A swap is a commodity or financial instrument generally traded over-the-counter rather than on a regulated commodity exchange. Swaps involve the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities or otherwise shifting risks, and are used most commonly in financial instruments. But under the Dodd-Frank financial regulatory reform law, the CFTC and Securities and Exchange Commission (SEC) are required to develop and implement regulations governing swaps, including determining what entities will be labeled as swap dealers and thereby subjected to extensive registration, reporting, recordkeeping and other requirements.
In a statement submitted recently to the CFTC, the NGFA urged the agency to apply the swap dealer definition to financial firms, and not to bona fide hedgers that are end-users of swaps or offer them as risk-management tools to customers that have a physical exposure to the pricing of commodities in their business operations.
"At a time of significant volatility in agricultural markets, producers and agribusinesses need a range of risk-management tools to optimize income from the marketplace and to hedge their risk," wrote NGFA Risk Management Committee Chairman Matt Bruns. "Defining firms that provide these services as 'swap dealers' very well could have the perverse and unintended effect of limiting risk-management activities and tools."
In a second statement submitted to the CFTC, the NGFA also supported the agency's proposal to implement a "robust" end-user exception that would exempt bona fide hedgers from the requirement under the Dodd-Frank law to clear over-the-counter swap transactions through regulated commodity exchanges. Congress included a provision in the law that would exempt commercial end-users of swaps from the clearing requirement so as not to burden them or their customers with added transaction costs, and in recognition that such commercial end-users present a much lower risk than financial entities that enter into swaps for investment or speculative purposes.
"It is clear that the intent of Congress in legislating an end-user exception was to minimize costs for commercial end-users, thereby not burdening either party to a swap with new and unnecessary costs that would be rolled into the transaction and make their way to the consumer," wrote Bruns, vice president, corn processing for Archer Daniels Midland Co., Decatur, Ill. The NGFA was very supportive of including an end-user exception in the law.
