Meeting Date:
Thursday, January 13, 2011
CFTC Staff:
Mark Fajfar
Lee Ann Duffy
Thelma Diaz
Steve Kane
Carl Kennedy
David Aron
Nela Richardson
Organization(s):
National Rural Utilities Cooperative Finance Corporation (NRUCFC)
Russell Barron
Hogan Lovells
External Attendees:
Rich Larochelle (NRUCFC)
John F. Suter (NRUCFC)
Thomas E. Kandel (NRUCFC)
Ed Barron (Russell Barron)
Elizabeth A. Khalil (Hogan Lovells)
Josh Kans (SEC)
Peter Curley (SEC)
Richard Grant (SEC)
Additional Information:
NRUCFC’s primary comment is that it should not be treated as a “financial entity” for purposes of the end-user exception from clearing in new section 2(h)(7) of the Commodity Exchange Act (CEA). NRUCFC explained that it provides financing only to its members, which are eligible electric cooperatives or non-profit electricity providers regulated under the Rural Electrification Act. NRUCFC provides financing that would otherwise not be available to small electric cooperatives because of their limited size. NRUCFC issues debt securities in the public markets and is subject to regulation by the Securities and Exchange Commission (SEC), including the applicable requirements of the Sarbanes-Oxley Act, which means that NRUCFC is subject to transparency and accountability requirements.
NRUCFC believes that for these reasons, including that it is in some respects a conduit for financing from larger lenders to small cooperatives and other non-profits, it should be treated as an end user rather than a financial entity for purposes of the end-user exception. If NRUCFC were treated as a financial entity, it would be required to submit its swaps for clearing. NRUCFC primarily enters into “plain vanilla” interest rate swaps to manage its interest rate risks. That is, it uses swaps to coordinate its fixed or floating rate borrowings to the fixed or floating rate loans it makes. NRUCFC is concerned that if it had to clear its swaps, it would be required to post collateral to the clearinghouse, whereas currently it is not required to post collateral to the swap dealers that are counterparties to its swaps. NRUCFC also points out that because it enters into a relatively low volume of swaps and typically holds the swaps through maturity, its swaps would not provide the regularity and volume that are beneficial to reducing the risks in the overall pool of swaps in the clearinghouse.
NRUCFC’s second comment relates to the method of determining if a financial entity is “highly leveraged” for purposes of the definition of “major swap participant.” NRUCFC said that because of its status as a cooperative, it is limited in issuing equity securities and so it issues subordinated debt to its members. This subordinated debt is part of NRUCFC’s capital and is the basis for borrowing funds that it then lends to its members. However, it appears that the proposed method of calculating its leverage ratio would treat the subordinated debt as a liability and not as equity, and therefore it would appear that NRUCFC has a high leverage ratio. NRUCFC said that instead of measuring its leverage ratio in this manner, the “highly leveraged” test should refer to the adjusted leverage ratio that it reports in its public financial statements.
