February 4th, 2011
Elizabeth M. Murphy
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: File Number S7-43-10 – End-User Exception to Mandatory Clearing of Security-Based Swaps
Dear Ms. Murphy:
On behalf of Americans for Financial Reform, thank you for the opportunity to comment on the
proposed rule, “End-User Exception to Mandatory Clearing of Security-Based Swaps.” Americans for
Financial Reform is an unprecedented coalition of over 250 national, state and local groups who have
come together to reform the financial industry. Members of our coalition include consumer, civil rights,
investor, retiree, community, labor, religious and business groups as well as economists.
Reckless swaps and derivatives trading played a critical role in the financial crisis, turning the fallout
from the crash of the domestic housing market into a global economic catastrophe. The Dodd-Frank
Wall Street Reform and Consumer Protection Act put in place key statutory changes intended to prevent
the recurrence of a systemic crisis like the one experienced in 2008. It is now up to the regulators to
ensure the success of Dodd-Frank by putting rules in place that are comprehensive and do not create
loopholes that will be exploited in the future. The proposed rule will be critical in providing the
Commission a comprehensive view of the security-based swap market and giving regulators access to
data critical to the safety and soundness of the market.
Proposed Rule 3Cg-1(a)(5)¸ Meeting Financial Obligations
Proposed Rule 3Cg-1(a)(5) requires end-users, when relying on the clearing exception to engage in an
over-the-counter swap transaction, “to provide certain information to the Commission regarding the
methods used to mitigate credit risk.” The proposed rule defines several types of credit risk mitigation
tools and requires end-users to disclose to the Commission whether any or all of these tools are used in
the security-based swap transaction in question. We agree that this information should be disclosed.
AFR believes, however, that in order to ensure the financial integrity of the security-based swaps
market, the Commission should collect substantially more information.
AFR urges the SEC to require additional disclosures designed to provide a clear picture of financial risks
associated with transactions believed to be eligible for the exception. The required “Financial Obligation
Notice” should be strengthened to require information about:
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the types of collateral provided by the end-user and the impact of posting collateral on the end-
user’s ability to meet its financial obligations;
whether the collateral requirements are unilateral or bilateral;
contractual terms and whether they are triggered by changes in the credit-rating or other financial
circumstances of either of the counterparties;
whether any “third-party” guarantor of the end-user’s obligations is a parent or affiliate of the
person invoking the end-user exception; and
the identity of any collateral agent, custodian or other entity involved in segregating collateral.
In Footnote 28 of the proposed rule, the Commission states that in some swaps transactions,
counterparties “choose not to mitigate credit risk and instead rely on the general creditworthiness of
their opposite counterparty, given the circumstances and financial terms of the transaction.”1 The
Commission goes on to reference guidance issued by the Office of the Comptroller of the Currency that
states “[c]redit exposure arising from derivative activities should be addressed within the same
framework used to assess credit risk in traditional banking activities.”2 In other words, when an end-user
enters an uncollateralized swap with a bank, the bank is still taking on credit risk and that risk is
substantially similar to an uncollateralized loan or a credit facility. An uncollateralized swap transaction,
therefore, is really two transactions – a hedging transaction and a loan. The bank charges the end-user
for this implied loan by embedding a fee in the swap transaction.
If Dodd-Frank is to be implemented in a way that truly brings transparency to the derivatives markets,
these two transactions must be separately reported to the SEC. Americans for Financial Reform urges
the SEC to include in the Financial Obligation Notice a disclosure that breaks out the amount paid by the
end-user for the swap and, separately, the fee paid for the implied loan. This will help the Commission
to more effectively evaluate the derivatives market. More importantly, however, it will provide end-
users with the information they need to shop for the best price and make informed decisions about
whether choosing to use the regulated, cleared swaps market is more cost effective.
Required Consideration of a Clearing Exemption for Small Banks, Savings Associations, Farm Credit
System Institutions and Credit Unions
The Dodd-Frank Act directs the Commission to consider whether to exempt from mandatory clearing
banks, savings associations, farm credit system institutions and credit unions with less than $10 billion
in assets. Proposed Rules 3Cg-a(b) and (c) would exempt such institutions from mandatory clearing.
