AFR meeting with Chairman Gensler 3/12/12 

I. Introductions and agenda review 

2. What does Chairman Gensler see as priorities for effective 

derivatives regulation in the coming months? 

3. Issue discussion: 

- Swap dealer definition 

- Swap execution facilities and RFQs 

- Available to trade rule 

- Volcker rule 

- Speculation and manipulation in commodities markets 

4. Next steps 

Michael Greenberger, Professor, University of Maryland School ofLaw 

Lisa Donner, Executive Director, Americans for Financial Reform 

Marcus Stanley, Policy Director, Americans for Financial Reform 

Wally Turbeville, Member, Americans for Financial Reform (phone) 

Heather Slavkin, Office of Investment, AFL-CIO (phone) 

Barb Roper, Consumer Federation of America (phone) 
AMERICANS 

FOR FINANCIAL REFOR M 

ACCUU~ fABILITY I FAlP.IItSS I SECUHiiY 

.March 12,2012 

Americans for Financial Reform 

1629 K St NW, 10th Floor, Washington, DC, 20006 

202.466.1886 

The Honorable Gary Gensler 

Chaim1an 

Commodity Futures Trading Commission 

Three Lafayette Center 

1155 21st Street, NW 

Washington DC, 20581 

The Honorable Mary Schapiro 

Chairman 

Securities and Exchange Comm.ission 

I 00 F Street NE 

Washington, DC 20549 

Dear Chairman Gensler and Schapiro: 

Atilericans for Financial Reform (AFR) is an unprecedented coalition of over 250 national, state 

and local.groups who. have come together to reform the financial industry. Members of our 

coalition include consumer, civil rights, investor, retiree, community, labor, faith based and 

business groups as well as economists and other experts. 

We tmderstand that the SEC and the CFTC are close to finalizing their definitions of 'swap 

dealer' and that the fina l rules are likely to· incorporate significant revisions over the original 

proposal. AFR commented on the original proposed swaJ> dealer definition. and was generally 

suppo1::tive. However, we are concerned about rumors that substantial revisions are being made in 

this definition in response to industry lobbyjng. 

ft is unclear from press reports alone whether the contemplated changes in the rule are so farreaching as to undermine the statutory framework, or whether the key elements of that 

~mework are being preserved. However, given the range of potential changes that have been 

rumored, we would like to raise several potential issues. Our discussion is divided into two 

sections, one regarding a potential hedge exemption and the other regarding potential chances in 

the de minimis exemption. Our argument is at a broad J~vel of generality since we are reacting 

to press reports, and do not bave detailed information about changes being·considered. 

Potential Hedge Exemption And Phvsical Commoditv Producers 
The initial proposal did not clearly include a hedge exemption to designation as a swaps dealer 

(nlthough an effective exemption was discussed in U1e case of security-based swaps). A more 

clearly outlined and significant hedge exemption in the final rule could pose a number of 

problems. 

We are concerned that the intersection of a generous hedge exemption, a large de minimis 

exemption, and potentially also a generous interpretation of the statutory exemption for swaps 

that are 'not in the ordinary course of business' could potentially shield significant swaps dealers 

from oversight. Tlus is especially true for companies that combine commodity production or 

distribution with major trading operations. Such companies will be especially well positioned to 

take advantage of a generous hedge exemption. 

Since the deregulation of U.S. energy markets, it has been common for energy companies to mix 

significant trading operations and energy production. In many cases, this grows into a major 

stand-alone trading operation that is an important profit center for the company.

1 This is the 

history ofEnron and numerous other energy companies besides. Many major banks also own 

both physical commodities and power generation operations and could potentially take 

advantage of a hedge exemption.2 

In this connection, it is important to note that the systemic. protections intended by the DoddFrank Act extend not simply to a generalized collapse of the entire financial system such as 

occun·ed in 2008, but also to the failure of market functioning in markets for key individual 

commodities such as energy. For example, the California power blackouts and other market 

disruptions created by the activities ofEnron certainly represent a systemic financial failure. It is 

thus important to ensure that major dealers in individual commodity markets are properly 

designated and are not able to shelter dealing activities as hedging. 

