Meeting Date:
Friday, February 4, 2011
CFTC Staff:
Gary Gensler
Tim Karpoff
Terry Arbit
Mark Fajfar
Julian Hammar
Dave Aron
Rose Troia
Stephen Kane
Organization(s):
Capital One N.A.
B&F Capital Markets Inc.
Branch Banking & Trust Company
Wilmer Cutler Pickering Hale and Dorr LLP
External Attendees:
Kenny Abramowitz (Capital One N.A.)
Alistair W.J. Fyfe (B&F Capital Markets Inc.)
Ludolf H. Röell (Branch Banking & Trust Company)
Paul M. Architzel (Wilmer Cutler Pickering Hale and Dorr LLP)
Additional Information:
The discussion covered the following topics, which are also addressed in a comment letter from Ludolf Röell of Branch Banking & Trust Company (BB&T) dated February 3, 2011 (Comment No. 27500).
Capital One, B&F Capital Markets and BB&T (collectively, the Banks) commented on the statutory exclusion from the definition of “swap dealer” of swaps entered into by insured depository institutions (IDI) in connection with loans made by the IDI. The Banks believe this exclusion should be available for any swap that is in connection with the loan, regardless of whether the swap is entered into contemporaneously with making the loan, before making the loan, or during the term of the loan, so long as: (i) the notional value of the swap does not exceed the amount of the loan, (ii) the duration of the swap does not exceed the duration of the loan, and (iii) the payments under the swap correspond to payments under the loan. Also, this interpretation would apply only to fixed/floating interest rate swaps between the borrower and the lender that hedge the borrower’s interest rate risk from the loan. The Banks explained that sometimes borrowers do not wish to hedge all or part of a loan at the time the loan is made, but may decide to enter into a hedging swap during the term of the loan. Also, borrowers may wish to execute the swap prior to entering into the loan if, for example, interest rates available under the swap are favorable. The Banks estimate that only about one-half of the interest rate swaps they enter into with borrowers in connection with loans are executed at the time the loan is made.
The Banks also commented on the definition of eligible contract participant (ECP). The Banks pointed to clause (C) of the definition of ECP in current §1a(12) of the Commodity Exchange Act, which authorizes the CFTC to determine that a class of persons are ECPs “in light of the financial or other qualifications of the person[s].” The Banks believe that the definition of ECP should include companies that, in connection with their business, borrow from banks and enter into related swaps with banks. The exact parameters of the proposed new class of ECP were not discussed, but the new class would include borrowers/swap customers who currently rely on the “line of business” exemption in the CFTC’s 1989 Swap Policy Statement. The Banks said this expansion of the definition of ECP is necessary because many of their borrowers/swap customers are limited liability companies or are otherwise structured such that they do not have sufficient net worth or assets to qualify as ECPs under the existing definition. These customers rely on guarantees or other financial support from their owners. Even though the customers have this financial support, the Banks believe that because of the way the guarantees and support are structured, they would not qualify as “assets” or “net worth” and the customers would not qualify as ECPs. The Banks roughly estimate that, each year in the United States, between 7,000 and 10,000 companies that would not qualify as ECPs enter into swaps in connection with loans from IDI in reliance on the line of business exemption, and that the notional value of these swaps is between $15 billion and $20 billion. The Banks pointed out that allowing these customers to hedge their interest rate risk using swaps reduces overall risk.
