June 1, 2017

The Honorable Steven Mnuchin Secretary U.S. Department of the Treasury 1500 Pennsylvania Avenue, NW Washington, D.C. 20220

Re: 13772: Core Principles for Regulating the United States Financial System

Dear Secretary Mnuchin:

The Coalition for Derivatives End-Users (“Coalition”) is pleased to submit this letter in support of the core principles enumerated in Executive Order 13772, titled “Core Principles for Regulating the United States Financial System” (“Executive Order”).1 As discussed below, the Coalition believes that the U.S. Department of the Treasury (“Treasury”) should advocate for and/or help implement legislative, regulatory, and other administrative solutions that advance the core principles and that will remove barriers to raising capital and market liquidity in the United States.

I. THE COALITION FOR DERIVATIVES END-USERS

The Coalition represents commercial end-user companies that employ derivatives and derivatives strategies primarily to manage risks, enhance their competitiveness, and provide stable pricing to their customers. Hundreds of companies and industry trade associations have been active in the

Coalition on both legislative and regulatory matters,2 and our message is straightforward: financial regulatory reform measures should promote economic stability and transparency without imposing undue burdens on commercial end-users, which are the engines of the U.S. economy. Imposing unnecessary regulation on commercial end-users—parties that did not contribute to the 2008-2009 financial crisis—would fuel economic instability, restrict job growth, decrease productive investment, and hamper U.S. competitiveness in the global economy.

For commercial end-users, to hedge is to promote the efficient and less risky functioning of their business. The alternative (i.e., not hedging) would create unacceptable levels of commercial risks. For example, U.S. commercial end-users engaging in significant sales of U.S. products overseas will need to account for currency exchange risks. Revenue generated by these sales has the potential to amount to serious losses should the price of foreign currency change in relation to the

1 President Donald J. Trump, Executive Order 13772: Core Principles for Regulating the United States Financial System, 82 Fed. Reg. 9965 (Feb. 3, 2017), available at https://www.whitehouse.gov/the-press- office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states [herein after the “Executive Order”].

2 For a list of companies and trade associations that have been active in the Coalition, please see http://coalitionforderivativesendusers.com/AboutUs/coalition-members.

Hon. Steven Mnuchin June 1, 2017 Page 2 U.S. dollar. Derivatives hedges help to stabilize price fluctuation by locking in predetermined prices, thus freeing up capital that would otherwise need to be stockpiled as a cushion against unexpected market volatility. The use of derivatives to hedge commercial risk benefits the global economy by allowing a range of businesses—from manufacturing to healthcare to agriculture to energy to technology—to improve their financial planning and forecasting, offer more stable prices to consumers, and contribute to more stable economic growth.

Duplicative, inefficient, and overtaxing regulations that are imposed on financial institutions— which are often the counterparties to commercial end-users for their derivatives transactions— have the tangible effect of increasing costs for commercial end-user derivatives transactions, reducing market liquidity, and restricting end-users’ ability to obtain financing necessary for short- term operations and long-term growth of their businesses. The increased costs, which are passed on to U.S. businesses by regulated financial institutions, along with restrictions on financial institutions to engage in market making activities, effectively reduces available capital and prevents end-users from reinvesting in the growth of their businesses and establishing new jobs for American workers.

Therefore, the Coalition believes it is important that U.S. regulatory policy consider the comprehensive impacts that the full suite of financial regulations can have on commercial end- users’ opportunities to effectively and cost-efficiently manage their exposures to volatile market risks and access the capital markets. In doing so, U.S. regulatory policy will be better aligned with the goal of achieving sustainable U.S. growth.

II. THE CORE PRINCIPLES OF THE EXECUTIVE ORDER

The Coalition supports the seven core principles espoused in the Executive Order (the “Core Principles”), which are designed to encourage U.S. economic growth and mitigate risks to the U.S. financial system. The Coalition also supports the Executive Order’s directive to examine and report to the President whether any “existing U.S. laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other government policies that inhibit Federal regulation of the U.S. financial system in a manner consistent with those [C]ore [P]rinciples.”3 We believe that it is appropriate to reexamine the financial regulatory reform measures that were enacted and issued in response to the 2008-2009 financial crisis, and to determine whether they are promoting economic growth or are instead imposing unnecessary complexity and undue hardships on U.S. businesses.

