ABA Letter Regarding the Petition for Rulemaking on the Definition of Eligible Contract Participant in CEA Section 1a(18)

The American Bankers Association (ABA) is requesting guidance on rulemaking in an interpretive letter on exemptive relief from the CFTC and SEC on the eligible contract participant (ECP) definition in CEA Section 1a(18), which is incorporated by reference in SEA Section 3(a)(65). As a result of the Dodd-Frank Act, only ECPs will be able to enter into over-the-counter (OTC) swaps. Without clarity as to the scope of the ECP definition, banks will not be able to enter into swaps with persons that may not be ECPs (given the risk of violating the CEA by entering into prohibited transactions). This is likely to have a chilling effect on the lending market, as many bank loans are tied to interest rate swaps.

In the letter, the ABA urged the Commission to provide relief expeditiously so that loan officers will have the information that they need to continue underwriting loans and so that there is no undue disruption in lending. The ABA further noted that the uncertainty as to the definition of the term "swap" is already beginning to have an impact as loan officers consider commitments that may close on or after the October effective date.

Among the questions as to which the ABA requested comment are (i) what it means to have "amounts invested on a discretionary basis," (ii) how "joint investments" held by spouses and co-borrowers are treated, (iii) whether sole proprietorships are treated like individuals, (iv) how swaps are to be treated in connection with real estate loans, (v) whether every obligor on a transaction must qualify as an ECP, (vi) whether every guarantor of a transaction must qualify as an ECP, and (viii) as to the scope of required procedures to verify ECP status.

Lofchie Comment: The ABA is putting some very hard and important questions to the CFTC (and the SEC as well, although the primary relevance of the questions is as to CFTC-regulated swaps). Up until now, the CFTC has tended to answer questions of this type by asserting either the broadest possible jurisdiction and the widest possible prohibitions, or by declining to give any meaningful guidance; e.g., saying that the regulators would decide treatment retrospectively in light of (undefined) "facts and circumstances." However, I think it will be difficult for the CFTC (and the SEC) to avoid directly confronting the questions put to them by the ABA. Further, if the regulators respond in a way that limits the ability of banks to provide interest rate swaps in connection with loans, then that is likely to have at least some negative effect on lending in the United States at a time when the government is seeking to boost the economy. In short, the questions in the letter bring home the reality that many of the requirements of Dodd-Frank will have a negative impact on financing; the questions raised by the letter go to the scope of that negative impact.

Another point raised by the letter is the incredible clunkiness of the regulatory structure created by Dodd-Frank. As the letter points out (on page 3), interpretative action of the type requested by the ABA seems to require joint action by the CFTC and the SEC, which action can be taken only after consultation with the Federal Reserve Board. In short, the statute almost mandates that the regulators will move very slowly if they can move at all.

Cross-Reference(s): Commodity Exchange Act Section 1a(18) and Exchange Act Section 3(a)(65) (Eligible Contract Participant).

View letter in full here (links externally to SEC website).