Companies are pressing for an end-user exemption, but what if parts of their business are dealers or MSPs?
The past week has seen a host of regulators sitting before Congress describing their efforts so far in writing and implementing Dodd-Frank. On the question of derivatives, it’s been a lot of heated back and forth between the two sides about margining (see related story here) and who would fall under the heading of swap dealer or major swap participant (MSP) and not be considered an exempted end-user.
The goal of the (now Republican) House and corporations, of course, is to make sure companies don’t get swept up in the rules and have to post margin or otherwise lose their end-user exemption because they’re a dealer or MSP. One of the worries, as Commodity Futures Trading Commission Commissioner Scott O’Malia puts, is that the rules are so broad that some may get the “swap dealer” moniker – “the scarlet letters” of swap trading.
According to the CFTC and SEC a dealer is a person who “holds itself out as a dealer in swaps,” “makes a market in swaps” and “regularly enters into swaps with counterparties in the ordinary course of business for its own account” among other others. An MSP is a person who “maintains a ‘substantial position’ in any of the major security-based swap categories,” and whose outstanding security-based swaps “create ‘substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.’” See the complete definitions here.
For its part, the CFTC’s head, Gary Gensler, says his agency will “get it right” on margining. Mary Schapiro, of the Securities and Exchange Commission also tried to be reassuring on the subject, although Daniel Tarullo of the Fed said it might be possible that larger companies might have to post extra capital if they’re trading derivatives.
One of those could be Shell Energy, a subsidiary of Royal Dutch Shell, which is actually one of the top global energy dealers. As a posting by MIT Professor John Parsons points out on his Betting the Business blog, “Shell the oil producer, refiner, shipper and marketer is an end-user”… “but Shell the derivatives dealer and prop trader? Why should they be exempted?” This is a valid point and its competitors at banking derivative desks would likely wonder the same thing.
But what if Shell Energy assists its corporate parent (that would qualify for the exemption) in risk management? What then? Will it create even more bifurcation of the rules to accommodate such companies? This likely will raise challenges for treasurers much like the case where some cash-rich tech companies – like Google, for instance – could be considered a mutual fund because it has excess amounts of cash.