No-action position for excluding certain commodity swaps from inclusion in the major swap participant registration threshold calculation of an insured depository institution

Summary: No-action position for excluding certain commodity swaps from inclusion in the major swap participant registration threshold calculation of an insured depository institution

CFTC Letter No. 20-10 No-Action March 20, 2020

Division of Swap Dealer and

Intermediary Oversight

Joshua B. Sterling

Director

Re:

No-Action Position for Excluding Certain Commodity Swaps from

Major Swap Participant Registration Threshold Calculation of an

Insured Depository Institution

Ladies and Gentlemen:

This letter is issued by the Division of Swap Dealer and Intermediary Oversight

(“DSIO”) of the Commodity Futures Trading Commission (“Commission” or “CFTC”)

in response to a request from an insured depository institution (“IDI”), “X”.1 “X”

requests conditional, time-limited no-action relief from the requirement to include

certain swaps when calculating whether it exceeds a certain threshold specified by

Commission regulations and thereby triggering a requirement to register with the

Commission as a major swap participant (“MSP”).

I.

Regulatory Background

Pursuant to the requirements of section 1a(33) of the Commodity Exchange Act

(“CEA”), Commission regulation 1.3 further defines certain terms, including the term

“major swap participant” (the “MSP Definition”). Paragraph (1) of the MSP

Definition requires registration as an MSP of any person that is not a swap dealer and

meets or exceeds one or more thresholds of swap activity set forth in the rule

nt to the requirements of section 1a(33) of the Commodity Exchange Act

(“CEA”), Commission regulation 1.3 further defines certain terms, including the term

“major swap participant” (the “MSP Definition”). Paragraph (1) of the MSP

Definition requires registration as an MSP of any person that is not a swap dealer and

meets or exceeds one or more thresholds of swap activity set forth in the rule. One such

threshold in paragraph (1)(ii)(A) states in relevant part that any person will be an MSP if

such person “maintains a substantial position in swaps for any of the major swap

categories, excluding … positions held for hedging or mitigating commercial risk.”2

The “major swap categories” for purposes of the MSP Definition are defined in

Commission regulation 1.3 as rate swaps, credit swaps, equity swaps, and other

commodity swaps.3 As relevant for this letter, a “substantial position” in “other

1 Letter from “X” dated March 17, 2020.

2 17 CFR 1.3, definition of MSP, paragraph (1)(ii)(A).

3 17 CFR 1.3, definition of “Category of swaps; major swap category.”

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Major Swap Participant No-Action

Page 2

commodity swaps” is defined in Commission regulation 1.3 to mean (a) $1 billion in

daily average aggregate uncollateralized outward exposure; or (b) $2 billion in (i) daily

averaged aggregate uncollateralized outward exposure, plus (ii) daily average aggregate

potential outward exposure.4 “Aggregate uncollateralized outward exposure” (“AUOE”)

is calculated with respect to each swap counterparty in a given major swap category by:

[D]etermin[ing] the dollar value of the aggregate current exposure arising

from each of its swap positions with negative value (subject to [permitted

netting]) in that major category by marking-to-market using industry

standard practices; and deduct[ing] from that dollar am

lized outward exposure” (“AUOE”)

is calculated with respect to each swap counterparty in a given major swap category by:

[D]etermin[ing] the dollar value of the aggregate current exposure arising

from each of its swap positions with negative value (subject to [permitted

netting]) in that major category by marking-to-market using industry

standard practices; and deduct[ing] from that dollar amount the aggregate

value of the collateral the person has posted with respect to the swap

positions. The aggregate uncollateralized outward exposure shall be the

sum of those uncollateralized amounts across all of the person’s swap

counterparties in the applicable major category.5

“Current exposure” under the AUOE calculation is based on daily averages over all

business days (as of close) in a fiscal quarter.6

II.

