Fewer Energy Cos to Be Impacted by Anticipated Swap Dealer Ruling

The Commodity Futures Trading Commission (CFTC) is expected to rule Wednesday on the definition of a swap dealer, settling a controversial debate that has taken place since the Dodd-Frank Act was passed two years ago.

Initially, the notional value of a company, or the total value of a leveraged position's assets, was anticipated to be around $100 million under the definition.

However, the CFTC is expected to rule that a swap dealer is a company with a notional value ranging between $3 billion and $8 billion, said William F. Hederman, director of Deloitte & Touche LLP's Enterprise Risk Service practice, in an interview with Rigzone.

"The number of upstream oil and gas companies that could be classified as a swap dealer has been an issue the industry has been trying to address," said Hederman, who anticipates that many energy-related companies should escape the financial burden of being a swap dealer.

The upstream energy industry has faced a hard-fought battle in seeking a definition of swap dealer that would not have an adverse affect on their risk management plans, Hederman commented.

The Dodd-Frank Act was supposed to focus on the financial industry, but because the energy industry uses derivatives so frequently, the criteria that determines whether a company is a swap dealer impacts almost every part of the energy business.

Dodd-Frank did not spell out the notional value a company had to be above to be classified as a swap dealer; the CFTC was expected to come up with a number. A low notional value was initially thought to be passed, which would have meant that only the smallest mom and pop producers and the smaller gas and electric utilities would have been exempted.

A company's status as a swap dealer would impact how much money an oil and gas company has to invest, as the margin requirements would eat up a significant portion of a company's capital. For oil and gas companies, this could limit exploration and production activity.

The heavy paperwork and additional capital requirements the rule would bring has had many companies looking into the matter already. Several companies that Deloitte has worked with realize their current financial systems need significant change to accommodate the requirements.

"If the CFTC rules [today], the clock starts ticking 60 days after the definition is published, which leaves companies a short time to get ready" for the new rule, said Hederman.


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