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capital one

capital one

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Published by: MarketsWiki on Mar 17, 2011
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CapitalOneFinancialCorporation1680CapitalOneDriveMcLean,VA22102
February22,2011DavidA.Stawick,SecretaryCommodityFuturesTradingCommissionThreeLafayetteCentre115521
st
Street,NWWashington,DC20581dfadefinitions@cftc.govElizabethM.Murphy,SecretarySecuritiesandExchangeCommission100FStreet,NEWashington,DC20549-1090rule-comments@sec.gov
Re:FurtherDefinitionof"SwapDealer,'"Security-BasedSwapDealer,""MajorSwapParticipant,""MajorSecurity-BasedSwapParticipant"and"EligibleContractParticipant";JointProposedRule(CFTCDefinitions;SECFileNo.
87-39-10)
DearMr.StawickandMs.Murphy:CapitalOneFinancialCorporation(togetherwithitssubsidiaries,"CapitalOne")!submitsthisletterinresponsetotheJointNoticeofProposedRulemaking(the"ProposedRulemaking")issuedbytheCommodityFuturesTradingCommission("CFTC")andSecuritiesandExchangeCommission("SEC"and,togetherwiththeCFTC,the"Commissions"),inconsultationwiththeBoardofGovernorsoftheFederalReserveSystem,tofurtherdefine"SwapDealer,""Security-BasedSwapDealer,""MajorSwapParticipant,""MajorSecurity-BasedSwapParticipant"and"EligibleContractParticipant"containedinTitleVIIoftheDodd-FrankWallStreetReformandConsumer
1
CapitalOneFinancialCorporation(www.capitalone.com)isafinancialholdingcompanywhosesubsidiaries,CapitalOne(Europe)pic,CapitalOneBank(CanadaBranch),CapitalOne,N.A.,andCapitalOneBank(USA),N.A.,collectivelyhad$122.2billionindepositsand$197.5billionintotalassetsoutstandingasofDecember31,20I
O.
HeadquarteredinMcLean,Virginia,CapitalOneoffersabroadspectrumoffinancialproductsandservicestoconsumers,smallbusinessesandcommercialclientsintheU.S.,CanadaandtheUK.AtoptencreditcardissuerintheUK,CanadaandUnitedStatesandaFortune500company,CapitalOnetradesontheNewYorkStockExchangeunderthesymbol"COF"andisincludedintheS&P100index.
 
CapitalOneCommentsonDefinitionsContainedinTitleVIIoftheDodd-FrankAct
Page2
ProtectionAct(the"Dodd-FrankAct").2CapitalOneappreciatestheopportunitytocommentontheseimportantdefinitions.'
Introduction
CapitalOneentersintoswapswithlargeswapdealerstomitigatetherisksofordinarybankingactivities,suchashedgingtheinterestrateandforeignexchangerisksarisingfromitscorelendinganddeposit-takingactivities.CapitalOnealsoentersintoswapswithitscommercialbankingcustomersinconnectionwithloanoriginationandforhedgingotherinterestrateandforeignexchangerisksarisingfromtheirbusinessoperations.CapitalOnemanagestheriskexposurearisingfromeachofthesecustomer-facingswapsbyenteringintooffsettingswapswithlargeswapdealers.WeparticipatedinthepreparationofthelettersubmittedbytheFinancialServicesRoundtableontheProposedRulemakingandsupportthecommentssetforththerein,includingitsviewson(i)unintendedconsequencesthatwillarisefromanarrowlydefined
deminimis
exemptionfromtheswapdealerdefinition,(ii)theimportanceofclarifyingthattheexemptionfromtheswapdealerdefinitionforbanksinconnectionwithloansextendstootherprovisionsofcreditbybanksand(iii)otheraspectsoftheswapdealerdefinition.WealsosupporttheFinancialServicesRoundtable'sviewsonthedefinitionofmajorswapparticipant,includingitscommentssupportingtheCommissions'proposalsforfurtherdefining"substantialposition"and"substantialcounterpartyexposure".ThereareanumberofareasoftheProposedRulemakingthatareofinteresttoCapitalOne.Therefore,weofferadditionalcommentsonthefollowingareas:
EligibleContractParticipant("ECP")Definition:
weproposeanewcategorytotheECPdefinitionthatallowscommercialenduserstocontinuetoeffectivelyandeconomicallyhedgetheirloansandotherextensionsofcreditwithlenderbanks;
LendingExclusionfromtheSwapDealerDefinition:
weproposethatthelendingexclusionexplicitlyincludeswapsenteredintoinconnectionwithaloanforpartialhedging,anticipatoryhedgingorsubsequenthedgingpurposes;
LimitedSwapDealerDesignation:
wesupportaregistrationprocessthatprovidesallmarketparticipantsanopportunitytorequestalimitedswapdealerdesignationthatwouldbecomeimmediatelyeffective,onaprovisionalbasis,atthetimeofregistration;and
2
See
75Fed.Reg.80174(December2
J,
20
J
0).
3
CapitalOnedoesnotenterintosecurity-basedswaps,however,weareprovidingthesecommentstotheSECinconnectionwithitscoordinatingrolewiththeCFTCinfurtherdefining"SwapDealer,""MajorSwapParticipant"and"EligibleContractParticipant,"andadoptingatimelineforimplementationofTitleVIIoftheDodd-FrankAct.
 
