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On February 15, APGA filed comments with the Prudential Regulators (Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System) in response to a proposed rulemaking that would implement a new approach for calculating the exposure amount of derivative contracts under the agencies’ regulatory capital rule. The proposed approach, called the standardized approach for counterparty credit risk (SA-CCR), would replace the current exposure methodology (CEM) as the methodology for calculating advanced approaches total risk-weighted assets under the capital rule. These technical changes would require banking institutions to hold much more capital for natural gas swaps. And this would result in higher costs that would be imposed on a swap or energy swap transactions.

In its comments, APGA communicates how its members use swaps to reduce the volatility of natural gas prices paid by their consumers. The comments also discuss how APGA members utilize natural gas prepays to enter into long-term supply for their consumers and communicate that a critical component of a prepay is a unique form of matched commodity swaps that allow the parties to hedge their respective exposures to the changing price of the natural gas. APGA states that the end result of the proposed rule is that swap transaction costs for end users would be higher, and there would be less market liquidity. APGA further communicates that while the proposed rule is a direct requirement on banks, if implemented it would have indirect, adverse and material impacts on end-users, such as public gas systems, that routinely rely on derivatives executed with bank counterparties to hedge the risk associated with their commercial operations.

A copy of APGA’s comments to the prudential regulators is available on the APGA website.

For questions on this article, please contact Dave Schryver of APGA staff by phone at 202-464-2742 or by email at dschryver@apga.org.