Summary of Request for Relief

Based on the request for relief and other communications with “X” and its counsel, we

understand the relevant facts to be as follows. Neither “X”, nor any affiliate of “X”, is

currently registered with the CFTC as a swap dealer. However, as part of its commercial

banking business “X” enters into swaps with loan customers to permit such customers

to hedge or mitigate the risks of such loans. The majority of swaps “X” enters into with

commercial loan customers qualify for the exception from counting such swaps toward

the de minimis swap dealer registration threshold for swaps entered into by an IDI with

a customer in connection with the originating a loan with that customer.7

As an IDI, “X” offers, through its commercial banking business, a wide range of

financing solutions to domestic commercial end-user customers that are oil and natural

gas exploration and production (“E&P”) companies. These E&P customers are small,

medium and large oil and natural gas E&P companies with footprints across many of the

oil and natural gas producing regions of the United States that rely on “X” as a source of

funds for their operations

iness, a wide range of

financing solutions to domestic commercial end-user customers that are oil and natural

gas exploration and production (“E&P”) companies. These E&P customers are small,

medium and large oil and natural gas E&P companies with footprints across many of the

oil and natural gas producing regions of the United States that rely on “X” as a source of

funds for their operations. Additionally, “X” offers risk-management products (e.g.,

commodity swaps) to those E&P customers to hedge the volatility of commodity prices

inherent to oil and natural gas production and exploration. These ancillary services “X”

offers to its customers provide the E&P companies with the certainty of future cash-

4 17 CFR 1.3, definition of “substantial exposure.”

5 Id.

6 See 17 CFR 1.3, definition of “major swap participant,” paragraph 3.

7 17 CFR 1.3, definition of “swap dealer,” paragraph 5.

Major Swap Participant No-Action

Page 3

flows in volatile markets in a cost-effective manner. Additionally, the hedging of the

collateral (hydrocarbon reserves), which secure the commodity swaps and the loans

offered by “X”, can allow the E&P customers greater loan amounts that they can use to

help grow their businesses and support the U.S. workforce, while increasing the

certainty of debt repayment to “X”.8

“X” does not post margin or otherwise provide collateral to E&P customers to secure

“X”’s obligations under such swaps. Thus, “X”’s AUOE, without any deduction for

collateral posted by “X”, is driven by market conditions, specifically commodity prices.

As commodity prices decline, “X”’s AUOE increases correspondingly

.S. workforce, while increasing the

certainty of debt repayment to “X”.8

“X” does not post margin or otherwise provide collateral to E&P customers to secure

“X”’s obligations under such swaps. Thus, “X”’s AUOE, without any deduction for

collateral posted by “X”, is driven by market conditions, specifically commodity prices.

As commodity prices decline, “X”’s AUOE increases correspondingly.

The unprecedented drop in global demand for crude oil as a result of the COVID-19

pandemic9 followed closely by the OPEC + supply cut disagreement10 have resulted in

the price of crude oil decreasing by approximately 48% year to date.11 Given the nature

of “X”’s lending and risk management business with E&P customers, the volatility and

low oil prices associated with the above events have led to an unprecedented increase in

“X”’s AUOE to the point where it is highly likely “X” will exceed the MSP registration

threshold by the end of the next calendar quarter.

“X” notes that commodity swaps that are entered into in connection with originating

loans to E&P customers are risk-reducing and collateralized by the underlying loan

collateral (i.e., hydrocarbon reserves). Such commodity swaps benefit the commercial

end-user customer and “X” by protecting the underlying assets from market risk and

reducing credit risk of the commercial end-user to “X”. In an environment of low energy

prices, such commodity swaps also provide customers with steady cash-flows. “X”

wants to continue to serve the risk management needs of domestic oil and natural gas

E&P companies in a period of significant stress to the U.S. energy markets.12

“X” represents that its AUOE for each quarter in 2019, a typical year, never exceeded

40% of the AUOE registration threshold

environment of low energy

prices, such commodity swaps also provide customers with steady cash-flows. “X”

wants to continue to serve the risk management needs of domestic oil and natural gas

E&P companies in a period of significant stress to the U.S. energy markets.12

“X” represents that its AUOE for each quarter in 2019, a typical year, never exceeded

40% of the AUOE registration threshold. Given the historic level of “X”’s AUOE, a

8 In order to ensure that it can offer competitively priced swaps to its customers as described above, “X”

generally manages the risk exposures arising from each of its customer-facing swaps by entering into

offsetting swaps with registered swap dealers or exchange traded futures.

9 See “WHO Responding to a Cluster of Pneumonia Cases in Wuhan,” World Health Organization (Jan. 4,

2020), available at https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-

happen.

10 See “Oil Prices Plunge After Russia-Saudi Split,” The Wall Street Journal (Mar. 6, 2020), available at

https://www.wsj.com/articles/saudi-russian-deadlock-pushes-brent-crude-to-2-year-low-11583500044

11 Crude Oil WTI (NYM $/bbl) Front Month contract price on March 13, 2020 closed at $31.73 compared

to $61.06 on December 31, 2019.

