Deadlines for inter-affiliate clearing and reporting press regulators to act.
With key deadlines barreling down on them, non-financial end-users of swaps between company affiliates still are awaiting clarification from regulators that, depending which way they go, could result in major operational challenges between now and as soon as April.
The Commodity Futures Trading Commission (CFTC) proposed a rule August 21, 2012 that exempts swaps between certain affiliates in a corporate group from clearing. However, it’s unclear in the proposal, and hence the anticipated final rule, whether a so-called treasury center that aggregates those inter-affiliate swaps and swaps the net exposure with a third party, in a “market facing” trade, must clear the swap. This will be problematic for non-financial companies who engage in swaps between affiliates for risk-management, accounting, tax and other reasons.
“We’re hoping the CFTC will use its authority to exempt them, but it’s not clear that will happen,” said Tom Deas, treasurer of FMC Corp. and chairman of the National Association for Corporate Treasurers.
Financial entities must start clearing swaps by June 10, leaving companies just over three months to prepare their systems to clear “market-facing” trades, if that’s the CFTC’s decision. Luke Zubrod, a director at Chatham Financial, said that his firm’s “interactions with the CFTC” suggest regulators are sympathetic to non-financial companies’ concerns and are considering extending relief, so treasury centers’ market-facing trades would not be subject to clearing.
Given it’s a “multi-month” process to set up for clearing, however, regulators must act soon to avoid putting users – especially non-financial end-users – in a bind, Mr. Zubrod said. He added that firms must solicit fee schedules from bank clearing members, select one or more firms, negotiate terms with them, and adapt their systems to send the necessary data. The process isn’t necessarily arduous, he said, but clearing member banks may have hundreds of clients in need of connectivity, and non-financial corporates – typically less frequent use of swaps – will likely end up at the back of the line.
“The banks only have so much capacity, and they need to dedicate that capacity first and foremost to those customers who are going to be doing high volume transaction activity – think of the Blackrock’s of the world,” Mr. Zubrod said.
Another concern in addition to timing is what constraints regulators place on such swaps. Mr. Zubrod said one constraint that is likely to be carefully evaluated is a parent company guarantee for the treasury center.
Indications are that most non-financial corporates are betting that an exemption is in the offing. Chatham recently sponsored webinars on clearing for corporates and another the end-user exemption, Mr. Zubrod said, and “we had only a handful of corporates that showed up for the clearing webinar and more than 300 for the end-user exemption one.
The Coalition for Derivative End-Users, which represents NACT, the Business Roundtable and several other industry trade groups, submitted a letter February 22 that reiterates earlier requests to regulators to exempt treasury centers’ market facing swaps from clearing.
On February 26, the Coalition submitted another letter addressing a more pressing deadline. Companies must begin reporting new and historical inter-affiliate swaps to swap data repositories (SDRs) April 10, 2013 unless the CFTC extends the deadline and/or removes the historical component that requires reporting of swap data going back to July 21, 2010, when the Dodd-Frank Act was enacted. Mr. Zubrod said many corporates view their inter-affiliate swaps as little more than an accounting exercise, and so they may not even realize this requirement is looming.
“So recognizing they have some action steps, figuring out how to accomplish the task of reporting, and getting it all done by April 10 is going to be a tall order,” Mr. Zubrod said.
Mr. Deas said NACT supports increasing transparency through real-time reporting, but given banks are already set up to do this and non-financial corporate end-users must transact through banks, “We’ve asked regulators to please give them the responsibility.”
The Coalition’s letter requests the CFTC to require end-users to report inter-affiliate swap data to SDRs annually, within 60 days after the company’s fiscal year, rather than within days after the transaction takes place, as required by Part 5 of CFTC regulations. The letter also requests that the end-user deadline to connect to SDRs be extended to October 10, 2013 and that end-users be responsible for swap data only after the letter’s date.