The Commission’s stated reason for proposing the exemption is that smaller financial institutions “may
face difficulties in meeting the burdens associated with a mandatory clearing requirement due to their
limited operations or infrequent use of security-based swaps.”
1
Footnote 28 of File No. S7-43-10.
2
Comptroller of the Currency, Comptroller’s Handbook: Risk Management of Financial Derivatives, 43 (1997) available at
http://www.occ.gov/static/publications/handbook/deriv.pdf.
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Americans for Financial Reform urges the Commission to ensure that any financial institution that
engages in more than de minimis activity in the swaps market is required to clear, including small banks,
savings associations, farm credit system institutions and credit unions. If these institutions’ security-
based swap activity is truly de minimis, they should still be required to file Financial Obligation Notices
in order to ensure that regulators have a comprehensive view of activity in the security-based swap
market and a clear picture of the counterparty relationships.
* * *
Congress has imposed on the SEC the heavy responsibility of adopting regulations that bring meaningful
reform to the over-the-counter derivatives markets and help to prevent a repetition of the devastating
financial crisis of 2008. The proposed rule falls short of what is needed to meet that responsibility.
Accordingly, we urge the Commission to require entities exempt from clearing security-based swaps to
disclose substantially more information than would be required by the proposed rule and to ensure that
any financial entity that engages in more than a de minimis amount of security-based swap transactions
is required to clear.
Thank you again for this opportunity to share our views on the proposed rule. If you have the further questions,
please contact Heather Slavkin, AFL-CIO at (202) 637-5318.
Sincerely,
Americans for Financial Reform
www.ourfinancialsecurity.org
Following are the partners of Americans for Financial Reform.
All the organizations support the overall principles of AFR and are working for an accountable, fair and
secure financial system. Not all of these organizations work on all of the issues covered by the coalition
or have signed on to every statement.
A New Way Forward
AARP
ACORN
AFL-CIO
AFSCME
Alliance For Justice
Americans for Democratic Action, Inc
American Income Life Insurance
Americans for Fairness in Lending
Americans United for Change
Calvert Asset Management Company, Inc.
Campaign for America’s Future
Campaign Money
Center for Digital Democracy
Center for Economic and Policy Research
Center for Economic Progress
Center for Media and Democracy
Center for Responsible Lending
Center for Justice and Democracy
Center of Concern
Change to Win
Clean Yield Asset Management
Coastal Enterprises Inc.
Color of Change
Common Cause
Communications Workers of America
Community Development Transportation Lending Services
Consumer Action
Consumer Association Council
Consumers for Auto Safety and Reliability
Consumer Federation of America
Consumer Watchdog
Consumers Union
Corporation for Enterprise Development
CREDO Mobile
CTW Investment Group
Demos
Economic Policy Institute
Essential Action
Greenlining Institute
Good Business International
HNMA Funding Company
Home Actions
Housing Counseling Services
Information Press
Institute for Global Communications
Institute for Policy Studies: Global Economy Project
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International Brotherhood of Teamsters
Institute of Women’s Policy Research
Krull & Company
Laborers’ International Union of North America
Lake Research Partners
Lawyers' Committee for Civil Rights Under Law
Leadership Conference on Civil Rights
Move On
NASCAT
National Association of Consumer Advocates
National Association of Neighborhoods
National Community Reinvestment Coalition
National Consumer Law Center (on behalf of its low-income clients)
National Consumers League
National Council of La Raza
National Fair Housing Alliance
National Federation of Community Development Credit Unions
National Housing Trust
National Housing Trust Community Development Fund
National NeighborWorks Association
National People’s Action
National Council of Women’s Organizations
Next Step
OMB Watch
Opportunity Finance Network