In furtherance of the Executive Order’s stated purpose, we have identified several “laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies,” that we believe are inconsistent with the Core Principles.4 In addition, we propose legislative, regulatory, and other policy reforms that would directly complement and address the Core

3 Executive Order, Sec. 2.

4 Id.

2 Hon. Steven Mnuchin June 1, 2017 Page 3

Principles.5 In particular, we note that the proposals we discuss in this letter would support and promote the Core Principles by:

1. Empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth by ensuring that commercial end-users can pass on cost savings to American consumers;

2. Preventing taxpayer-funded bailouts by appropriately balancing the needs for bank capital requirements sufficient to weather financial market crises and commercial end-user access to affordable risk-mitigation solutions;

3. Fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as and information asymmetry, by directly studying the cumulative economic impacts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) and other financial regulations on both capital-raising activities of U.S. commercial end-users and market-wide liquidity in the U.S.;6

4. Enabling [U.S. commercial end-users] to be competitive with foreign firms in domestic and foreign markets by addressing and removing the regulatory disparities that currently benefit foreign businesses over U.S. businesses;

5. Advancing American interests in international financial regulatory negotiations and meetings by advocating for U.S. business interests in connection with foreign matters (e.g., “Brexit”) and focusing on international harmonization;

6. Making regulations efficient, effective, and appropriately tailored by recognizing the unique role that commercial end-users play in the U.S. economy and ensuring that commercial end-users are not unduly burdened by such regulations; and

7. Restoring public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework by ensuring that regulations deepen market liquidity, protect and encourage capital raising, and ultimately provide benefits to U.S. businesses and American consumers.7

The Coalition respectfully requests that Treasury (in coordination with the member agencies of the Financial Stability Oversight Council) consider and support the legislative, regulatory, and other policy reforms discussed in the sections below, which we believe are necessary to help enable end- users to effectively manage risks, remove barriers to raising capital, strengthen U.S. businesses, and grow our economy.

5 Id.

6 Pub. L. 111-203, 124 Stat. 1376 (2010).

7 Executive Order, Sec. 1.

3 Hon. Steven Mnuchin June 1, 2017 Page 4

III. LEGISLATIVE INITIATIVES

Despite congressional efforts to provide end-users with relief from some of the costliest regulations promulgated under Title VII of Dodd-Frank, commercial end-users still face significant burdens in seeking to comply with some Dodd-Frank rules. In addition, U.S. prudential regulators8 also have issued rules that increase costs for commercial end-users’ derivatives activities. The cumulative effects of these burdens and costs have threatened the ability of American businesses to affordably protect against risks associated with their commercial operations.

While the U.S. Commodity Futures Trading Commission (“CFTC”), the U.S. Securities and Exchange Commission (“SEC”), and the U.S. prudential regulators have implemented important reforms to better protect commercial end-users and the derivatives markets generally, the implementation of many of these new rules have had the unintended consequences of constricting American business investment, acquisitions, research and development, and job creation.9 Seeking relief from many of these unintended consequences, commercial end-users support the enactment of key legislative reforms to Dodd-Frank and other financial regulations. The reforms we seek are consistent with the Core Principles and, we believe, can generate bipartisan support.

The Coalition has identified five targeted areas of legislative reform that, if addressed by Congress, could have the potential to reduce costs for American businesses (and ultimately consumers), strengthen and stabilize U.S. businesses by promoting capital-raising activities, remove duplicative and ineffective regulatory and administrative burdens, and advance American interests in international fora.

a. Credit Valuation Adjustment

We respectfully ask Treasury to support the passage of a legislative exemption for commercial end-users’ derivative hedging transactions from the Credit Valuation Adjustment (“CVA”) bank

8 The term “U.S. prudential regulator” is defined in Section 1a(29) of the Commodity Exchange Act. Depending on the context, it refers to one of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the System, the Farm Credit Administration, or the Federal Housing Finance Agency.

9 Although the CVA is not discussed in Dodd-Frank, the underlying statutory authority of 12 U.S.C §§ 5371(b)(2) and 5365(b)(1) provides prudential regulators with the authority to promulgate risk-based standards, like the CVA under 12 C.F.R. § 324.132(e) (2016). See, e.g., Comment Letter: End-User Support for the Grimm-Peters-Scott-McIntyre to Protect Derivatives End-Users from Unnecessary Margin Requirements, Coalition for Derivatives End-Users (Feb. 14, 2013), available at http://coalitionforderivativesendusers.com/uploads/sites/351/Coalition%20for%20Derivatives%20End- Users%20Letter%20in%20Support%20of%20New%20Margin%20Bill.%20(PDF)%20February%2014,%2020 13.pdf; Comment Letter: End-User Support for the Stivers-Fudge-Gibson-Moore Bill to Protect Derivatives End-Users from Unnecessary Inter-Affiliate Swap Requirements and Preserve Central Hedging (Feb. 14, 2013), available at http://coalitionforderivativesendusers.com/uploads/sites/351/Coalition%20for%20Derivatives%20End- Users%20Letter%20in%20Support%20of%20New%20Inter- Affiliate%20Bill.%20(PDF)%20February%2014,%202013_1.pdf

