basis. In the case of individuals, the “eligible contract participant” (“ECP”) definition is tied to whether the individual has specified “amounts invested on a discretionary basis.” In light of the important ramifications of ECP status, this language should be clarified in order to provide greater certainty regarding whether a particular person is, or is not, an ECP. Further interpretive guidance should be provided to indicate whether any assets owned by an individual in order to conduct a business or otherwise for investment purposes with a view toward making a profit (excluding property held for personal use) are investments made on a discretionary basis. For instance, individuals may own commercial or residential rental real estate, have bank deposits, brokerage accounts, money market or mutual fund accounts, or a range of retirement accounts. Are these considered “amounts invested on a discretionary basis?” Also, with respect to the phrase “amounts invested on a discretionary basis,” further guidance is needed on how to treat spouses with respect to a joint investment account.
Eligible Contract Participant: Construction Loans. With respect to construction loans, borrowers frequently will be unable to qualify as ECPs until the construction project is completed. The rules should be clarified to allow a borrower who wishes to obtain a swap related to a construction loan to take the amount of the bank’s commitment under the construction loan into account in determining the borrower’s total assets and net worth for purposes of qualifying as an ECP.
Eligible Contract Participant: Guarantees. Under the ECP definition, in certain instances entities and persons can qualify as ECPs if their swaps are guaranteed or supported by certain ECPs. Further guidance should be provided regarding the portion of the swap exposure that must be guaranteed in order to support a determination of ECP status. A guarantee, letter of credit or other form of support covering a substantial portion of an entity’s or person’s swap exposure (i.e., in excess of 50%) should be sufficient. In any event, it should be clarified that a fixed or capped guaranteed amount determined in good faith at the time the guarantee, etc. is put in place is sufficient.
We appreciate the opportunity to submit these comments and requests for clarification.
