Are commodity merchants "swap dealers" by any other name?

Tue Feb 21, 2012 3:40pm EST
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By Chris Baltimore

HOUSTON (Reuters) - Big energy companies like Royal Dutch Shell and commodity merchants like Cargill have a simple argument in pushing back against looming new swap market rules: We're not a bank, so don't regulate us like one.

But their efforts to avoid being branded a "swap dealer," a designation that brings with it greater scrutiny and onerous new rules, tend to sidestep the fact that, in one small but important way, most of them trade exactly like a bank.

For much of the past decade, companies including BP Plc, U.S. conglomerate Koch and Swiss-based trader Vitol have quietly offered their hedging strategies and risk management savvy to other firms, often going head to head with banks like Goldman Sachs and Morgan Stanley to pitch airlines, utilities or producers on ways to hedge prices.

Now, a pivotal rule in the financial overhaul of the $700 trillion derivatives market may force them into a stark choice: retain their third-party swap-dealing desks and shoulder the mantle of extra regulation; or cede the hard-won and potentially lucrative prize back to the big banks.

The Commodity Futures Trading Commission (CFTC) on Tuesday once again delayed a high-stakes vote on definitions for "major swap participant" and "swap dealer," designations that will determine which companies will face heightened regulations. The CFTC gave no reason for removing the rules from the agenda of its planned February 23 meeting.

It is the latest in a series of delays on these controversial definitions that the CFTC is jointly working on with the Securities and Exchange Commission.

Commodity companies argue that although they may trade billions of dollars a year in swaps, they should be spared the CFTC regulations because they use the market principally to shield themselves from risks associated with the physical assets they own -- be it an oil well, refinery, or power plant.

While few dispute that the bulk of such trades are made on behalf of the company's own risks, these firms are also a visible presence in the world of third-party sales, said Chris Thorpe, executive director of energy derivatives at INTL FC Stone, a broker that also offers risk management services.   Continued...