4 Hon. Steven Mnuchin June 1, 2017 Page 5

capital charge.10 Part of the Basel III regulatory framework, the CVA assesses an additional capital charge on banking organizations to address the counterparty credit risk of their uncleared derivatives transactions. The CVA requires a banking organization to retain additional capital to protect against potential mark-to-market losses in situations where their OTC derivatives counterparties’ creditworthiness deteriorates. Included in the CVA calculation in the United States—but not Europe—are uncleared derivatives transactions with commercial end-users. Coalition members require fairly-priced, tailor-made, and widely offered derivative products to protect their core business activities from a multitude of commercial and financial risks. However, commercial end-users executing uncleared swaps will see increased transaction costs as banking organizations are likely to pass through the costs of the CVA capital charge in the form of higher pricing on their uncleared swap transactions.

Treasury’s support of legislative reform in this area would be directly consistent with two Core Principles in the Executive Order. First, it would enable American companies to be competitive with foreign firms in domestic and foreign markets. In particular, the lack of an exemption for commercial end-user transactions from the United States’ implementation of the CVA is different from the way in which the CVA was implemented in the European Union (“EU”).11 This discrepancy directly disadvantages U.S. businesses. The establishment of an exemption would eliminate this inequity and put U.S. businesses on equal footing with their non-U.S. counterparts. Second, CVA exemptive relief for uncleared derivatives transactions of end-users would make regulation efficient, effective, and appropriately tailored.12 Applying the CVA charge to end- user hedging transactions fails to consider that end-user hedging transactions are risk-reducing transactions that do not meaningfully contribute to systemic risk and effectively undermines the exceptions from clearing and margin requirements13 that end-users are expressly granted by statute.14 CVA reform would reduce market inefficiencies posed by current regulation and provide

10 12 U.S.C. §§ 5365(b)(1) and 5371(b)(2).

11 Currently, EU regulated entities enjoy regulatory advantages when compared to U.S. entities, placing U.S. entities at a competitive disadvantage. The cost savings passed on by EU-regulated banks create an unfair advantage for EU businesses operating both in the United States and abroad.

12 Removing the CVA charge for a small subset of OTC derivatives transactions (i.e., end-user hedging transactions) would not affect the multitude of other capital charges imposed on banks. For example, a CVA exemption would not affect the supplementary leverage ratio, a capital requirement imposed on the largest banks, which also requires such institutions to account for counterparty credit risk in their OTC derivatives transactions.

13 The Coalition has been active in advocating for the smart regulation of clearing and margin requirements for derivatives end-users. See, e.g., Comment Letter: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants; RIN 3038-AC97, Coalition for Derivatives End-Users (Dec. 2, 2014), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60057&SearchText=; Comment Letter: Extended Comment Period for “Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants” / File Number RIN 3038-AC97, Coalition for Derivatives End-Users (Sept. 14, 2012), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=58796&SearchText=coalition.

14 Tailored relief exempting only end-user transactions, much like the clearing and margin exemptions, would remove only a small subset of the overall volume of derivatives transactions—namely, uncleared risk

5 Hon. Steven Mnuchin June 1, 2017 Page 6 appropriately tailored relief designed to strengthen U.S. commercial markets by encouraging prudent risk management via affordable derivatives transactions.15

b. Financial Entity Definition

Currently, non-financial end-users that engage in swaps to hedge or mitigate commercial risks are eligible for exceptions and exemptions from several Dodd-Frank requirements, including mandatory clearing, mandatory trading, and the requirements under the CFTC’s and U.S. prudential regulators’ final uncleared margin rules.16 However, Dodd-Frank’s expansive definition of “financial entity” unfairly captures the hedging activities of certain end-users, which prevents these entities from qualifying for or otherwise electing any of the foregoing exceptions or exemptions. Further, end-users utilize special purpose vehicles and similar subsidiary structures to engage in derivatives transactions. These structures sometimes create ambiguities as to whether such entities are “predominantly engaged” in activities that are financial in nature and therefore captured under the financial entity definition. These ambiguities often lead to unnecessarily complex analyses and uncertainty as to the status of such entities that are hedging business risks. End-users should not be so disadvantaged in the derivatives marketplace if they too use derivatives to hedge bona fide business risks.

