Definition of “Major Swap Participant”

The definition of “major swap participant” (“MSP”) will fundamentally alter markets for swaps referencing energy and agriculture commodities. Market participants will incur significant costs and/or change their businesses to adjust for the MSP definition, and these changes will affect the broader swap markets. Once the costs are incurred or changes made, they cannot be unwound. Thus, the Commission should carefully fashion regulations to clarify properly the definition of “major swap participant” well before it applies such term to market participants.

(I) Tests for Commodity Swaps Should be Adjusted to Capture Only Entities Presenting Systemic Risk to the U.S. Financial System.

• Congress intended for the MSP definition to capture entities that are not swap dealers but that pose a systemic risk to the U.S. financial system. The proposed thresholds do not fully reflect Congress’ intent, as they are overly inclusive.

• There are examples of Commercial Energy Firms sustaining losses well in excess of the proposed thresholds (e.g., $18.7 billion and $4.35 billion [in aggregate notional amount]) and not causing a financial crisis. Based on these examples, the Working Group believes the above recommendations would capture only those entities that pose a systemic risk to the U.S. financial system.

(II) Calculation of the Exposure Tests is Exceedingly Difficult without the Commission Providing Further Guidance.

• The final MSP definition should include step-by-step procedures to facilitate the calculations required by the rules.

• A number of technical and interpretive issues in the MSP definition require additional clarification to enable market participants to fully understand and calculate the definitional tests proposed by the CFTC. Attached as Exhibit A are step-by-step procedures developed by the Working Group for applying the definitional tests as it understands them.

• Key aspects of the definitional tests that require further clarification include:

o Netting: Calculations of current and potential future exposure should fully incorporate contractual provisions that allow offsetting exposures to be netted, including exposures related to physical contracts, as applicable.

o Credit Thresholds: Unused unsecured thresholds, including those in dormant master agreements, should not be considered exposure, as they represent the absence of exposure.

o Notional Amounts: The proposed definition does not provide guidance regarding the conversion of positions into notional amounts. The conversion of basis swaps into a notional dollar amount, for example, overstates amount at risk if you take the view that such position is simply the equivalent of two fixed for float swaps.

• The CFTC should use a broad definition of collateral when determining whether a swap is secured for purposes of the definition of MSP, including, but not limited to, letters of credit and liens on assets.

• Under the proposed MSP definition, the value associated with cleared and daily margined swaps is discounted 80% in the potential outward exposure calculation. A discount of 90% is more appropriate for the risk that a counterparty cannot meet its daily margin call.

(III) Treatment of Affiliated Enterprises in the MSP Determination.

• Aggregation of affiliated entities’ positions to determine if an entity or group of entities is an MSP would not be consistent with the statutory definition, which contemplates an entity level analysis.

• Inter-affiliate swaps should not be considered in the MSP determination.

(IV) Swaps Hedging of Physical Positions Should Constitute “Hedging or Mitigating commercial Risk.”

• Footnote 128 states that swaps that hedge or mitigate risk associated with physical commodity positions that are speculative or are trading positions do not qualify as swaps “hedging or mitigating commercial risk.” Merchants and marketers alike hold inventory in physical commodities, which is speculative by nature. Such commercial parties hold significant price risk with respect to these positions and use swaps to hedge or mitigate such risk.

Exhibit A

See Attached

¹ This recommendation would only apply to participants in the other commodities market. The CFTC should set separate thresholds that are appropriate for other categories of swaps. This recommendation uses relative thresholds, consistent with the Working Group’s prior comment letter. In unrelated comment letters, we also have recommended the use of static numbers to facilitate certainty. Use of static numbers would require the CFTC to periodically revisit such thresholds. Based on the OCC’s data for the second quarter of 2011, the proposed relative thresholds of 1% and 2% of the notional market value of other commodity swaps market translate approximately to $14 billion and $27 billion notional, respectively. The use of the OCC data is not ideal as it only includes swaps with a bank as one of the counterparties and will understate the size of the market. In addition, because of the format of the OCC’s publicly available data, the above notional estimates include both swaps and futures.