Pub. 1 2012 Issue 3

24 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s The FCS is not a bank. Repeat: The FCS is not a bank T HE FCS, EVER THE SEEKER OF EXEMPTIONS AND special treatment, is trying yet again to gain favorable regulatory treatment, this time from the Commodity Futures Trading Commission (CFTC). Hopefully the CFTC will slam the door shut on this shameless attempt by the FCS to cast itself as something it is not – a bank – in order to escape being regulated by the CFTC as a “swap dealer,” as defined in the Dodd-Frank Act (DFA). This attempt to evade CFTC oversight can be viewed from two perspectives. First, the FCS is trying to sidestep the plain language of DFA, which in defining the term “swap dealer” states very clearly that “in no event shall an insured depository institution [i.e., a bank] be considered to be a swap dealer to the extent it offers to enter into a swap with a customer in connection with originating a loan with that customer.” In other words, a bank may enter into a swap contract with a borrower but if the lender is not a bank, it cannot enter into a swap contract with a borrower unless the lender is regulated by the CFTC as a swap dealer. The congressional intent is absolutely clear – only insured banks are exempt from swap- dealer regulation. Acomment letter the FCS trade association, the Farm Credit Council (FCC), submitted to the CFTC on February 17 argued that “the lending business engaged in by [FCS] institutions is functionally equivalent to that conducted by insured depository institutions.” That may be true but DFA did not exempt “functionally equivalent” lenders from its swap- dealer regulation requirement. The FCS then whined about unfair com- petition, claiming that banker complaints about “being disadvantaged in the [agricultural] marketplace” are misplaced. However, as last month’s FCW reported, even Leland Strom, the chairman of the FCS’s regula- tor, the Farm Credit Administration (FCA), readily acknowledged that two factors, the FCS’s tax exemptions and its “GSE status in terms of savings from lower funding costs,” have “contributed significantly” to FCS earnings. Those earnings enhancements are what give the FCS its competitive edge over banks in agricultural lending. Especially amusing in this “I’m not a bank but treat me as if I am” saga is the FCC’s rationale, in its February 17 letter requesting exemp- tions from CFTC regulations. The letter noted that DFA gives the CFTC specific authority “to further define the term[] . . . ‘swap dealer.’” The FCC wants the CFTC to expand the definition of “insured depository institution” to include FCS institutions. What the FCC letter failed to note is why the CFTC was given this definitional authority – to empower the CFTC to treat as a swap dealer “transactions and entities that have been structured to evade” the CFTC’s regulatory authority. [Emphasis supplied] Second, unspoken in the FCC’s letter is the FCS’s deathly fear of being regulated by any entity other than the FCA. If ever there was a “captured” regulator, the FCA is it. Not only have many FCA board members come from within the FCS, including two current members of that board, there is a steady flow of personnel between the FCA and FCS institutions. The FCS and the FCA operate in an insular, incestuous little world, and they want to keep it that way, which is why the FCS so strongly opposes having to register with the CFTC as a “swap dealer.” What is especially puzzling, though, is why the FCS is expending so much energy trying to gain an exemption from registering as a swap dealer. According to the FCS’s Annual Information Statement for 2011, only two FCS institutions – an unnamed bank (most likely CoBank) and an unnamed association – enter into “interest rate swaps . . . with certain of their customers.” That only two of 87 FCS banks and associations engage in interest-rate swaps with their customers raise questions about a statement in the FCC’s February 17 letter that if not exempted by the CFTC, “compliance risks and new regulation would force at least some of our members to cease the activity that would cause them to be considered as swap dealers.” A footnote to a table on derivative credit exposure in the Information Statement states that the notational or nominal amount BERT ELY’S FARM CREDIT WATCH ® SHEDDING LIGHT ON THE FARM CREDIT SYSTEM, AMERICA’S LEAST KNOWN GSE ©2012 Bert Ely