Amending the definition of “financial entity” in Section 2(h)(7)(C)(i) of the Commodity Exchange Act (“CEA”) would complement the Core Principles and ultimately strengthen the U.S. economy in two important ways.17 First, amending the financial entity definition would enable American companies to be competitive with foreign firms in domestic and foreign markets. Foreign

management hedges—from the CVA capital charge imposed on their bank counterparties; risky and speculative trades by other entities would still remain subject to the safeguards that the CVA was intended to capture.

15 Relatedly, a CVA exemption for uncleared derivatives transactions would complement congressional recognition of the benefits of U.S. commercial businesses engaging in prudent risk management and further rationalize the Federal financial regulatory framework. Current statutory exemptions from clearing and margin requirements for such transactions are an explicit recognition of not only the non-systemic nature of such transactions, but also of the importance in reducing market inefficiencies caused by unnecessary regulatory costs on U.S. businesses.

16 CFTC, Final Rule, End-User Exception to the Clearing Requirement for Swaps, 77 Fed. Reg. 42,560 (July 19, 2012), available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2012-17291a.pdf; CFTC, Final Rule, Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed. Reg. 636 (Jan. 6, 2016), available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2015-32320a.pdf; U.S. prudential regulators, Final Rule, Margin and Capital Requirements for Covered Swap Entities, 80 Fed. Reg. 74840 (Nov. 30, 2015), available at https://www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.pdf.

17 7 U.S.C. § 2(h)(7)(C).

6 Hon. Steven Mnuchin June 1, 2017 Page 7

jurisdictions, such as the EU,18 Switzerland,19 Canada,20 and Singapore,21 have de minimis tests to ensure that certain entities are afforded exemptions based on their derivatives activities and not simply because they are financial in nature. As a result, there is an incongruous situation where entities that would qualify for exemptions from clearing, trading, and margin in foreign jurisdictions would not qualify under U.S. rules. Second, amending the definition would make regulation efficient, effective, and appropriately tailored. The expansive definition of “financial entity” unfairly captures and creates ambiguities for unregistered entities—including special purpose vehicles and other similar end-user subsidiary structures—which use derivatives to hedge or mitigate commercial risks simply because of a broad definition that fails to consider the risk- reducing and non-systemic nature of such transactions.

c. Foreign Exchange Non-deliverable Forwards

Legislative reform is needed to address fragmentation in the currency markets that has resulted from a lack of statutory authority afforded to Treasury.22 In determining the extent to which Treasury could exempt certain FX derivatives from the definition of regulated “swaps,” Treasury concluded that it was without statutory authority to exempt certain foreign exchange forwards.23 These constraints ignore the economic realities of the ways in which companies utilize FX products and the reasons behind their use. Treasury’s support of a legislative amendment in this space would enable American companies to be competitive with foreign firms in domestic and foreign markets and would bring about better and more efficient, effective, and appropriately tailored regulation.

Treasury’s 2012 written determination excludes deliverable foreign exchange swaps and foreign exchange forwards (“Exempted FX Derivatives”) from the definition of “swap,” thereby

18 European Market Infrastructure Regulation (EU) No 648/2012 (Dec. 12, 2012), available at http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0011:0024:EN:PDF.

19 Swiss Financial Market Supervisory Authority, Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (June 19, 2015), available at https://www.admin.ch/opc/en/classified-compilation/20141779/index.html.

20 Canadian Securities Administrators, National Instrument 94-101 (Jan. 19, 2017), available at http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20170119_94-101_derivatives.htm.

21 Monetary Authority of Singapore, Securities and Futures (Clearing of Derivatives Contracts) Regulations 2015, chapter 289, available at http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/Annex%20B%2 0%20Securites%20and%20Futures%20Clearing%20of%20Derivatives%20Contracts%20Regulations.pdf.

22 Department of the Treasury, Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 Fed. Reg. 69694, 69695 (Nov. 20, 2012) (“The Secretary’s authority to issue a determination is limited to foreign exchange swaps and forwards and does not extend to other foreign exchange derivatives. Foreign exchange options, currency swaps, and [non-deliverable forwards] . . . may not be exempted from the CEA’s definition of ‘swap’ because they do not satisfy the statutory definitions of a foreign exchange swap or forward.”).

