Energy Policy Briefing Note: The Real Costs of Eliminating Unsecured Credit Lines and Requiring Cash Collateral in OTC Swaps Markets

Tue Mar 13 16:24:38 EDT 2012
By Dr. Sharon Brown-Hruska and Kurt Strunk

On 13 March 2012, NERA Vice Presidents Dr. Sharon Brown-Hruska and Kurt Strunk submitted an Energy Policy Briefing Note to the Commodity Futures Trading Commission (CFTC) entitled "The Real Costs of Eliminating Unsecured Credit Lines and Requiring Cash Collateral in OTC Swaps Markets." The note further describes the methodology and approach used for calculating the cost of capital in their study, "Cost-Benefit Analysis of the CFTC's Proposed Swap Dealer Definition," which Dr. Brown-Hruska and Mr. Strunk prepared for the Working Group of Commercial Energy Firms. The report analyzes the incremental costs and benefits associated with the CFTC's proposed definition of "Swap Dealer" under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The NERA team performed a detailed analysis of the activities that will be required of entities designated as Swap Dealers by the CFTC and developed estimates of the costs for Nonfinancial Energy Companies to comply with the associated proposed CFTC regulations. NERA also analyzed the potential benefits of the CFTC’s proposed regulation of Nonfinancial Energy Companies falling under the definition of "Swap Dealer." The report's cost-benefit analysis demonstrates that the proposed expansive definition of "Swap Dealer" is contrary to the public interest. Under the proposed rulemakings, Nonfinancial Energy Companies that fall within the definition of "Swap Dealer" will face significant increases in incremental costs, while little or no incremental benefit will accrue to over-the-counter (OTC) energy swaps markets and users of OTC energy swaps.