WASHINGTON — Municipal and other market participants yesterday urged federal regulators to consider allowing state and local governments, nonprofit organizations, utilities and other end-users in derivatives transactions to provide one set of required disclosures that could be updated when material changes occur.
At a roundtable with Commodity Futures Trading Commission and Securities and Exchange Commission staff, they also pressed for a phase-in of the derivatives end-user rules required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, with larger market participants having to comply with the rules first and smaller ones later.
Under Dodd-Frank, swaps are exempt from mandatory clearing and exchange trading requirements if one of the counterparties to the swap meets three requirements. It must not be a “financial entity” or use swaps to “hedge or mitigate commercial risk,” and it must notify the CFTC of how it will meet its financial obligations associated with the swap into which it is entering.
Muni market participants want to make sure that state and local governments, nonprofits and public utilities or rural electric cooperatives qualify for an “end-user” exemption from the clearing and exchange trading requirements.
Peter Shapiro, managing director at Swap Financial LLC, said state and local governments and other end-users should be allowed to meet the notification requirement by providing the CFTC with a one-time disclosure document that would only have to be updated if material changes occurred. This would be far less burdensome than providing disclosure on a swap transaction by transaction basis, he said. After the roundtable had ended, Shapiro compared the one-time document to a shelf offering statement that is sometimes filed for corporate financings.
Panel members, such as Russell Wasson, senior associate director for tax, finance and accounting policy at the National Rural Electric Cooperative Association, also worried about swaps in which two end-users are counterparties and there is no dealer that would normally handle the disclosure obligations. But most acknowledged this would not be a common practice.
Shapiro also urged that smaller state and local governments and nonprofit organizations such universities be given more time before having to comply with the rules than larger market participants, but said they could become final for everyone within two years.
CFTC chairman Gary Gensler, who sat in on the meeting, asked Shapiro how the commission could rationalize protecting some end-users but not others with its rules. Shapiro responded, “You’d think you’d want to protect everyone out of the chute,” but added that some market participants are more sophisticated than others.
In written comments submitted to the CFTC, Shapiro said the agency should clarify that governmental and nonprofit entities are not financial entities and qualify for the end-user exemption. The Securities Industry and Financial Markets Association and the National Association of College and University Business Officers filed similar comments with the CFTC.