External Meetings: Definitions Meeting with Chatham re Community Banks

The meeting discussed issues raised in a comment letter prepared by Chatham Financial on behalf of 19 community and regional banks (comment number 27974).  Primarily, the meeting focused on the exception from the definition of swap dealer available to insured depository institutions (IDI) entering into swaps in connection with the origination of loans.  Chatham believes the exception should be available so long as the aggregate notional amount of swaps between a bank and a borrower are no greater than the amount of outstanding loans to the borrower.
Chatham said that the exception should apply when banks issues a standby letter of credit (i.e., a form of guarantee) that backs a bond issued by a non-profit or municipal entity, because the standby letter of credit facilitates the flow of funds to the entity.  Generally, the letter of credit provides that the bank will purchase the bonds if other purchasers are not available, and/or the bank will make any bond payments that the entity misses.  Because the bonds frequently call for a variable rate of interest, the bank and the entity enter into a fixed/floating interest rate swap.
Chatham also said the exception should apply when a bank enters into a swap with a borrower after the bank acquires the loan to the borrower in the process of working out a failed bank.  It should also apply when the bank acquires the loan through the acquisition of a healthy bank.
Regarding the de minimis exception from the swap dealer definition, Chatham believes that for community and regional IDI, the notional amount of swaps is a less relevant standard, so the de minimis exception should depend on the frequency of the IDI entering into swaps.  Chatham believes that the proposed threshold of 20 swaps per year is too low; the threshold should be set by reference to industry data regarding how frequently small banks enter into swaps.
Regarding the definition of eligible contract participant (ECP), Chatham mentioned different ways that the CFTC’s swaps policy statement from 1989 could be integrated into the definition, including by providing that a subsidiary using swaps in connection with its line of business is an ECP if the subsidiary’s parent is an ECP.