More generally, dealing activities should not be treated differently simply because the firm 

performing them is also part of a corporate structure that includes entities that produce 

commodities. In many ways, combining a trading operation with substantial holdings of the 

referenced assets is particularly problematic. If a dealer can profit from price changes because of 

the assets it holds, that dealer has a substantial conflict of interest with its customers. The 

interplay between physical holdings and derivatives dealing requires the attention of regulatory 

authorities and highHghts the importance of designating companies that combine swap dealing 

and commodity production as swap dealers. 

1 Parsons, John, "Do Trading and Power Oi>erations Mix'l", MIT Center for Energy and Environmental 

Research, Massachusetts Institute ofTechnology, November, 2011. 

2 For example, Goldman Sachs has major ownership interests in Energy Future Holdings and Cogentrix 

Energy. Simon Greenshields of Morgan Stanley has stared Lhat "We have a very strong physical presence in 

oil". See Osipovich, Alexander, "Risk and Energy Risk: 2012 Commodity Ran kings", ~n gy Risk, February 9, 

2012. 
AFR was critical of the broad scope of the hedge exemption permitted under the Major Swaps 

Participants (MSP) definition. In the initial mle proposal. the Commissions themselves stated 

tha~: 

"The Line between speculation, investing or trading, on the one hand, and hedging, on the 

other, can at times be difficult to discern" 

In the original definitions proposal, the swap deale1· definition served an important 

complementary ftmction to the MSP defmition in part because tbe dealer definition did not 

contain a broad hedge exemption. The inclusi.on of a broad hedge exemption to this definition as 

well could leave certain companies able to avoid either designation. 

It should be remembered that the purpose of the swaps dealer and MSP designations is not to ban 

any swaps activity, but simply to eJlsure that such activity is properly capitalized and margined 

and is conducted according to proper business conduct standards. Thus, the issue here is not 

whether hedging is permiued but whether entities that are important market players conduct their 

swaps activities responsibly. This calls for a narrow and well policed hedging exemption. 

Trading operations that are significant business centers and stand ready to take advantage of 

dealjn·g and trading opportunities in the market must not be ahle to simply pair off their trades 

with commodity exvosurcs in other units of the company and claim that they arc 'hedges, based 

on some generalized con·elation. 

Costs and Benefits 

We are aware that energy industry representatives have raised issues relating to the costs to an 

energy company of being designated as a swap dealer. In particular, a law firm (Hunton & 

Williams) acting as counsel to the Working Group of Commercial Energy Fhms (whose 

membership is largely undeterminable by the public) hired a consulting firm (NERA) to produce 

a cost analysis.4 The Working Group is clearly an interested party, and independent analysis has 

determined that this study is so riddled with technical flaws that it cannot be seriously considered 

in the deliberations regarding the mle.5 A flawed study, based on unavailable data, paid for by a 

shadowy organization cannot be considered credible. The best view of it is that the facts do not 

support burdensome costs. 

De Minimis Exemption 

The Swap Dealer Designcztion is Based on Function and Conduct, Not Size 

Sec;:lion 72 t of the Dodd rnll)k Act clearly de lines a 'swap dealer' based on market conduct -

making markets in or dealing swaps, or indeed any conduct whatsoever that leads market 

3 CPR 80195, Federal Register, Vol. 75, No. 244, Tuesday, December 21, 2010. 

4 NERA Economic Consulting, ''Cost-Benefit Analysis oflhc CFTC's Proposed Swap Dealer Definition 

Prepared for the Working Group of Commercial Energy Firms", December 20, 2011. 
participants to describe an entity as a 'dealer' in swaps. While a de minimis exemption is 

permitted, the definition clearly pivots aJound market conduct and not size. ll is very important 

that a de minimis exemption not become a test of, for example, whether the size of a single 

dealer is sufficient to impact the national swaps market. As implied by the very term 'de 

minimis', this exemption .is intended only to exempt those companies who engage in very small 

amounts of incidental swaps activity. 