Partners for the Common Good
PICO
Progress Now Action
Progressive States Network
Poverty and Race Research Action Council
Public Citizen
Sargent Shriver Center on Poverty Law
SEIU
State Voices
Taxpayer’s for Common Sense
The Association for Housing and Neighborhood Development
The Fuel Savers Club
The Seminal
TICAS
U.S. Public Interest Research Group
United Food and Commercial Workers
United States Student Association
USAction
Veris Wealth Partners
Western States Center
We the People Now
Woodstock Institute
World Privacy Forum
UNET
Union Plus
Unitarian Universalist for a Just Economic Community
Partial list of State and Local Signers
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Alaska PIRG
Arizona PIRG
Arizona Advocacy Network
Arizonans For Responsible Lending
Association for Neighborhood and Housing Development NY
Audubon Partnership for Economic Development LDC, New York NY
BAC Funding Consortium Inc., Miami FL
Beech Capital Venture Corporation, Philadelphia PA
California PIRG
California Reinvestment Coalition
Century Housing Corporation, Culver City CA
CHANGER NY
Chautauqua Home Rehabilitation and Improvement Corporation (NY)
Chicago Community Loan Fund, Chicago IL
Chicago Community Ventures, Chicago IL
Chicago Consumer Coalition
Citizen Potawatomi CDC, Shawnee OK
Colorado PIRG
Coalition on Homeless Housing in Ohio
Community Capital Fund, Bridgeport CT
Community Capital of Maryland, Baltimore MD
Community Development Financial Institution of the Tohono O'odham Nation, Sells AZ
Community Redevelopment Loan and Investment Fund, Atlanta GA
Community Reinvestment Association of North Carolina
Community Resource Group, Fayetteville A
Connecticut PIRG
Consumer Assistance Council
Cooper Square Committee (NYC)
Cooperative Fund of New England, Wilmington NC
Corporacion de Desarrollo Economico de Ceiba, Ceiba PR
Delta Foundation, Inc., Greenville MS
Economic Opportunity Fund (EOF), Philadelphia PA
Empire Justice Center NY
Enterprises, Inc., Berea KY
Fair Housing Contact Service OH
Federation of Appalachian Housing
Fitness and Praise Youth Development, Inc., Baton Rouge LA
Florida Consumer Action Network
Florida PIRG
Funding Partners for Housing Solutions, Ft. Collins CO
Georgia PIRG
Grow Iowa Foundation, Greenfield IA
Homewise, Inc., Santa Fe NM
Idaho Nevada CDFI, Pocatello ID
Idaho Chapter, National Association of Social Workers
Illinois PIRG
Impact Capital, Seattle WA
Indiana PIRG
Iowa PIRG
Iowa Citizens for Community Improvement
JobStart Chautauqua, Inc., Mayville NY
La Casa Federal Credit Union, Newark NJ
Low Income Investment Fund, San Francisco CA
www.ourfinancialsecurity.org
Long Island Housing Services NY
MaineStream Finance, Bangor ME
Maryland PIRG
Massachusetts Consumers' Coalition
MASSPIRG
Massachusetts Fair Housing Center
Michigan PIRG
Midland Community Development Corporation, Midland TX
Midwest Minnesota Community Development Corporation, Detroit Lakes MN
Mile High Community Loan Fund, Denver CO
Missouri PIRG
Mortgage Recovery Service Center of L.A.
Montana Community Development Corporation, Missoula MT
Montana PIRG
Neighborhood Economic Development Advocacy Project
New Hampshire PIRG
New Jersey Community Capital, Trenton NJ
New Jersey Citizen Action
New Jersey PIRG
New Mexico PIRG
New York PIRG
New York City Aids Housing Network
NOAH Community Development Fund, Inc., Boston MA
Nonprofit Finance Fund, New York NY
Nonprofits Assistance Fund, Minneapolis M
North Carolina PIRG
Northside Community Development Fund, Pittsburgh PA
Ohio Capital Corporation for Housing, Columbus OH
Ohio PIRG
OligarchyUSA
Oregon State PIRG
Our Oregon
PennPIRG
Piedmont Housing Alliance, Charlottesville VA
Michigan PIRG
Rocky Mountain Peace and Justice Center, CO
Rhode Island PIRG
Rural Community Assistance Corporation, West Sacramento CA
Rural Organizing Project OR
San Francisco Municipal Transportation Authority
Seattle Economic Development Fund
Community Capital Development
TexPIRG
The Fair Housing Council of Central New York
The Loan Fund, Albuquerque NM
Third Reconstruction Institute NC
Vermont PIRG
Village Capital Corporation, Cleveland OH
Virginia Citizens Consumer Council
Virginia Poverty Law Center
War on Poverty - Florida
WashPIRG
Westchester Residential Opportunities Inc.
Wigamig Owners Loan Fund, Inc., Lac du Flambeau WI
www.ourfinancialsecurity.org
WISPIRG
www.ourfinancialsecurity.org