23 Id.

7 Hon. Steven Mnuchin June 1, 2017 Page 8

exempting them from CFTC trade execution, mandatory clearing, and margin requirements.24 Treasury noted its lack of statutory authority as the reason why it did not similarly exempt foreign exchange non-deliverable forwards (“FX NDFs”). FX NDFs should be treated in the same manner as deliverable FX forwards as they are economically and functionally identical to deliverable foreign exchange forwards. Moreover, prior regulatory and market practice domestically treated FX NDFs and foreign exchange forwards as the same product.25 The adoption of a legislative amendment is important to Coalition members because commercial end-users frequently trade FX NDFs to hedge their foreign onshore investments or earnings since international trading of the underlying physical currency is relatively difficult or expressly prohibited by certain foreign jurisdictions. The arbitrary distinction between FX NDFs and Exempted FX Derivatives ignores the way in which commercial end-users use foreign exchange derivatives and, as a result, imposes unnecessary costs and burdens on them in connection with their risk mitigating activities.

Given this statutory constraint, Treasury should support a legislative solution to exempt FX NDFs in a similar manner as Exempted FX Derivatives. Without such recognition, commercial end- users will continue to suffer from inefficient, less effective, and inappropriately tailored regulations and will continue to be competitively disadvantaged relative to foreign businesses.

d. Inter-affiliate Transactions

Inter-affiliate derivatives transactions also could benefit from an amendment to Dodd-Frank.26 Currently, CEA provisions and CFTC regulations indiscriminately apply many requirements under Dodd-Frank to inter-affiliate derivatives transactions as if those transactions were executed between unaffiliated, third-parties. While the CFTC has issued final rules and staff no-action letters to provide relief from various Dodd-Frank requirements—in recognition of the fact that inter-affiliate derivatives transactions are not speculative and do not raise the systemic risk concerns that Dodd-Frank is intended to address—these efforts have created uncertainty and impose complex conditions on commercial end-users’ internal risk management practices.

A legislative solution (as opposed to regulatory or staff no-action relief) would more permanently clarify that these internal, risk-reducing transactions are not subject to regulatory burdens that were designed to be applied only to certain market-facing swaps.27 It would ensure that commercial end-users—which often enter into a greater number of inter-affiliate derivatives transactions than

24 Id.; 7 U.S.C. § 1a(47)(E).

25 It is noteworthy that U.S. tax law subjects foreign exchange forwards and FX NDFs to the same special rules. See 26 U.S.C. § 1256(g)(2).

26 “Inter-affiliate derivatives transactions” are internal, risk management transactions that enable end-users to centralize their risk management activities between affiliated counterparties. In general, counterparties are considered “affiliated” where (1) one counterparty, directly or indirectly, holds a majority ownership interest in the other counterparty, or (2) a third party, directly or indirectly, holds a majority ownership interest in both counterparties. See 17 C.F.R. § 50.52(a).

27 While CFTC staff no-action relief for end-users has been helpful, and regulatory clarification would be welcomed, CFTC staff’s actions to address these issues underscore the need for legislation to provide certainty and a more permanent legislative solution.

8 Hon. Steven Mnuchin June 1, 2017 Page 9 external swap transactions with third parties—can use these transactions to manage their commercial risks without unnecessary and costly burdens.28 Further, initial margin requirements for inter-affiliate trades of end-users’ counterparties, and the related collateral segregation requirements for such entities, impose additional cost burdens that ultimately increase transaction prices for commercial end-users. Ensuring that inter-affiliate transactions for both end-users and their counterparties are exempt from economically inefficient regulation would help to reduce costs and would not contribute to the systemic risk that Dodd-Frank was intended to address.

Earlier this year, the House of Representatives sought to address this issue by passing the Commodity End-User Relief Act,29 which, if enacted into law, would remove inter-affiliate derivatives transactions from the definition of “swap.”30 The House is currently debating the Financial CHOICE Act 2.0, which is proposing a similar measure for the treatment of inter-affiliate derivatives transactions.31 Congressional recognition of the need for a legislative solution further evidences the need for reform in order to create more efficient, effective, and appropriately tailored regulation for commercial end-users.

e. Centralized Treasury Units

A legislative amendment is necessary to harmonize the language of CEA Section 2(h)(7)(D)32 with that in CFTC No-Action Letter 14-144 to clarify the CEA’s regulation of centralized treasury units (“CTUs”). Such an amendment would make regulation efficient, effective, and appropriately tailored with respect to such CTUs.33 CTUs are centralized corporate departments of companies that aggregate and manage the enterprise-wide treasury needs of a derivatives end-user. Rather than each subsidiary engaging in its own derivatives hedging transactions, CTUs serve as a singular unit to oversee the needs of the organization, creating costs savings and making for a more

28 Rather than having each affiliate separately execute swaps, it is a common for derivatives end-users to engage in the risk-reducing best practice of operating a single market-facing entity within a corporate group in order to centralize hedging expertise. This model allows for risks to be managed by a local entity within a corporate group, with the appropriate specialized expertise and operations, in the appropriate entity, jurisdiction, or time zone.

