Congressional Correspondence

On December 16, the Commodity Futures Trading Commission (CFTC) approved a final rule addressing margin requirements for uncleared swaps for swap dealers and major swap participants. APGA filed comments and met with CFTC staff on this rulemaking. Both the proposed rule and the final rule specifically exempt transactions with non-financial end-users—such as public natural gas systems—from margin requirements, which is a positive outcome for APGA members. However, in its comments and in meetings with CFTC staff, APGA raised concerns regarding the potential impact of margin requirements imposed on certain transactions between two swap dealers or major swap participants. The issue of concern for APGA is that a back-to-back swap transaction is a component of a natural gas prepayment transaction—the use of tax-exempt financing for the long-term purchase of natural gas. The first half of the swap transaction would be between a public natural gas system or joint action agency and a swap dealer or producer, and as a result that swap would be exempt from margin requirements; the back end of the swap transaction would likely be between two swap dealers and therefore would not not be exempt from having margin requirements imposed upon it. The concern from APGA’s perspective is that if margin requirements are imposed on the back end of the swap transaction, those costs would ultimately be passed onto the public natural gas system or joint action entering into the prepay. APGA argued, among other things, that the swap associated with a prepay is a “tear-up” swap and there is not any market exposure to any of the counterparties. The final rule approved by the CFTC is silent as to whether margin requirements would have to be posted on these back-to-back transactions at this time. However, the final rule did note that the CFTC considered the issue as the final rule states, “The Commission notes that capital requirements of Covered Swap Entities are outside the scope of this rulemaking and therefore is not addressing the capital implications of Municipal Prepayment Transactions at this time.” APGA will discuss this issue further at its upcoming committee meetings scheduled for January 25 and 26 in Tucson, Ariz. One specific concern will be how banks will handle prepay transactions in the future. For example, will banks require margin requirements on these transactions and what impact will this have on the cost of the prepay?

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