12 See “Russia Takes Aim at U.S. Shale Oil Producers,” The Wall Street Journal, (Mar. 13, 2020), available

at https://www.wsj.com/articles/russia-takes-aim-at-u-s-shale-oil-producers-11584052675

saudi-russian-deadlock-pushes-brent-crude-to-2-year-low-11583500044

11 Crude Oil WTI (NYM $/bbl) Front Month contract price on March 13, 2020 closed at $31.73 compared

to $61.06 on December 31, 2019.

12 See “Russia Takes Aim at U.S. Shale Oil Producers,” The Wall Street Journal, (Mar. 13, 2020), available

at https://www.wsj.com/articles/russia-takes-aim-at-u-s-shale-oil-producers-11584052675

Major Swap Participant No-Action

Page 4

return of relevant commodity prices to previously trending levels13 would permit “X” to

de-register as an MSP, but not before incurring the costs of compliance and disruptions

to trading relationships that will occur as a consequence of registration.

In the alternative, conditional, time-limited no-action relief from the MSP registration

calculation would allow “X” to continue helping its E&P customers weather volatile

market conditions without disrupting current lending and risk management activities by

reducing customer commodity swap activity and/or redirecting resources to MSP

registration efforts.

Thus, “X” requests relief that would permit “X” to exclude certain commodity swaps

from its AUOE calculation until at least September 30, 2020. Assuming that the price

disruption is temporary, such relief would allow “X” to avoid the costs and disruptions

to customer relationships that would be entailed in MSP registration and compliance.

“X” recognizes, however, that if the unprecedented commodity prices that led to “X”

approaching the MSP registration threshold were to continue beyond the period of

requested relief and any extension, “X” would register as an MSP or be required to make

other adjustments to its business to reduce its AUOE below the applicable registration

threshold.

III.

DSIO No-Action Position

Based on the foregoing and the representations made by “X”, DSIO believes that a no-

action position is warranted

SP registration threshold were to continue beyond the period of

requested relief and any extension, “X” would register as an MSP or be required to make

other adjustments to its business to reduce its AUOE below the applicable registration

threshold.

III.

DSIO No-Action Position

Based on the foregoing and the representations made by “X”, DSIO believes that a no-

action position is warranted. Specifically, DSIO recognizes the unprecedented nature of

the decline in commodity prices that have brought “X” to the verge of the MSP

registration threshold. Accordingly, for the period from the date of this letter to and

including September 30, 2020, DSIO will not recommend that the Commission take an

enforcement action against “X” if it fails to include any swap in its AUOE calculation

that meets the following conditions (the “Excluded Swaps”):

1.

The swap is excluded from counting towards the swap dealer de minimis

threshold pursuant to paragraph (4)(i)(C) of the definition of “swap dealer” in

Commission regulation 1.3, or from being considered swap dealing activity

pursuant to paragraph (5) of the definition of “swap dealer” in Commission

regulation 1.3, each of which requires such swap to be entered into by “X” with a

customer in connection with originating a loan to that same customer; and

13 For example, the price of the WTI front month contract, which as of the date of this letter is below $30,

has not been below $40 since 2016 and before that since 2009. See

https://markets.ft.com/data/commodities/tearsheet/summary?c=WTI+Crude+Oil.

Further, the average price of WTI year-to-date and for the last five years is shown below:

2015

2016

2017

2018

2019

2020

$48.72

$43.58

$50.84

$64.90

$57.05

$50.73

See https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart.

has not been below $40 since 2016 and before that since 2009. See

https://markets.ft.com/data/commodities/tearsheet/summary?c=WTI+Crude+Oil.

Further, the average price of WTI year-to-date and for the last five years is shown below:

2015

2016

2017

2018

2019

2020

$48.72

$43.58

$50.84

$64.90

$57.05

$50.73

See https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart.

Major Swap Participant No-Action

Page 5

2.

The commodity underlying the swap is crude oil, natural gas, or natural gas

liquids.

DSIO may extend the period of relief for additional quarterly periods depending on

prevailing commodity market conditions. The relief provided by this letter is subject to

the condition that “X” provides DSIO with its AUOE calculation including and excluding

the Excluded Swaps:

(a)

As of the end of each calendar quarter during the period of relief until its quarter-

end AUOE including the Excluded Swaps exceeds the MSP registration threshold,

if ever; and

(b)

As of the end of each calendar month thereafter for the remainder of the period of

relief.

IV.

