II-00022

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David Murphy <David.Murphy@NGSA.org>

Tuesday, November 16, 2010 2:08 PM

dfarulemakings <dfarulemakings@CFTC.gov>; OTCDefinitions

<OTCDefinitions@CFTC.gov>

Jenny Fordham <jenny.fordham@ngsa.org>; Daphne Magnuson

<Daphne.Magnuson@NGSA. org>; Sam Willett <Willett@DC.NCGA. com>; Skip

Horvath <Skip.Horvath@NGSA. org>

Joint Letter Regarding Implementation of "Swaps Dealer" Definition

NCGA - NGSA Swap Dealer Letter 11162010_final.pdf

Dear Mr. Stawick:

Please find attached a joint letter on behalf of the Natural Gas Supply Association and the National Corn

Growers Association regarding the implementation of the "Swaps Dealer" definition. If you have any questions

or concerns, please feel free to contact Ms. Jenny Fordham, NGSA’s vice president, markets. Thank you.

Sincerely,

David W. Murphy

David W. Murphy

Energy Markets & Government Affairs

Natural Gas Supply Association

Direct: (202) 326-9301

Cell: (205) 657-1848
November 16, 2010

Mr. David Stawick, Secretary

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21 st Street, NW

Washington, DC 20581

Subject: Pre-Proposal Comments Regarding Implementation of the Swap Dealer

Definition

Dear Mr. Stawick:

In response to the U.S. Commodity Futures Trading Commission ("CFTC" or

"Commission") August 26, 2010, Notice of Acceptance of Public Submissions,* the National

Corn Growers Association ("NCGA") and the Natural Gas Supply Association submit the

following comments regarding implementation of the Swap Dealer definition in the Commodity

Exchange Act (the "CEA") as amended by the Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010 (the "Act.")

Founded in 1957, NCGA is the largest trade organization in the United States

representing corn growers representing 35,000 dues-paying corn farmers nationwide and the

interests of more than 300,000 growers who contribute through corn checkoff programs in their

states. NCGA and its 48 affiliated state associations and checkoff organizations work together to

create and increase opportunities for their members and their industry. Established in 1965,

NGSA represents integrated and independent companies that produce and market approximately

40 percent of the natural gas consumed in the United States.

NCGA and NGSA were active participants in shaping the Act during its passage and

wish to take an active role in the Act’s successful implementation. The implementation of the

swap dealer definition is critical to maintaining the economic protections that Act provides to

end -users.

*Acceptance of Public Submissions on the Wall Street Reform and Consumer Protection Act and the Rulemakings

that will be Proposed by the Commission, 75 Fed. Reg. 52,512 (Aug. 26, 2010).
Page 2 of 3

A primary purpose of CFTC regulation of the "over-the-counter" (OTC) markets is to

protect consumers from systemic risk. The CFTC’s definition of Swap Dealer should balance the

goals of protecting consumers from systemic risk and ensuring no unnecessary harm to the

economy. Thus, the CFTC must carefully scope the definition of Swap Dealer because an

unnecessarily broad definition will sweep in end-users, limiting the use of the key protections for

the economy incorporated into Dodd-Frank.

Trading in Swaps Should Not Make a Company a Swap Dealer. The CFTC should

implement the Swap Dealer definition by ensuring that both the law’ s general exception and the

de minimis exception are properly applied. The general exception applies to entities entering

into swaps for their own account (e.g. traders). The de minimis exception allows for the

exclusion from a Swap Dealer designation of entities that engage in a de minimis quantity of

swap transactions "with or on behalf of" their customers. These two exceptions are essential

because they allow entities that use swaps to hedge or mitigate commercial risks, such as those

risks that stem from the production of energy and agricultural commodities, to avoid being

designated as Swap Dealers, a designation that would preclude eligibility for the end-user

clearing exception. Entities designated as Swap Dealers would be required to transact their

swaps on an exchange or to clear such transactions, subjecting them to costly margin and

clearing expenses and draining the economy of billions of working capital dollars.