The emphasis on conduct in the swap dealer definition is further confirmed by the inclusion of 

another entity definition based almost purely on size, the major swaps participant designation. 

As A ]\!fatter of Policy, Oversight j\lfust Not Be Limited To The Largest Entities 

ft is sometimes claimed that since a major goal of swaps dealer oversight is to provide prudential 

protections against systemic risk, such oversight should be limited to the largest entities. As 

discussed above, this is clearly not the intention of the statute, so Uus argument falls simply 

based on statutory interpretation. However, even for pure policy reasons, oversight of swaps 

dealers clearly should not be limited to the larger entities alone. First, swaps dealer designation is 

intended to create improvements in business practices, not only to reduce systemic risk. These 

improvements include both internal and external business conduct .rules. These business conduct 

rules are intended to be especially strict when dealers are interacting with public entities and 

pension fnnds; tor this reason the proposed rule lowered the de minimis exemption f.or 

transactions with these entities, and it is important that this type of distinction be maintained. 

Second, prudential issues may be created by problems among large numbers of undercapitalized 

smaller entities. This is a major reason why prudential banking agencies regulate the full range of 

banks, from tiny community banks to global entities with asset bases larger than some national 

GDPs. Examples of systemic failures of J)rudential oversight that occutTed among small entities 

include the S&L crisis ·of the 1980s and the banking panic that occurred during the Great 

Depression. The major swaps markets are currently dominated by a few large players, but we 

should not assume this will always be tl11e, or that it will be true among emerging new classes of 

swaps. 

!fA Large De Minimis Exemption Is Applied To Each Individual Swaps Class Then Major 

Players Could Be Exempted 

Even a de minimis exemption significantly larger than the originally proposed level would 

obviously not shield from designation the largest banks who deal across the entire ra11ge of swap 

classes. However, if the Commjssions choose to designate dealer status based on activity in 

single classes of swaps, and a large de minimis exemption is applied unif01mly across such 

classes, then major market participants in particularized swaps markets could be cxcmpled. For 

example, activity that would be very small in the interest rate swaps market could be significant 

5 See Turbeville, Wallace, "1\nalysjs ofNERA Re1lQ!t'', February, 2012. 
in the·credit default swap market, particularly if the CDS market is further subdivided info 

classes based on reference enti.ties. 

The Original!'roposed Rule Contains Data That Conflicts With A Large De lvfinimis E--.:emption 

The Commissions' original proposal suggested a level of $ 100 million in notional va lue as a de 

minimis exemption, and made this statement: 

"We understand that in general the notional size o.f a small swap or security-based 

swap is $5 million or Jess, and this proposed threshold would re:t1ect 20 

instruments of that size." 

Jftlus is true, then a de minimis threshold of, for example, $3 billion in notional value would 

reflect 600 typical swaps transactions over the course of a year, or two to tlu-ee transactions per 

working day. Tt is hard t<;> believe that·an entity that engaged in 600 swaps transactions while 

representing itself as a dealer in swaps should not be d'esignated as a swaps dealer. If the 

Cqmmissions have perfonned additional data analysis or gathered additional information that 

indicates that a large de minimis exemption is justified by typical market practice, then it is 

incumb~nt on them to present this data to the public. 

Thank y0u for your time and attention and the opportunity to ·comment on this issue. If you have 

any questions, p.lease contact Marcus Stanley, AFR's Policy Director, at (202) 466-3672 or 

marcus@ourfinancialsecurity.org. 

Sincerely, 

Americans for Financial Reform 
Following are tbe partners of Americans for Financial Reform. 

All the organizations support tlze overall principles of A FR and are working for an accountable, fair and 

secure financial system. Not all of these organizations work on all of the issues covered by tire coalition 

or /rave signed on to eve1y statement. 

