On October 13, 2016, the Commodity Futures Trading Commission (“CFTC’”) unanimously issued an order establishing December 31, 2018 as the swap dealer de minimis threshold phase-in termination date (the “Order”). The Order is effective October 13, 2016.
Summary of the Order
Pursuant to CFTC Regulation 1.3(ggg), a person shall not be deemed to be a swap dealer (“SD”) unless its swap dealing activity exceeds an aggregate gross notional amount of $3 billion (measured over a rolling 12-month period), subject to a phase-in period during which the gross notional amount threshold is set at $8 billion. Absent further action by the CFTC, the phase-in period would terminate on December 31, 2017, at which time the de minimis threshold would decrease to $3 billion. This would have required swaps entered into as of January 1, 2017 to be counted toward the lower $3 billion SD registration threshold.
The Order, however, postpones the date of the phase-in period to December 31, 2018. This change means that firms will have one more year before the lower de minimis threshold will apply (i.e., it will start applying to swaps entered into as of January 1, 2018 instead of January 1, 2017).
Among the reasons the CFTC gave for postponing the termination date of the phase-in period are: (1) the fact that it has not yet adopted capital requirements for SDs, which is a significant component of SD registration; (2) the fact that the SD requirements regarding margin for uncleared swaps are currently being implemented; and (3) the lack of certain metrics needed for evaluating different de minimis thresholds as well as swap data reporting validity issues. The CFTC believes that a year’s delay will allow it to finalize the SD capital rule, assess the implementation of margin requirements for uncleared swaps, and obtain more metrics for evaluating different potential de minimis threshold levels. Moreover, the CFTC stated that having information on these aspects associated with SD registration would be helpful in further assessing the impact of lowering the de minimis threshold.
Concerns expressed by Commissioner Bowen
Although Commissioner Bowen supported the Order, she stressed the need to see hard data backing up the opinions the CFTC will receive during this year about why they should not allow the threshold to drop to $3 billion.
Bowen also hopes to receive empirical data that will establish an appropriate level for the de minimis threshold.
Special thanks to Veronica Simonet for her assistance in drafting this post.