CapitalOneCommentsonDefinitionsContainedinTitleVIIoftheDodd-FrankAct
Page3
Phased-InCompliancePeriod:
wesupportaflexiblecomplianceperiodofatleast18monthssothatsmalldealersarenotseverelydisadvantagedrelativetothelargestandmostactivedealers)andcommercialendusersarenotadverselyimpactedbytheliquiditydrainthatwouldresultifregionalandlocaldealershalttheiractivities.CapitalOnestronglysupportsatransparentandregulatedderivativesmarketandcommendstheCommissionsontheireffortstoimplementtheprovisionsoftheDodd-FrankAct.WeurgetheCommissions,however,toexercisetheirstatutoryauthoritysothatthekeydefinitionsofTitleVIIoftheDodd-FrankActareimplementedinamannerthatminimizestheriskofunintendedconsequencesforcommercialendusersandthelenderbanksthatservethem.
DefinitionofEligibleContractParticipant
WeappreciatetheCommissions'requestforcommentsontheECPdefinition,includingwhetheradditionalcategoriesshouldbeincludedintheECPdefinitionforcommercialrealestateborrowersandfirmsusingswapsashedges.Section723(a)(2)oftheDodd-FrankActmakesitunlawfulforanenduserwhoisnotanECPtoenterintoaswapotherthanonadesignatedcontractmarket("DCM").Asaresult,commercialenduserswhoarenotECPsmaynotenterintoaswaponaswapexecutionfacilityorabilateral,off-exchangebasiswithabankorothercounterparty.PriortotheenactmentoftheDodd-FrankAct,commercialenduserborrowersandtheirlenderbanksgenerallyreliedonthe1989CFTCPolicyStatementConcerningSwapTransactions(the"PolicyStatement")"toenterintobilateral,interestrateswapsinconnectionwithloans.ThePolicyStatementprovidedthatindividuallynegotiatedswapswouldnotbesubjecttoregulationasfuturescontractsundertheCommodityExchangeAct(the"CEA")ifacommercialenduserenteredintotheswaprelatedtoitslineofbusinessandalsosatisfiedotherrequirements.Communityandregionalbankborrowersaretypicallysmallbusinessesandpartnershipswhoorganize,primarilyfortaxandlegalconsiderations,alimitedliabilitycompanywithaspecialpurposeentitydesignationastheborrowingentity.Asaresult,theselimitedliabilitycompaniesgenerallydonotmaintainsufficientcapitalattheborrowingentityleveltoqualifyasECPs.Instead,theseborrowersrelyuponthePolicyStatementtoenterintointerestswapsontheirloanswithlenderbanks.TitleVIIoftheDodd-FrankActisinconsistentwiththePolicyStatementandrestrictscommercialendusers'accesstoswaps.WeurgetheCFTCtoaddressthisproblembyincludinganadditionalcategoryintheECPdefinition,assetforthinSectionla(l2)oftheCEA,thatpermitscommercialenduserborrowerstocontinueenteringintointerestrateswapsinconnectionwithobtainingloansorotherextensionsofcreditwith
4
See
PolicyStatementConcerningSwapTransactions,54Fed.Reg.30694(July
2),
1989).

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