CFTC Commissioner Scott D O’Malia: Not all end-users are created equal
11 May 2011
Commissioner Scott D O’Malia covered the following three main topics: Who are the end-users; what did Congress say about the treatment of end-users; and how does the CFTC rule proposals treat end-users.
Are All End-Users the Same?
The non-clearing end-user class consists of commercial end-users, corporate end-users and municipalities. Each uses swaps for different reasons, and Congress recognised as much when it drafted the end-user clearing exemption. Commercials use commodities to produce, manufacture, process or merchandise goods, and they use the swaps market to lock in long-term prices to finance exploration and drilling projects and to hedge price, currency, rate and commodity risk. These entities - companies like yours - have tangible assets, employ thousands of people, and primarily use the swaps market to hedge interest rate and foreign currency risk.
In contrast to the non-clearing end-user class, the clearing end-user class consists of financial end-users and retirement end-users. They are subject to the mandatory clearing requirement and they must post initial and variation margin to a swap dealer on every uncleared trade. Financial end-users are hedge funds, private equity funds, endowments and other financial entities that do not generate revenue from commercial activity, but take speculative positions in the market. Retirement end-users consist of entities whose sole obligation is to preserve capital and generate returns for the retirement benefit of others. This category includes ERISA plans and pension funds. They generally use the swaps market to hedge the fixed income exposure associated with their bond portfolios, and to gain customised exposure to certain asset classes.
© CFTC - Commodity Futures Trading Commission