The CFTC Should Use the Concept of"Intermediation" to Define Swap Dealer. To

achieve congressional goals, the CFTC should use a two-step process based on the Securities

Exchange Act and the concept of intermediation (transacting to satisfy a customer order or,

simply put, acting on behalf of a customer) to first implement the general exception and then

implement the de minimis exception in the Swap Dealer definition. The Securities and

Exchange Commission (SEC) precedent~ on the designation of a dealer provides a

comprehensive way to distinguish trading from dealing. Central to the SEC case law

characteristics that distinguish dealing from trading is intermediation. To implement the two

exceptions, the CFTC should use the concept of intermediation as the basis for filtering dealers

from traders, many of whom use swaps to hedge business risk. This approach will ensure that

financial entities engaging in swaps with or on behalf of customers remain in the regulatory

purview of the CFTC without diminishing the integrity of the end-user clearing exception.

Step one: Use the SEC model for distinguishing between "dealers" and "traders" to

implement the general exception. Built into the Swap Dealer definition is a general exception

excluding "persons that enter into swaps for that person’s own account, either individually or in a

fiduciary capacity, but not as a part of a regular business"-- from designation as a Swap Dealer.

Put another way, the general exclusion establishes that only an entity trading swaps that are not

for its own account (e.g. done in an intermediary capacity) is a Swap Dealer. In securities

markets, the SEC and the courts have identified a number of characteristics for dealing activity.

While the securities market activities do not translate precisely to the commodity swaps market,

the concept of"intermediation" does translate. (See inset next page.) The concept of

intermediation can be used to implement the general exception as the starting point for sorting

dealers from traders so that the integrity of the economic protection provided by the general

exclusion can be maintained.

t Vol. 15, Broker-Dealer Regulation, David A. Lipton, Section 1:6 at 1-42.11, n.4.
Page 3 of 3

Step two: Implement the de minimis exclusion by considering the level of "dealing"

transactions relative to total swap transaction activities. An entity would not qualify for the

general exception if it both trades and deals.

astute trading capabilities also enter into

transactions with their traditional customers

that may ultimately resemble dealing.

Often this "dealing" is the result of the

customer’ s interest in transacting financial

hedges with a counterparty that has

physical assets and a history in bringing

physical product to market. This is where

the de minimis exception plays a critical

role. For entities that trade swaps and

engage in this limited form of dealing, the

CFTC should design the de minimis

exception so that the level of dealing

(defined by using the concept of

intermediation as reflected in the SEC

regulations) is compared to their total swap

transactions (e.g. trading and dealing). If

the level of dealing relative to the total is

small, in other words, if the entity primarily

trades swaps although it engages in some

dealing, the de minimis exception is satisfied.

While not universal, many commercial entities with

Swaps Nar~et Sw.a~ D~ale~"

The right Swap Dealer approach works for consumers and the economy. Using the

concept of intermediation to implement the general and de minimis exceptions will allow the

CFTC to sort true swap dealers from those entities that trade swaps to hedge commercial

business risk. This approach is consistent with existing case law and the congressional goal of

avoiding unnecessary harm to the economy. Finally, the solution provides the CFTC with a

practical and valid way to regulate Swap Dealers that buy and sell swaps to satisfy customer

orders, without the harm to the economy that would result from avoidable and unnecessary

increases in business risk management costs. Appropriate implementation of the Swap Dealer

definition is essential to maintaining the integrity of the end-user protection provisions that were

central to the passage of the Dodd-Frank Act.

NCGA and NGSA stand ready to work the Commission on implementation of the Act.

Please do not hesitate to contact Sam Willett, Senior Director of Public Policy for NCGA at 202-

628-7001 or Jenny Fordham, Vice President, Markets for NGSA at 202-326-9317, if we can

provide any additional information. Thank you for your consideration.

Sincerely,

National Corn Growers Association.

Natural Gas Supply Association