External Meetings: Definitions Meeting with Americans For Financial Reform

At the meeting, Americans for Financial Reform (AFR) made the following points regarding the proposed rules further defining major swap participant (MSP) and swap dealer.
1) AFR said that to qualify for the exception from the MSP definition for swaps hedging or mitigating commercial risk, the swap user should be required to demonstrate that the swap does not create additional risk, the risk is of a type that can be hedged by swaps, and that there is congruence the swap and the risk.  The swap user should demonstrate this for each swap position, and if a position ceases to meet these requirements the swap user should count it to determine if it is an MSP.
2) AFR said that the commercial risks that can be hedged by swaps are limited to risks that are inherent in the swap user’s business.  Any risk arising from discretionary activities, such as how the business is financed, are not commercial risks.  The commercial risks of financial entities are limited to those arising from their commercial operations.
3) AFR said that more generally, the hedging exemption from the MSP definition is more of a matter for disclosure.  Companies could achieve many of the same results using swaps or loans.  Since part of the purpose of MSP regulation is to provide regulators information about the swap market, the hedging exemption should be narrow.
4) AFR said that a Value at Risk (VaR) method should be used to measure future exposure for the MSP definition.  The rule should allow the swap user to use whatever VaR model and assumptions it uses in the normal course, except it should be required to apply a 99% confidence level and 3 or 5 day interval.
5) On the swap dealer definition, AFR said the dealer/trader distinction is not helpful because the transparency and operational robustness of the securities market is much higher than the swap market.