The De Minimis Exception

Perspectives of Commercial Firms

Presentation to the CFTC’s Energy & 

Environmental Markets Advisory Committee

February 25, 2016

Lael Campbell, Commodity Markets Council

David McIndoe, The Commercial Energy Working Group

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Recommendation

• EEMAC should recommend

– CFTC issue an interim final rule setting the 

de minimis threshold at $8 billion – as soon as 

possible

– CFTC dramatically improve the information it 

receives before taking any other action regarding 

the de minimis threshold

– CFTC identify specific regulatory objectives that 

are not sufficiently met with a de minimis

threshold at $8 billion 

– CFTC issue a final capital rule

2
Concerns 

• Automatic drop in de minimis threshold 

– does not materially advance any policy objective 

and 

– harms the commercial markets

• Alterations to the current definition and 

interpretations of “swap dealing”

• Lack of regulatory certainty for business 

planning

3
An $8 Billion Threshold

• It works well 

– Encompasses a significant amount of the OTC 

market

– About 78% of all OTC commodity swaps involved a 

registered swap dealer

• Meets regulatory objectives

• Commercial market has planned and built 

compliance infrastructure to this threshold

4
Lowering the De Minimis Threshold 

• Regulatory costs in chasing a very small 

portion of the market

• Likely outcome is severe harm to the 

commodity markets

– Natural business decision to lessen swap dealing

– Decrease in liquidity, Increase in concentration

– Increased hedging costs

– Volatility in commodity prices

5 
The Utility Special Entity Problem

• Loss of liquidity as commercial counterparties 

would no longer trade with special entity

– Ex: one special entity lost 2 of its 3 largest enduser counterparties following the implementation 

of the de minimis threshold for special entities, 

greatly diminishing its ability to hedge, and 

subjecting it to wider bid ask spreads.

• APPA testimony before House Agricultural Committee 

(Mar. 2013)

6
The Commodity Swap Markets

• Very small slice of the global derivatives 

markets 

• There is no finding that commercial firms 

create systemic risk

• Bilateral market structure

– Not every transaction involves swap dealing

• For many commercials – swap dealing is 

ancillary to their physical business

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Bilateral OTC Swaps

• Bilateral OTC market also plays a valuable role 

for customized hedging

– Allows physical market players to optimize 

credit relationships / collateral efficiency

– “Natural” longs and shorts can often hedge 

efficiently between each other, without 

either acting as a “Dealer”

8
Bilateral Swap Example

• In this example a natural “long” (power 

generator) and a natural “short” (electricity 

supplier) enter into a swap that serves as a 

hedge for both parties

9 

ISO Market/LMP

GEN

$ Fixed (Swap)

SUPPLIER

$ Fixed

CUSTOMERS

$ Float 

Market MW

MW

$ Float (Swap)
Information Problems

• No party currently has the information 

necessary to make informed decisions about 

the de minimis threshold and the commodity 

derivatives markets

• Good information is critical path

• Far better for the CFTC to collect and analyze 

pertinent information than debate the use of 

other swap dealer metrics

10
The Preliminary Report

• Demonstrates the need for better information

• The Counterparty and Transaction Count 

methods are flawed

– Would effectively alter the definition of “swap 

dealer”

• Over inclusive of trading and speculative 

transactions

• Multiple tier analysis and regulation are 

flawed

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Final Thoughts

• $8 Billion de minimis threshold works

• Interim Final Rule to prevent the drop

– Protection for markets that are critical to the 

commodity supply chain in the United States

• CFTC must gather more information

• CFTC must finish the critical rules

• Only then, engage in informed decisions

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