29 H.R. 238, 115th Cong. (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/238.

30 Id.

31 H.R. 10, 115th Cong. (2017), available at https://www.congress.gov/bill/115th-congress/house- bill/10?q=%7B%22search%22%3A%5B%22financial+choice+act%22%5D%7D&r=1.

32 7 U.S.C. § 2(h)(7)(D).

33 Indeed, the Coalition has supported previous legislation, like H.R. 1317, that would clarify such discrepancies. See H.R. 1317, 114th Cong. (2015), available at https://www.congress.gov/bill/114th-congress/house-bill/1317; Comment Letter, Subcommittee Hearing on Capital Formation and Reducing Small Business Burdens: Support for Derivatives End-Users Clarification Act, Coalition for Derivatives End-Users (Mar. 15, 2015), available at http://coalitionforderivativesendusers.com/uploads/sites/351/3.24.2015Coalition%20Letter%20to%20Senate%2 0Subcommittee%20on%20Securities%20Insurance%20and%20Inve....pdf; see also Comment Letter: Request for 4(c) Exemptive Relief from Clearing and Trade Execution Requirements for Centralized Treasury Units of Non-Financial End-Users, Coalition for Derivatives End-Users (Feb. 22, 2013), available at http://www.nam.org/Issues/Corporate-Finance-and-Management/Coalition-Letter-to-CFTC-Requesting-4(c)- Exemptive-Relief-for-Centralized-Treasury-Units/.

9 Hon. Steven Mnuchin June 1, 2017 Page 10 efficient and financially sound enterprise. Current regulatory treatment of CTUs, however, has left certain interpretive gaps that threaten the cost-saving efficiencies of these corporate structures. A legislative amendment would remove uncertainty for both end-users and market regulators.

IV. REGULATORY REFORM

The Coalition has identified the following two regulatory issues as posing significant risks to the end-user community: (a) data reporting harmonization; and (b) further expansion of the CFTC’s cross-border jurisdiction. In particular, we respectfully ask for Treasury’s support in addressing the following issues on behalf of end-users’ interests, at both the domestic and international level.

a. Data Reporting Harmonization

The current state of international swap data reporting is disjointed and could benefit from Treasury advanc[ing] American interests in international financial regulatory negotiations and meetings.

The implementation of swap data reporting rules in the United States and in other countries has followed a fairly uniform approach, whereby a single-party to a derivatives transaction is required to report swap identification information (e.g., price, counterparties, commodity) to a trade repository. End-users have largely been afforded relief from reporting requirements, as U.S. regulations often require their bank counterparts or financial counterparts to report such information.34 However, this approach has not been the case in the EU. Rather, the EU requires both parties to report the same data to a trade repository.35 As a result of this needless duplication, multinational end-users are faced with significant cost, operational, and legal burdens in complying with such requirements.

Although purely an EU-specific issue, the requirements are triggered when EU affiliates of U.S. commercial end-users engage in either inter-affiliate or external derivatives transactions. Therefore, it is critical that Treasury advocate for greater swap data reporting harmonization, which will enable U.S. commercial end-users to be more competitive with foreign firms in domestic and foreign markets.

b. Further Expansion of the CFTC’s Cross-Border Jurisdiction

At the end of 2016, the CFTC proposed to expand its cross-border jurisdiction in a manner that would further tilt against the interests of U.S. commercial end-users operating abroad.36 We

34 See 17 C.F.R. Part 45 (2016).

35 See Article 9, EMIR, available at http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF.

36 Proposed Rule, Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants, 81 Fed. Reg. 71946 (Oct. 18, 2016), available at https://www.gpo.gov/fdsys/pkg/FR-2016-10-18/pdf/2016-24905.pdf [“Proposed Cross-Border Rule”]; Coalition Comment Letter available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61067&SearchText=.

10 Hon. Steven Mnuchin June 1, 2017 Page 11 respectfully ask that Treasury consider the inconsistencies of the CFTC’s proposed rule with the Core Principles and the profound effects such a rule would have on the ability of commercial end- users to efficiently and effectively do business abroad.

