Nearing the deadline for comment the Coalition for Derivatives End-Users has sent a letter to the Securities & Exchange Commission suggesting new cross-border swap proposals will add costs to corporations doing business globally. The Coalition includes the Agricultural Retailers Association, the Business Roundtable, the National Association of Corporate Treasurers and several other groups.
While addressing a host of issues the Coalition has with the SEC’s May proposals – globally conflicting rules, clarity – one of its biggest beefs is with the concept of “conduit affiliates.” The CFTC raised the issue of conduit affiliates in its interpretive guidance of 2012 and recently finalized it in its own rules for cross-border swaps. Observers noted that that Final Guidance did not provide a definition of what was a conduit affiliate, instead including the factors the Commission considers relevant in determining whether a non-U.S. person is a conduit affiliate. The Coalition called the definition of a conduit affiliate “overly-broad and unnecessarily classifies many non-U.S. end-user affiliates as conduit affiliates.”
This ultimately will add costs and decrease the competitiveness of US companies:
“…swap transactions entered into by the non-U.S. end-user referenced in the example above could be subject to increased regulatory requirements as compared to other non-U.S. entities operating in the same swaps market. These increased regulatory burdens could be placed on the non-US end-user’s swap and security-based swap transactions even though, because it is an end-user that is hedging or mitigating commercial risk, the non-U.S. end-user would not be increasing the systemic risk exposure of its U.S. affiliate. The non-U.S. end-user could thus face higher transaction costs when executing trades with non-U.S. persons, and some security-based swap dealers might well refuse to enter into security-based swaps with a non-U.S. end-user that is classified as a “conduit affiliate.” As a result, the U.S. end-user and the non-U.S. end-user affiliates could face higher hedging costs and reduced hedging choice without any corresponding prevention of systemic risk to the US financial system.”
The upshot for practitioners is that treasuries not centralized in the US could be considered as “conduit affiliates” and therefore be put at a disadvantage when dealing with their non-US counterparties. In other words, companies that centralize their hedging in the US could face higher costs to do so when transacting with their affiliates abroad. These are the equivalent to interco loans, the Coalitions said; they spread risk around the company and do not increase systemic risk.
Thus, “imposing requirements that are designed to address systemic risk on inter-affiliate trades would create costs without any corresponding benefit.” The Coalition suggests the “conduit affiliate” proposal not be included in the final rules or if it is, it should exclude those using swaps to mitigate internal risks.