Conclusion

This letter, and the positions taken herein, represent the views of DSIO only, and does

not necessarily represent the position or view of the Commission or of any other office

or division of the Commission. The relief issued by this letter does not excuse persons

relying on it from compliance with any other applicable requirements contained in the

CEA or in Commission regulations. Further, this letter, and the positions taken herein,

are based upon the facts and circumstances presented to DSIO. Any different, changed,

or omitted material facts or circumstances might render the relief provided by this letter

void.

Finally, as with all staff letters, DSIO retains the authority to condition further, modify,

suspend, terminate, or otherwise restrict the terms of relief provided herein, in its

discretion

itions taken herein,

are based upon the facts and circumstances presented to DSIO. Any different, changed,

or omitted material facts or circumstances might render the relief provided by this letter

void.

Finally, as with all staff letters, DSIO retains the authority to condition further, modify,

suspend, terminate, or otherwise restrict the terms of relief provided herein, in its

discretion. Specifically with respect to this letter, DSIO retains the authority to, in

consultation with “X”, revisit the relief to the extent price activity and trends in the

relevant commodity markets become more stable for a sustained period.

If you have any questions concerning this correspondence, please contact Frank

Fisanich, Chief Counsel, DSIO, at (202) 418-5949 or ffisanich@cftc.gov.

Sincerely,

___________________________________

Joshua B. Sterling

Director

Division of Swap Dealer and Intermediary Oversight

Major Swap Participant No-Action

Page 6

cc:

Regina Thoele, Compliance

National Futures Association, Chicago

7 U.S.C. § 1a(33)

17 C.F.R. 1.3

Submitted Via Certified Mail and Electronically (dsioletters@cftc.gov)

March 17, 2020

Mr. Joshua Sterling

Director

Division of Swap Dealer and

Intermediary Oversight

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street NW

Washington, DC 20581

Re:

Request for Division of Swap Dealer and Intermediary Oversight Staff No-Action

Letter Pursuant to CFTC Regulation 140.99: Excluding Certain Loan-Related

Commodity Swaps from Certain Major Swap Participant Calculations

Dear Director Sterling:

As discussed with the staff of the Division of Swap Dealer and Intermediary Oversight

(the “Division” or “DSIO”) of the Commodity Futures Trading Commission (the “CFTC” or

“Commission”), “X”, an insured depository institution (“IDI”) and a subsidiary of “Y”,1

respectfully requests conditional, time-limited no-action relief from DSIO staff from including

certain loan-related swaps in the “Ot

As discussed with the staff of the Division of Swap Dealer and Intermediary Oversight

(the “Division” or “DSIO”) of the Commodity Futures Trading Commission (the “CFTC” or

“Commission”), “X”, an insured depository institution (“IDI”) and a subsidiary of “Y”,1

respectfully requests conditional, time-limited no-action relief from DSIO staff from including

certain loan-related swaps in the “Other Commodity” asset class in the calculation of

“Aggregate Uncollateralized Outward Exposure” in Paragraph 2 of the definition of

“Substantial Position” in CFTC Regulation 1.3, as discussed in more detail below.2 This

request reflects the impacts of the COVID-19 outbreak and the OPEC+ supply cut

disagreement on the commodities markets and the resulting impacts on certain calculations

that could trigger registration as a major swap participant (“MSP”), which would, in turn,

disrupt “X’s” lending and risk management services to U.S. commercial end-user customers.

“X” is an IDI that offers, through its commercial banking business, a wide range of

financing solutions to domestic commercial end-user customers that are oil and natural gas

exploration and production (“E&P”) companies. These E&P customers are small, medium and

large oil and natural gas E&P companies with footprints across many of the oil and natural gas

producing regions of the United States that rely on “X” as a source of funds for their operations.

1 [REDACTED]

2 See 17 C.F.R. 1.3, Substantial Position, ¶2; Further Definition of “Swap Dealer,” “Security-Based Swap

Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant,” “and “Eligible Contract

Participant,” 77 Fed. Reg. 30,596 (May 23, 2012).

nited States that rely on “X” as a source of funds for their operations.

1 [REDACTED]

2 See 17 C.F.R. 1.3, Substantial Position, ¶2; Further Definition of “Swap Dealer,” “Security-Based Swap

Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant,” “and “Eligible Contract

Participant,” 77 Fed. Reg. 30,596 (May 23, 2012).

2

Additionally, “X” offers risk-management products (e.g., commodity swaps) to those E&P

customers to hedge the volatility of commodity prices inherent to oil and natural gas production

and exploration. These ancillary services “X” offers to its customers provide the E&P

companies with the certainty of future cash-flows in volatile markets in a cost-effective manner.