If adopted, the CFTC’s proposal would completely re-write the CFTC’s existing guidance regarding the scope of the agency’s cross-border jurisdiction over swaps transactions.37 Among other things, the proposed rule would introduce the concept of a “foreign consolidated subsidiary” (“FCS”) to identify those non-U.S. persons whose swap activities present “a greater supervisory interest relative to other non-U.S. market participants.”38 While well-intended, the over-breadth of the proposed rule threatens commercial end-users’ ability to engage in hedging transactions when they offer their products and services abroad. In particular, the proposed rule would count the swaps activities of an FCS against the registration thresholds for swap dealers and major swap participants, thereby requiring any non-U.S. person who deals with a commercial end-user’s FCS affiliate to count all of its swaps activities when determining whether it meets the CFTC registration thresholds. Despite having no connection to the United States, the non-U.S. person, if having exceeded a CFTC registration threshold, would be subject to CFTC regulation by virtue of dealing with a commercial end-user’s FCS affiliate.

In effect, the introduction and implementation of the FCS concept would have three significant, adverse impacts on U.S. businesses with overseas operations. First, it would put U.S. commercial end-users operating in foreign jurisdictions at a significant disadvantage thereby preventing them from being competitive with foreign firms in domestic and foreign markets—both in terms of reduced liquidity and in terms of competition relative to their foreign counterparts. U.S. commercial end-users would likely face increased costs of hedging in foreign jurisdictions where local counterparties are generally used for hedging and would be placed at a disadvantage over their non-U.S. competitors. Second, using the FCS concept for these purposes would have a reductive impact on market liquidity globally—hindering economic growth and curtailing vibrant financial markets. Third, the implementation of the FCS concept would likely create confusion as to the CFTC’s oversight and regulation of purely non-U.S. affairs and activities, and may lead to retaliatory action by foreign regulators.

V. OTHER POLICY INITIATIVES

In addition to legislative and regulatory issues, the Coalition requests that Treasury undertake additional preventative measures to ensure that commercial end-user interests and the interests of Main Street are better accounted for in the legislative and rulemaking processes. In particular, the Coalition asks that Treasury: (a) undertake a cumulative impact assessment; (b) advocate for explicit clarification that the swap dealer de minimis registration threshold remain at its current level; (c) advocate for and protect U.S. interest in connection with “Brexit”; and (d) advocate for

37 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45,292 (July 26, 2013), available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2013-17958a.pdf.

38 The proposed rule generally defines an FCS as a non-U.S. person that is consolidated for accounting and financial statement purposes under U.S. generally accepted accounting principles (“U.S. GAAP”) with an ultimate parent entity, which is a “U.S. person.” Proposed Cross-Border Rule at 71973.

11 Hon. Steven Mnuchin June 1, 2017 Page 12 the issuance of a new executive order that expressly recognizes the importance of and benefits commercial end-users. Each of these measures is explained below.

a. Cumulative Impact Assessment

The Coalition respectfully requests that Treasury—in coordination with other U.S. prudential regulators, the CFTC, and the SEC—undertake a cumulative impact assessment of Dodd-Frank financial regulations on commercial end-users. In particular, we propose that the impact analysis focus on capital regulations and the effects of such on end-user risk mitigation, capital formation, market liquidity, and the overall economic impacts.39 Such an assessment, would among other things, foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, by enabling Treasury and financial regulators to identify the costs and burdens, barriers to capital raising, and negative impacts on liquidity that financial regulation has on commercial end-user business.

Commercial end-users are the backbone of the American economy. Coalition members produce, manufacture and distribute the goods necessary for America to thrive. Coalition members employ Americans and are the job creators of this country. Therefore, it is important that Treasury, and government at-large, understand the cumulative effects of financial regulation on this vital sector of the economy.

b. Swap Dealer De Minimis Threshold

The CFTC’s current swap dealer de minimis threshold and the CFTC’s temporary deferral of that threshold’s automatic phase-in to a lower $3 billion gross notional level poses regulatory uncertainty and creates unnecessary risk for derivatives end-users. In addition, the lower swap dealer de minimis threshold would needlessly and unnecessarily capture a significant number of additional market participants and require them to register as swap dealers, ultimately leading to reduced market liquidity. The continuation of regulatory uncertainty, the unnecessary imposition of registration on less-active market participants, and the reduction of market liquidity all run contrary to the intent of Dodd-Frank and contrary to Treasury’s “directive to [m]ak[e] regulations efficient, effective, and appropriately tailored.” For these reasons, Treasury should actively advocate for the swap dealer de minimis threshold to remain at its current level of $8 billion (gross notional). For example, Treasury could coordinate with the CFTC to initiate a rulemaking to amend the CFTC’s regulations to maintain the $8 billion level.

c. Brexit

The United Kingdom’s exit from the EU (“Brexit”) poses significant uncertainties for financial markets and commercial end-users who rely on those markets. For that reason, commercial end-

39 For example, the Coalition, working with FTI Consulting, conducted a survey of end-users’ use of OTC derivatives and the impact of margin requirements. See The Impact of Margin Requirements on Main Street Business, Coalition for Derivatives End-Users and FTI Consulting (2014), available at http://www.centerforcapitalmarkets.com/wp-content/uploads/2014/03/EndUserMarginSurvey3-2014- 2.pdf?x48633.