• A New Way Forward 

• AFL-CIO 

• AFSCME 

• Alliance For Justice 

• Americans for Democratic Action, Inc 

• American Income Life Insurance 

• Americans UJ+itcd for Change 

• Campaign for America's Future 

• Campaign Money 

• Center for Digital Democracy 

• Center for Economic and Poliey Research 

• Center for Ecpnomic Pt:ogress 

• Center for Media and Democracy 

• Center for Responsible Lending 

• Center for Justice and Democracy 

• Center of Concern 

• Change to Win 

• Clean Yield Asset Management 

• Coastal Enterprises Inc. 

• Color of Change 

• Common Cause 

• Communications Workers of America 

• Community Development Transportation Lending Services 

• Consumer Action 

• Consumer Association Counc11 

• Consumers for Auto Safety and Reliability 

• Consumer Federation of America 

• Consumer Watchdog 

• Consumers Union 

• Corporation for Enterprise Development 

• CREDO Mobile 

• CTW Investment Group 

• Demos 

• Economic Policy Institute 

• Essential Action 

• Greenlining Institute 

• Good Business fnternational 

• HNMA. Funding Company 

• Home Actions 

r 

I 
• Housing Counseling Services 

• Information Press 

• Institute for Global Communications 

• fnstitute for Policy Studies: Global Economy Project 

• International Brotherhood ofTeamsters 

• Institute of Women's Policy Research 

• Krull & Company 

• Laborers' International Union of North America 

• Lake Research Partners 

• Lawyers' Committee for Civil Rights Under Law 

• Move On 

• NASCAT 

• National Association ofConsumer Advocates 

• National Association ofNeigbborhoods 

• National Communily Reinvestment Coalition 

• National Consumer Law Center (on behalf of its low-incmtle clients) 

• National Consumers League 

• National Council of La Raza 

• National Fait· Housing Alliance 

• National Federation of Community Development Credit Unions 

• National Housing Trust 

• National Housing Trust Community Development Fund 

• National NeighborWorks Association 

• National Nurses United 

• National People's Action 

• National Council of Women's Organizations 

• Next Step 

• OMB Watch 

• OpenTheGoverrunent.o.rg 

• Opportunity Finance Network 

• Partners for the Common Good 

• PICO National Network 

• Progress Now Action 

• Progressive States Network 

• Poverty and Race Research Action Council 

• Public Citizen 

• Sargent Shriver Center on Poverty Law 

• SEIU 

• State Voices 

• Taxpayer's for Common Sense 

• The Association for Housing and Neighborhood Development 

• The Fuel Savers Club 

• The Leadership Conference on Civil and Human Rights 

• The Seminal 

• TlCAS 

• U.S. Public Interest Research Group 

• UNITEHERE 

• United Food and Commercial Workers 
. . 

• United States Student Association 

• USAction 

• Veris Wealth Partners 

• Western States Center 

• We the People Now 

• Woodstock [nstitute 

• World Privacy Forum 

• UNET 

• Union Plus 

• Unitarian Universalist for a Just Economic Community 

List of St ate and Local Signers 

• Alaska PIRG 

• Arizona PlRG 

• Arizona Advocacy Network 

• Arizonans For Responsible Lending 

• Association for Neighborhood and Housing Development NY 

• Audubon Partnership for Economic Development LDC, New York NY 

• BAC Funding Consortium [nc., Ivliami FL 

• Beech Capital Venture Corporation, Philadelphia PA 

• Californja PJRG 

• California Reinvestment Coalition. 

• Century Housing Corporation, Culver City CA 

• CHANGERNY 

• Chautauqua Home Rehabilitation and Improvement Corporation (NY) 

• Chicago Community Loan Fund, Chicago JL 

• Chicago Community Ventures, Chicago lL 

• Chicago Consumer Coalition 

• Citizen Potawatomi CDC, Shawnee OK 

• Colorado PIRG 

• Coalition on Homeless Housing in Ohio 

• Community Capital fund, Bridgeport CT 

• Community Capital ofMaryland, Baltimore MD 

• Community Development financial Institution of the Tobono O'odham Nation, Sells AZ 

• Community Redevelopment Loan and Investment Fund, Atlanta GA 

• Community Reinvestment Association of North Carolina 

• Community Resource Group, Fayetteville A 

• Connecticut PIRG 

• Consumer Assistance Council 

• Cooper Square Committee (NYC) 