Additionally, the hedging of the collateral (reserves), which secure the commodity swaps and the

loans offered by “X”, can allow the E&P customers greater loan amounts that they can use to

help grow their businesses and create U.S. jobs, while increasing the certainty of debt repayment

to “X”.3

I.

Discussion

A. Regulatory Background

The definition of “Major Swap Participant” in CFTC Regulation 1.3, which further

defines Section 1a(33) of the Commodity Exchange Act (“CEA”), sets forth three alternative

statutory tests that determine whether a person that is not a swap dealer or security-based swap

dealer is an MSP and therefore required to register as such:

1. The person maintains a “substantial position” in swaps or security-based swaps

for any of the major swap categories, excluding positions held to hedge or

mitigate commercial risk and certain hedging positions held by an employee

benefit plan (as defined in ERISA) (“Substantial Position Test”);

2. The person has outstanding swaps that create “substantial counterparty

exposure” that could have serious adverse effects on the financial stability of

the United States banking system or financial markets (“Substantial

Counterparty Exposure Test”); or

3

e commercial risk and certain hedging positions held by an employee

benefit plan (as defined in ERISA) (“Substantial Position Test”);

2. The person has outstanding swaps that create “substantial counterparty

exposure” that could have serious adverse effects on the financial stability of

the United States banking system or financial markets (“Substantial

Counterparty Exposure Test”); or

3. The person is a “financial entity” that is "highly leveraged,” is not subject to

capital requirements by a Federal banking entity and has a “substantial position

in one or more of the major swap categories (“Highly Leveraged Test”).4

We focus on the Substantial Position Test5 which provides that a person has a

“Substantial Position” with respect to the Other Commodity swap category if it has: (1)

“Aggregate Uncollateralized Outward Exposure” greater than $1 billion (“Test 1”); or (2)

“Aggregate Uncollateralized Outward Exposure” plus “Potential Future Exposure” greater

than $2 billion (“Test 2”).6 The exposures under Test 1 and Test 2 are based on daily averages

3 In order to ensure that it can offer competitively priced swaps to its customers as described above, “X”

generally manages the risk exposures arising from each of its customer-facing swaps by entering into offsetting

swaps with registered swap dealers or exchange traded futures.

4 See 17 C.F.R. 1.3, Major Swap Participant, ¶1.

5 The Substantial Counterparty Exposure Test and the Highly Leveraged Test are not the subject of this request

for relief.

6 See 17 C.F.R. 1.3, Substantial Position, ¶1(iv).

(Cont’d on next page)

res arising from each of its customer-facing swaps by entering into offsetting

swaps with registered swap dealers or exchange traded futures.

4 See 17 C.F.R. 1.3, Major Swap Participant, ¶1.

5 The Substantial Counterparty Exposure Test and the Highly Leveraged Test are not the subject of this request

for relief.

6 See 17 C.F.R. 1.3, Substantial Position, ¶1(iv).

(Cont’d on next page)

3

over all business days (as of close) in a fiscal quarter.7 If a person exceeds the thresholds in

Test 1 or Test 2 such person must register as an MSP within two months,8 subject to a one

fiscal quarter re-evaluation period if the calculation does not exceed the threshold by more

than twenty percent for the first breached quarter.9

The relief sought in this request is solely focused on the calculation of Aggregate

Uncollateralized Outward Exposure for the purposes of the definition of Substantial Position.10

To calculate the Aggregate Uncollateralized Outward Exposure, a person determines the value

of its swap positions with negative value in each swap category with respect to each

counterparty by marking-to-market using standard industry practices and applying netting

provisions. The person then deducts from that amount the aggregate collateral it posted with

respect to the swap positions.11 It should be noted that assets pledged as loan collateral and

that secure such swaps are not permitted to be deducted or otherwise accounted for in the

Aggregate Uncollateralized Outward Exposure calculation. Accordingly, because “X” does

not post collateral to its E&P counterparties with respect to Other Commodity swaps, the

Aggregate Uncollateralized Outward Exposure is driven by market conditions, specifically

commodity prices, and as commodity prices decline, “X’s” Aggregate Uncollateralized

Outward Exposure for Other Commodity swaps correspondingly increases

ized Outward Exposure calculation. Accordingly, because “X” does

not post collateral to its E&P counterparties with respect to Other Commodity swaps, the

Aggregate Uncollateralized Outward Exposure is driven by market conditions, specifically

commodity prices, and as commodity prices decline, “X’s” Aggregate Uncollateralized

Outward Exposure for Other Commodity swaps correspondingly increases.

