The Farm Credit System, the largest single lender to U.S. agriculture, is likely to stay free of most government regulations tied to the sweeping Dodd-Frank market reforms when the Commodity Futures Trading Commission decides on swaps rule-making at a meeting on Wednesday, banking industry sources say.
Bankers are fuming at the prospect.
With more than $230 billion in assets, the Farm Credit System - a government-sponsored entity or GSE - is not likely to be deemed a "swap dealer" since its swap deals with customers are not big enough to meet a minimum threshold for players who might pose a systemic risk, they say.
The decision will turn on the fact that only a fraction of the $37 billion in swap agreements that Farm Credit has on its books are not directly related to market hedges.
Of that "notional" value for swaps on its books as of Dec. 31, 2011, only about $3 billion was outstanding that related to swap agreements the lender offered to its own customers. The rest were common interest-rate swaps that Farm Credit uses to hedge and manage interest-rate exposure on the notes and bonds it issues to fund the system's lending.
That would put Farm Credit's swap dealing well below the minimum annual level that the CFTC is looking at in order to increase oversight of large financial institutions in the multitrillion-dollar market for swaps, according to those familiar with the regulator's thinking.
Swaps are private "over-the-counter" agreements between parties to exchange one security or interest rate or physical commodity for another as a way to hedge or limit risk.
"I'm hearing the de minimis threshold will be raised to $8 billion annual gross notional of dealing activity, a significant increase from the proposed rule of $100 million and from previous drafts, where $3 billion has been the highest minimum," one source involved in the rule-making discussion told Reuters.
BITTER PILL FOR BANKERS
Any decision to exempt Farm Credit from swap dealer oversight will infuriate private banks, which compete with Farm Credit on farm lending.
For years, banks have complained bitterly about special advantages that Farm Credit has over them in lending to America's farmers and ranchers.
If the CFTC designated Farm Credit as a swap dealer, the ag lender would be subjected to higher capital requirements and other costs as well as to the higher level of oversight.
Bankers' arguments have zeroed in on whether regulators should let Farm Credit count customer swaps the same way as banks, which qualify for an exemption as "insured depository institutions" under the Dodd-Frank Act.