12 Hon. Steven Mnuchin June 1, 2017 Page 13 users require government support in securing U.S. interests that are implicated as a result of Brexit. To protect end-user interests and mitigate costs, we respectfully request that Treasury promote U.S. interests during the Brexit process to ensure that end-users remain competitive with foreign firms in domestic and foreign markets. We believe that Treasury could be incredibly helpful in advancing American interests in international financial regulatory negotiations and meetings by supporting transition provisions or similar accommodations to ease the potentially significant impacts on end-users.40

Many Coalition members have open derivatives positions (i.e., “live trades”) with U.K.-based counterparties. Currently, these transactions are governed under EU laws and regulations, but upon formal departure, such transactions would be subject to yet-to-be established U.K. law. A change in governing law may inadvertently trigger an event of default or other termination provision under derivatives transactions. To mitigate against such possibilities, U.K. banks may seek to avoid potential EU continuity of compliance issues by moving the open derivatives positions over to an EU affiliate. While novating such contracts to an EU affiliate may avoid potential termination or default provisions, it would create unnecessary counterparty risk and administrative burdens on commercial end-users, as each agreement will need to be renegotiated and reviewed for, among other things, the creditworthiness of the U.K. affiliate. For those contracts that remain, the uncertainty of U.K. laws and regulations pose additional risks.

d. Executive Order

The Coalition respectfully requests that commercial end-users are afforded greater consideration in the rulemaking and administrative process. An executive order to that effect will strengthen accountability within Federal financial regulatory agencies and enhance the need to rationalize the Federal financial regulatory framework.

To better protect commercial end-users and U.S. consumers, we believe that Treasury should work with the White House to craft an executive order that recognizes the contributions of commercial end-users to the U.S. economy. Similar to other recent executive orders aimed at advancing the interests of American businesses,41 a commercial end-user specific executive order would serve to ensure that agencies provide greater deference to and consideration of the needs of commercial end-users when promulgating regulations.42

40 This is particularly important now as talks between the U.K. and EU have already demonstrated the EU’s unwillingness to allow the UK “passporting” rights to EU financial markets once finalized.

41 See, e.g., Executive Order, Sec. 1; President Donald J. Trump, : Reducing Regulation and Controlling Regulatory Costs, 82 Fed. Reg. 9339 (Jan. 30, 2017), available at https://www.federalregister.gov/documents/2017/02/03/2017-02451/reducing-regulation-and-controlling- regulatory-costs; President Donald J. Trump, Executive Order 13796: Addressing Trade Agreement Violation and Abuses, 82 Fed. Reg. 20819 (Apr. 29, 2017), available at https://www.gpo.gov/fdsys/pkg/FR-2017-05- 04/pdf/2017-09156.pdf; President Donald J. Trump, Executive Order 13795: Implementing an America-First Offshore Energy Strategy, 82 Fed. Reg. 20815 (Apr. 28, 2017), available at https://www.gpo.gov/fdsys/pkg/FR- 2017-05-03/pdf/2017-09087.pdf.

42 For example, heightened cost-benefit analysis, with an end-user centric focus, would ensure that future financial regulations are promulgated with Main Street in mind.

13 Hon. Steven Mnuchin June 1, 2017 Page 14

VI. CONCLUSION

We appreciate your consideration of the Coalition’s comments on a wide variety of issues impacting our members. We believe that Treasury’s comprehensive review of all financial regulatory requirements—including, but not limited to, those resulting from Dodd-Frank—will ultimately help identify and reform excessive laws and regulations, which are overburdening American businesses, creating barriers to raising capital, decreasing liquidity, and ultimately dampening U.S. economic growth. The Coalition and its members are prepared to work with Treasury in any way to improve America’s global competitiveness and to promote the Core Principles.

Please let us know if you have any questions regarding any of the issues raised in this letter by contacting Michael Bopp at [email protected] or (202) 955-8256.

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