The calculations set forth under the MSP definition, including the Aggregate

Uncollateralized Outward Exposure calculation, do not provide an exclusion for swaps that are

entered into by IDIs with a customer in connection with originating a loan with that customer;

however, such swaps are excluded from counting toward the swap dealer de minimis threshold

calculation set forth in Paragraph 4(i)(A) of the definition of “Swap Dealer” in CFTC

7 See 17 C.F.R. 1.3, Major Swap Participant, ¶3.

8 See id.

9 See 17 C.F.R. 1.3, Major Swap Participant, ¶4.

10 We are not aware of prior publicly available letters issued by Commission staff in response to similar

circumstances, as the circumstances and U.S. market impacts that are the subject of this request are

unprecedented. However, Commission staff has previously issued no-action relief to address market

uncertainty, as well as for not including certain swaps in the MSP calculations. See, e.g., CFTC Letter No. 19-

08, No-Action Relief in Connection With Certain Previously Granted Commission Determinations and

Exemptions, in Order to Account for the Anticipated Withdrawal of the United Kingdom From the European

Union (Apr. 5, 2019); CFTC Letter 19-09, Extension to UK Entities of Regulatory Relief Previously Granted to

European Union Entities in CFTC No-Action Letters: 12-70, 13-45, 17-64, 17-66, and 17-67 (Apr. 5, 2019);

CFTC Letter No

on With Certain Previously Granted Commission Determinations and

Exemptions, in Order to Account for the Anticipated Withdrawal of the United Kingdom From the European

Union (Apr. 5, 2019); CFTC Letter 19-09, Extension to UK Entities of Regulatory Relief Previously Granted to

European Union Entities in CFTC No-Action Letters: 12-70, 13-45, 17-64, 17-66, and 17-67 (Apr. 5, 2019);

CFTC Letter No. 12-20, Time-Limited No-Action Relief: Swaps in Agricultural and Exempt Commodities Not

to be Considered in Calculating Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis

Exception and Calculation of Whether a Person is a Major Swap Participant (Oct. 12, 2012); and CFTC Letter

12-21, Time Limited No-action Relief: Foreign Exchange Swaps and Foreign Exchange Forwards Not to be

Considered in Calculating Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis

Exception or in Calculating Substantial Position in Swaps or Substantial Counterparty Exposure for Purposes of

the Major Swap Participant Definition; Time-Limited No-action Relief for persons that meet the definitions of

Commodity Pool Operators and Commodity Trading Advisors Solely as a Result of their Foreign Exchange

Swap and Foreign Exchange Forward Activities (Oct. 12, 2012).

11 See 17 C.F.R. 1.3, Substantial Position, ¶2.

(Cont’d on next page)

4

Regulation 1.3.12 The definition of “Swap Dealer” in CFTC Regulation 1.3, which further

defines Section 1a(49) of the CEA, provides that IDIs may exclude certain swaps that are

executed in connection with originating loans to customers from counting towards the $8

billion swap dealer de minimis threshold

, 2012).

11 See 17 C.F.R. 1.3, Substantial Position, ¶2.

(Cont’d on next page)

4

Regulation 1.3.12 The definition of “Swap Dealer” in CFTC Regulation 1.3, which further

defines Section 1a(49) of the CEA, provides that IDIs may exclude certain swaps that are

executed in connection with originating loans to customers from counting towards the $8

billion swap dealer de minimis threshold. More specifically, Paragraph (4)(i)(C) of the

definition of “Swap Dealer” in CFTC Regulation 1.3 provides that certain IDI swaps entered

into with a customer in connection with originating a loan to that customer, subject to the

conditions set forth in that section, may be excluded solely for the purpose of determining

whether an IDI has exceeded the $8 billion aggregate gross notional amount threshold set forth

in Paragraph (4)(i)(A) of the definition of “Swap Dealer” in CFTC Regulation 1.3.13

Additionally, Paragraph (5) of the definition of “Swap Dealer” in CFTC Regulation 1.3

provides that swaps entered into by an IDI with a customer in connection with originating a

loan with that customer shall not be considered in determining whether the IDI is a swap

dealer, subject to the conditions set forth in that paragraph.14

B. Impacts of COVID-19 and OPEC+ Supply Cut Disagreement on MSP

Calculation

As discussed above, the volatility in the commodity markets, specifically, a significant

decrease in crude oil prices, corresponds to an increase in “X’s” Aggregate Uncollateralized

