Comment Text:
Definitions Meeting with Bank of Oklahoma
Tuesday, February 08, 2011
Memo from
Fajfar, Mark
CFTC Staff :
Terry Arbit
Mark Fajfar
External Attendees :
Stacy Kymes (Bank of Oklahoma)
Steve Walton (Frederic Dorwart)
Additional Information :
The discussion centered on certain points raised by Bank of Oklahoma (BOK) in its comment letter (Comment No. 27651, dated Jan. 31, 2011).
BOK believes that section 716 of the Dodd Frank Act (known as the “push out rule”) effectively prevents insured depository institutions (IDI) from being swap dealers, because swap dealers are ineligible for certain Federal assistance (see page 6 of comment letter). BOK acknowledges that section 716 is subject to interpretation, and may not preclude all Federal assistance to an IDI that is a swap dealer. However, BOK is concerned by the leeway in the language, which it believes creates uncertainty.
BOK believes that the creation of a swap dealer entity that is separate from the IDI but under common ownership would not be practical for BOK, because the separate entity would not have the capital and liquidity that the IDI has.
BOK has concerns about the effect of the swap dealer rule proposal on regional IDI. If regional IDI are reluctant to register as swap dealers, primary dealers may gain more swap business, thereby increasing industry concentration. Also, increased interaction with primary dealers may lead end users of swaps to take on riskier swap positions because, for example, the primary dealers would not understand the end users’ businesses as well as regional IDI do. Smaller end users would not have the ability to enter into swaps with primary dealers and would reduce their (the end users’) hedging activity.
The rule proposal should provide a clear safe harbor from swap dealer status for regional IDI. BOK proposes (page 2 of comment letter) that “swap dealer” would not include an insured depository institution, all of the swaps of which are “customer initiated” (as that term is used in the FSOC January recommendations on proprietary trading) and permitted by the IDI’s Prudential Regulator, and which “wholly offsets the commodity and market risks” of the swaps through risk mitigation permitted by section 716(d)(1) of the Dodd Frank Act. BOK believes that, in general, to the extent section 716(d)(1) permits risk mitigation, then the activity that raises such mitigated risk should also be permitted.
BOK’s practice is to mirror its swap with its customer with a trade on an exchange, or a swap with a larger bank or commodity house. In this respect, BOK believes it is akin to a “broker” of swaps – just as a securities broker purchases securities from a larger source and resells to customers, BOK “acquires” swap positions from an exchange or larger dealer and enters into mirror swaps with its customers.
BOK is not certain that its swaps would fall within the exclusion in the definition of swap dealer for swaps by IDI that are “in connection with originating a loan,” because its swaps relate to the commodity business of the borrower (e.g., oil company borrower enters into swap with BOK to fix its oil prices) as opposed to the financial terms of the loan, and because BOK enters into swaps throughout the term of the loan, rather than only at origination.
