WASHINGTON — Utilities and energy companies are urging federal lawmakers to remove a provision of the financial regulatory reform bill that would impose a fiduciary duty on swap dealers engaging in transactions with state and local governments and require them to put the governments’ interest before their own.
Nine groups representing the companies, including American Public Power Association and the Large Public Power Council, made the request in a three-page letter dated May 3 that asked for several other modifications of derivatives provisions.
The associations told the lawmakers that their members use both over-the-counter and exchange-traded derivatives to manage commercial risks on behalf of their consumers.
They stressed the derivatives are primarily used for hedging and do not pose systemic risks.
The groups praised the bill for containing an exemption for commercial end-users of derivatives.
The exemption “is absolutely critical for us to maintain stable and affordable rates while continuing to invest in America’s energy infrastructure,” their letter said.
But the fiduciary duty provision, which is supported by Senate Agriculture Committee chairman Blanche Lincoln, D-Ark., “will prevent [dealers] from entering into swap transactions with state and local governments,” they warned.
“Swap dealers and end-users enter into swap transactions on an arm’s length basis as counterparties. By definition, the two parties to a swap (or any other commodity transaction) have conflicting interests, [in that] one party wants to buy low and the other wants to sell high,” the groups told the lawmakers.
A alternative, they said, would be to require state and local governments to engage a Commodity Futures Trading Commission-registered “swap transaction adviser” to act on their behalf as their fiduciary in transactions with swap dealers.
The associations also urged the lawmakers to ensure that end-users of swaps are not inadvertently misclassified as swap dealers or major swap participants.
In addition, they said the definition of a swap should expressly exclude “any sale of a nonfinancial commodity or security for deferred shipment or delivery.”