Outward Exposure related to client commodity swaps

he IDI is a swap

dealer, subject to the conditions set forth in that paragraph.14

B. Impacts of COVID-19 and OPEC+ Supply Cut Disagreement on MSP

Calculation

As discussed above, the volatility in the commodity markets, specifically, a significant

decrease in crude oil prices, corresponds to an increase in “X’s” Aggregate Uncollateralized

Outward Exposure related to client commodity swaps. The unprecedented drop in global

demand for crude oil as a result of the COVID-19 pandemic15 followed closely by the OPEC +

supply cut disagreement16 have resulted in the price of crude oil decreasing by approximately

48% year to date.17 Given the nature of “X’s” lending and risk management business with

E&P customers, the volatility and low oil prices associated with the above events have led to

an increased Aggregate Uncollateralized Outward Exposure calculation because such

calculation (1) is an average calculation of business days in a fiscal quarter; (2) does not

consider that the swaps are entered into by “X” in connection with originating the loan to the

E&P customer; and (3) does not consider that the swaps are collateralized by the collateral

posted by the E&P customer to “X” in connection with the loan.18

12 See 17 C.F.R. 1.3, Swap Dealer, ¶4(i)(A).

13 See 17 C.F.R. 1.3, Swap Dealer, ¶4(i)(C); see also, De Minimis Exception to the Swap Dealer Definition—

Swaps Entered Into by Insured Depository Institutions in Connection With Loans to Customers, 84 Fed. Reg.

12,450 (Apr. 1, 2019).

14 See 17 C.F.R. 1.3, Swap Dealer, ¶5.

15 See “WHO Responding to a Cluster of Pneumonia Cases in Wuhan,” World Health Organization (Jan. 4, 2020),

available at https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen.

16 See “Oil Prices Plunge After Russia-Saudi Split,” The Wall Street Journal (Mar

With Loans to Customers, 84 Fed. Reg.

12,450 (Apr. 1, 2019).

14 See 17 C.F.R. 1.3, Swap Dealer, ¶5.

15 See “WHO Responding to a Cluster of Pneumonia Cases in Wuhan,” World Health Organization (Jan. 4, 2020),

available at https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen.

16 See “Oil Prices Plunge After Russia-Saudi Split,” The Wall Street Journal (Mar. 6, 2020), available at

https://www.wsj.com/articles/saudi-russian-deadlock-pushes-brent-crude-to-2-year-low-11583500044

17 Crude Oil WTI (NYM $/bbl) Front Month contract price on March 13, 2020 closed at $31.73 compared to

$61.06 on December 31, 2019.

18 “X” also offers certain E&P customers natural gas swaps to hedge their related natural gas price risks. Natural

gas has also seen a decrease in price during this same period with the Generic 1st ‘NG’ Future (NYM $/MMBtu)

contract price on March 13, 2020 closing at $1.869 compared to $2.189 on December 31, 2019, a 15% decrease.

(Cont’d on next page)

5

C. Impacts on Commercial End User Customers and “X’s” Business

Commodity swaps that are entered into in connection with originating loans to E&P

customers are risk-reducing and collateralized by the underlying loan collateral (i.e.,

hydrocarbons). Such commodity swaps benefit the commercial end-user customer and “X” by

protecting the underlying assets from market risk and reducing credit risk of the commercial

end-user to “X”. In an environment of low energy prices, such commodity swaps also provide

customers with steady cash-flows. “X” wants to continue to serve the risk management needs

of domestic oil and natural gas E&P companies in a period of significant stress to the U.S.

energy markets.19 Further, the COVID-19 pandemic is causing IDIs to adapt to a new reality

of remote work, virtual meetings and rotation of employees in critical functions supporting

lending and ancillary swap dealing activity, with significant uncertainty as to the scope or

duration of such arrangements

domestic oil and natural gas E&P companies in a period of significant stress to the U.S.

energy markets.19 Further, the COVID-19 pandemic is causing IDIs to adapt to a new reality

of remote work, virtual meetings and rotation of employees in critical functions supporting

lending and ancillary swap dealing activity, with significant uncertainty as to the scope or

duration of such arrangements. Embarking on a large implementation project, such as

registration as an MSP, would be particularly challenging in this environment and would

detract resources from supporting the needs of clients during a time when their IDI’s role is

critically important.

