Corporate end users of swaps are breathing easier after theCommodity Futures Trading Commission (CFTC) earlier this monthproposed definitions to categorize swap users that are unlikely toaffect companies using swaps to hedge commercial risk. However,other concerns remain for companies, such as the CFTC's contentionthat it has the authority to impose margin requirements directly onend users.

Currently, corporate end users don't post margin on swaptransactions they use to hedge or mitigate business risks relatedto changing interest- and foreign-currency rates, commodity pricesand other factors. The Dodd-Frank financial reform legislationcreates a new category of swap users, called major swapparticipants (MSPs), that will be subject to margin requirementsand regulations similar to those imposed on swap dealers, and endusers worried they could fall into that category.

The CFTC proposal sets two thresholds for determining MSPstatus: companies with $5 billion in current uncollateralizedexposure and with $8 billion in current uncollateralized exposureplus potential future exposure.

Sam Peterson, a senior adviser in Chatham Financial's regulatoryadvisory services group, says most of his firm's customers will notexceed those thresholds.

The threshold calculation requires companies to multiply thenotional value of their swaps by pre-determined risk-factorpercentages based on the types of swaps and the duration of thepositions, then apply discounts based on netting and collateralheld against those exposures.

Peterson says the CFTC and the Securities and ExchangeCommission clearly incorporated public feedback when crafting thedefinitions.

“The fact that [the calculation] allows for netting, andessentially subtracts the collateral posted for the swap exposuresis helpful,” says Peterson, whose firm has worked closely on theissue with the Coalition of Derivatives End-Users, an umbrellagroup that includes Financial Executives International, theNational Association of Corporate Treasurers (NACT), the U.S.Chamber of Commerce and several other corporate tradeorganizations.

Thomas Deas, president of NACT and treasurer at FMC Corp.,praised regulators' broader definition of commercial risk in theproposal, since end-user swaps meeting the definition won't have togo through a clearinghouse.

“Many manufacturers are subject to indirect risks such as fuelcost adjustments from shipping companies, and the definition ofcommercial risk would be broad enough to allow them to hedge thatrisk,” Deas says.

There are still some outstanding issues keeping end users onedge, however. For one, notes Deas, it remains unclear whetherregulators will consider foreign-exchange forward transactions asderivatives, a decision the Treasury Department is likely to makenext year. And in cases where a company nets multiple swapsinternally before engaging a dealer, regulators must decide whetherto count the separate swaps or the netted amount. Adverse decisionson either issue could push some companies into MSP territory.

Another issue is whether the regulators can impose marginrequirements directly on nonfinancial companies that use swaps.CFTC Chairman Gary Gensler has said he believes they can, althoughduring a Dec. 1 open meeting he suggested he would not use suchauthority. The Federal Reserve oversees the bank dealers that aretypically the swap counterparties of corporate end users, so itsdecision on the issue is more relevant. Sources say Fed officialshave discussed imposing lesser margin requirements on corporationsthan MSPs or dealers would face.

Last week, 11 organizations representing the financial servicesindustry, including the Securities Industry and Financial MarketsAssociation, the American Bankers Association and the FuturesIndustry Association, sent a comment letter to both the SEC and the CFTC asking regulatorsto slow the pace of their work on derivatives regulations to allowfirms more time to comment on proposed rules and comply with allthe new rules that are to be imposed.

For more on companies' concerns about swaps regulations,see Corporate End Users in Jeopardy.