Regulators recently gave Southwest Airlines time-limited relief from public reporting requirements for long-term, illiquid swaps and swaptions, potentially allowing the airline to better take advantage of oil prices that have plummeted over the last few months.
On November 6, the Commodity Futures Trading Commission (CFTC) issued no action relief providing the airline and its counterparties with additional time for public reporting to a swap data repository (SDR) of long-dated Brent and West Texas Intermediate (WTI) crude oil swap and swaption contracts. The relief is limited to 15 calendar days.
Jiro Okochi, CEO of Reval, a provider of software-as-a-service treasury and risk management solutions, said the no-action letter conveys the CFTC’s understanding that reporting on bespoke swap contracts may be problematic for some market participants, so it’s providing more time under specific conditions.
“It’s sending a clear message that the agency is monitoring this, and it will give more time, but not forever,” Mr. Okochi said.
Vincent McGonagle, direct, division of market oversight (DMO) at the CFTC, said in the no-action letter that the commission’s rule currently provides for a public reporting time delay of four hours in the first year and two hours the second, when a swap dealer or major swap participant (MSP) is the counterparty. When the counterparty is neither a dealer or MSP, the delay is 48 hours in the first year, 36 in the second, and 24 thereafter.
“On October 29, 2014, Southwest notified the Division that additional time is necessary to comply with the reporting requirement in §43.3(a) for long-dated Brent and WTI crude oil swap and swaption contracts not subject to the mandatory clearing requirement,” the no-action memo states.
The letter goes on to note the DMO understands that the markets for Brent and WTI crude oil swaps with maturities of two years typically have few transactions and market participants. As a result, a shorter reporting period could increase the risk of the counterparties’ identities and their business transactions may become known, hindering the liquidity providers’ ability to engage in further transactions to hedge risk. Liquidity providers, in turn, would likely incorporate that risk in their transaction by raising prices.
Consequently, the CFTC granted the no-action relief on three conditions, one of which is that such Brent and WTI crude oil swap and swaption contracts must be reported to an SDR within 15 calendar days after these trades have been executed by Southwest or its counterparties–significantly more than the 48 hours under the rule. In addition, the contracts cannot be a part of an asset class subject to mandatory clearing, and the derivatives expiration dates must be at least two years out.
“We applaud the CFTC’s action that recognizes the importance of managing risk through our effective fuel-hedging program,” said a Southwest spokesman. “The CFTC action ensures that Southwest will continue to have the flexibility to manage our risk in a responsible way, which helps us to keep fares low.”
The airline declined to comment further. However, the no-action relief should allow it to more effectively take advantage of falling prices for Brent and WTI, each of which has dropped at least 20 percent in the last three months.
“With oil prices at three year lows, if you have exposure to energy prices for transportation or manufacturing it’s a great time to hedge,” Mr. Okochi said.