In a report citing comments filed by the American Public Power Association, the Global Markets Advisory Committee of the Commodity Futures Trading Commission warned of the harmful effects of increasing capital requirements for banks involved in hedging transactions with non-publicly traded entities.
The changes were included in “Regulatory Capital Rule: Large Banking Organizations and Banking Organizations with Significant Trading Activity,” Docket ID OCC–2023–0008, 88 Fed. Reg. 64028 (2023) and “Regulatory Capital Rule: Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies; Systemic Risk Report” (FR Y-15), Docket No. R–1814, 88 Fed. Reg. 60385 (2023).
CFTC was not involved in issuing those rules, but the Global Markets Advisory Committee has been discussing them because of their potential effect on derivatives markets.
The report released June 4 finds that the proposed bank capital rules will:
- reduce the capacity of U.S. banks to offer clients access to derivatives markets;
- reduce liquidity in derivatives markets;
- increase the costs of hedging for end-users and, as a result, increase costs for their customers;
- disproportionately harm smaller end-users and non-public companies;
- increase systemic risk; and
- create an unlevel playing field for market participants, including across jurisdictions.
In comments filed in April with the CFTC's Energy and Environmental Advisory Committee, APPA joined with the National Rural Electric Cooperative Association in warning that the proposed rules will make effective risk management more difficult and more expensive for commercial end-users in the energy industry without materially improving risk management for the banking sector.
Specifically, APPA and NRECA said that the proposed rule as drafted will have serious consequences for public power utilities and rural electric cooperatives seeking to find regulated counterparties for the forward contracts, commodity trade options, and energy commodity swaps needed to hedge price and supply risks.
The Global Markets Advisory Committee concludes its report by recommending that CFTC:
- Continue engaging with the relevant U.S. bank regulators about the pending proposals and the effect they will have on the markets that fall under the CFTC jurisdiction;
- Conduct an independent study of the proposals to better understand the effect of the proposals, should they be adopted in their current form, on the users of derivatives markets; and
- Organize a roundtable with U.S. bank regulators focused on derivatives markets.