Conditional, time-limited no-action relief from the MSP registration calculation that

recognizes the unique nature of the IDI relationship with E&P customers would allow “X” to

continue helping its E&P customers weather volatile market conditions without disrupting

current lending and risk management activities by reducing customer commodity swap

activity and/or redirecting resources to MSP registration efforts.

II.

Request for Relief

A. Scope and Duration of Relief Requested

The scope of relief requested in this section is time-limited and subject to the

conditions set forth below. “X” requests relief beginning on the date of the issuance of a letter

by DSIO and continuing through at least September 30, 2020.20 The specific CFTC regulation

from which this request seeks relief is the definition of “Aggregate Uncollateralized Outward

Exposure” in Paragraph (2) of the definition of “Substantial Position” in CFTC Regulation

1.3. The definitions of “Substantial Position” and “Aggregate Uncollateralized Outward

Exposure” are referenced in Paragraphs (1)(ii)(A) and (6)(ii)(B) of the definition of “Major

Swap Participant” in CFTC Regulation 1.3 for purposes of determining MSP registration

requirements. The related CEA section is 1a(33).

B

ragraph (2) of the definition of “Substantial Position” in CFTC Regulation

1.3. The definitions of “Substantial Position” and “Aggregate Uncollateralized Outward

Exposure” are referenced in Paragraphs (1)(ii)(A) and (6)(ii)(B) of the definition of “Major

Swap Participant” in CFTC Regulation 1.3 for purposes of determining MSP registration

requirements. The related CEA section is 1a(33).

B. Request for Relief for Not Including Certain Loan-Related Other Commodity

Swaps in the Aggregate Uncollateralized Outward Exposure Calculation

19 See “Russia Takes Aim at U.S. Shale Oil Producers,” The Wall Street Journal, (Mar. 13, 2020), available at

https://www.wsj.com/articles/russia-takes-aim-at-u-s-shale-oil-producers-11584052675

20 “X” believes that providing such relief through at least September 30, 2020 would provide a reasonable amount

of time to account for commodity market volatility discussed herein and the strained and redirected resources

resulting from the COVID-19 pandemic.

6

For the reasons discussed in this letter, we request that DSIO staff grant no-action

relief to “X” through at least September 30, 2020 to confirm that DSIO will not recommend

enforcement action to the Commission against “X” for not including in the calculation of

Aggregate Uncollateralized Outward Exposure a swap in the Other Commodity asset class that

meets the following conditions:

1. The swap is:

a. Excluded from counting towards the swap dealer de minimis threshold

pursuant to Paragraph (4)(i)(C) of the definition of “Swap Dealer” in

CFTC Regulation 1.3; and/or

b. Excluded from being considered swap dealing activity pursuant to

Paragraph (5) of the definition of “Swap Dealer” in CFTC Regulation

1.3;

2. The swap is entered into by “X” with a customer in connection with originating

a loan to that same customer; and

3. The commodity underlying the swap is crude oil, natural gas or natural gas

liquids.

III

r” in

CFTC Regulation 1.3; and/or

b. Excluded from being considered swap dealing activity pursuant to

Paragraph (5) of the definition of “Swap Dealer” in CFTC Regulation

1.3;

2. The swap is entered into by “X” with a customer in connection with originating

a loan to that same customer; and

3. The commodity underlying the swap is crude oil, natural gas or natural gas

liquids.

III.

Conclusion

As a result of the COVID-19 pandemic’s impact on the demand for energy

commodities and the OPEC+ supply cut disagreement, U.S. small, medium and large E&P

companies are under stress and require access to funding and risk management solutions

offered by “X”. Accordingly, without relief from DSIO staff from including certain loan-

related swaps in the Other Commodity swap category in the Aggregate Uncollateralized

Outward Exposure calculation, “X” may need to take measures to curtail its risk management

services and/or redirect resources to register as an MSP, which could adversely impact its

ability to meet the lending and risk management needs of domestic E&P customers, which

would in turn lead to disruption to those E&P customers’ businesses.

*

*

*

*

7

Thank you for your consideration of this very important issue to “X” and its E&P

customers. We look forward to discussing any part of this request with DSIO staff. Please

contact the undersigned at [REDACTED] or [REDACTED] with any questions or concerns.

Yours sincerely,

[REDACTED]

cc:

Frank Fisanich, Chief Counsel, DSIO, CFTC

Amanda Olear, Acting Deputy Director, Registration and Compliance, DSIO, CFTC