Comment Text:
Definitions Meeting with NRUCFC
Tuesday, February 15, 2011
Memo from
Fajfar, Mark
CFTC Staff :
Mark Fajfar
Julian Hammar
Lee Ann Duffy
Steve Kane
David Aron
Greg Kuserk
Rose Troia
External Attendees :
Rich Larochelle (NRUCFC)
John F. Suter (NRUCFC)
Thomas E. Kandel (NRUCFC)
Ed Barron (Russell Barron)
Elizabeth A. Khalil (Hogan Lovells)
Additional Information :
The discussion with National Rural Utilities Cooperative Finance Corporation (NRUCFC) was a follow-up to a meeting on January 13, 2011 (comment no. 27627) and discussed the written comments from NRUCFC dated February 14, 2011 (comment no. 27701).
NRUCFC made the point that it has used the method of adjusting its leverage ratio described at the January 13 meeting since 2001, and it has followed generally the same procedure in this regard since 1969. NRUCFC believes that the definition of “highly leveraged” for purposes of the major swap participant definition should treat as equity the subordinated debt that it issues. The proceeds of this debt are available to absorb losses in a manner similar to equity capital. Also, this treatment would be similar to the precedent which allows banks to treat subordinated debt as regulatory capital.
NRUCFC said 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). It is not a depository institution and its financing activities are limited to its members, which are limited to non-profit entities that are eligible for financing under the Rural Electrification Act. It is not engaged in the business of lending to the public. Since its members are commercial end users, NRUCFC should be treated as one too.
Alternatively, NRUCFC should qualify for the exemption from the definition of “financial entity” in paragraph (D). NRUCFC believes it acts as the equivalent of an agent for its members because it is entering into financing transactions that its members are not able to enter into. NRUCFC views itself as a conglomerate of cooperatives, so in that sense CFC is an agent for its members because NRUCFC’s obligations under its financing transactions are effectively passed through to its members.
NRUCFC also believes the exemption from the definition of “financial entity” in paragraph (C) could also apply to it. NRUCFC’s members are collectively analogous to a “parent company” since it has no owners other than its members.
NRUCFC also said that it does not enter into a high volume of swaps, and so it would not be important from a policy perspective that it participate in a clearinghouse.