• Cooperative Fund ofNcw England, Wilmington NC 

• Corporacion de Desarrollo Economico de Ceiba, Ceiba PR 
• Delta Foundation, Inc., Greenville MS 

• Economic Opportunity Fund (EOF), Philadelphia PA 

• Empire Justice Center NY 

• Empowering and Strengthening Ohio's People (ESOP), Cleveland OH 

• Enterprises, Inc., Berea KY 

• Fair Housing Contact Service OH 

• Federation of Appalachian Housing 

• Fitness and Praise Youth Development, Inc., Baton Rouge LA 

• Florida Consumer Action Network 

• Florida PIRG 

• Funding Partners for Housing Solutions, Ft. Collins CO 

• Georgia PIRG 

• Grow lowa Foundation, Greenfield IA 

• Homewise, Inc., Santa Fe NM 

• Idaho Nevada CDFT, Pocatello ID 

• fdaho Chapter, National Association of Social Workers 

• Ulinois PJRG 

• Impact Capital, Seattle WA 

• Lndiana PIRG 

• Iowa PJRG 

• Iowa Citizens for Community Improvement 

• JobStart Chautauqua, Inc., Mayville NY 

• La Casa Federal Credit Union, Newark NJ 

• Low Income Investment Fund, San Francisco CA 

• Long Island Housing Services NY 

• MaineStream Finance, Bangor ME 

• Maryland PIRG 

• Massachusetts Consumers' Coalition 

• MASSPIRG 

• Massachusetts Fair Housing Center 

• Michigan PTRG 

• Midland C01nmunity Development Corporation, Midland TX 

• Midwest Minnesota Community Development Corporation, Detroit Lakes MN 

• Mile High Community Loan Fund, Denver CO 

• Missouri PIRG 

• Mortgage Recovery Service Center of L.A. 

• Montana Community Development Corporation, Missoula MT 

• Montana PIRG 

• Neighborhood Economic Development Advocacy Project 

• New Hampshire PJRG 

• New Jersey Community Capital, Trenton NJ 

• New Jersey Citizen Action 

• New Jersey PlRG 

• New Mexico PlRG 

• New York PIRG 

• New York City Aids Housing Network 

• New Yorkers for Responsible Lending 

• NOAH Community Development Fund, Inc .• Boston tvlA 
.. . .. 

• Nonprofit Finance Fund, New York NY 

• Nonprofits Assistance Fund, MinneapoUs M 

• North Carolina PIRG 

• Northside Community Development Fund, Pittsburgh PA 

• Ohio Capital Corporation for Housing, Columbus OH 

• Ohio PJRG 

• OligarchyUSA 

• Oregon State PlRG 

• Our Oregon 

• PennPIRG 

• Piedmont Housing Alliance, Charlottesville VA 

• Michigan.PJRO 

• Rocky Mountain Peace and Justice Center, CO 

• Rhode lsl!md PIRG 

• Rural Community Assistance Corporation, West Sacramento CA 

• RuraJ Organizing Project OR 

• San Francisco Municipal Transportation Authority 

• Seattle Economic Development Fund 

• Community Capital Development 

• TexPIRG 

• The Fair Housing Counci I of Central New York 

• The Loan Fund, Albuquerque NM 

• Third Reconstruction Institute NC 

• Vermont PJRG 

• Village Capital Corporation, Cleveland 01-I 

• Virginia Citizens Consumer Council 

• Virginia Poverty Law Center 

• War on Poverty - Florida 

• WashPIRG 

• Westchester Residential Opportw1ities Inc. 

• Wigamig Owners Loan f und, Inc., Lac du Flambeau WI 

• WISPfRG 

Small Businesses 

• Blu 

• Bowden-Gill Environmental 

• Community McdPAC 

• Diversified Environmental Planning 

• Hayden & Craig, PLLC 

• Mid CHy Animal Hospital, Pheonix AZ 

• The Holographic Repatterning Jnsritute at A.ustin 

• UNET