On September 17, the Commodity Futures Trading Commission (CFTC) will hold its first open meeting under new Chairman Timothy Massad to vote on: 1) a re-proposed rule on margin requirements for uncleared swaps for swap dealers; and 2) a final rule excluding certain swaps with utility special entities from the de minimis calculation for swap dealer registration purposes.
The CFTC’s re-proposed margin rule is expected to be consistent with the one adopted last week by the Federal Reserve, OCC, FDIC, and other prudential banking regulators. That is because under Dodd-Frank, swap dealers for which there is a prudential regulator must meet minimum initial and variation margin requirements set by that regulator, while non-bank swap dealers must meet minimum margin requirements set by the CFTC.
The prudential banking regulators’ margin proposal would:
- Generally follow the international framework that the Basel Committee and IOSCO adopted in September 2013; that is, the margin amount required would vary based on the relative risk of the counterparty and of the uncleared swap;
- Not require a swap dealer to collect specific or minimum amounts of initial or variation margin from nonfinancial end users; rather, in a significant change from the prudential banking regulators’ prior proposal, that decision would be left to the swap dealer, consistent with its overall credit risk management;
- Seek to limit the impact of the margin requirements on global liquidity and smaller companies by freeing firms from having to post the first $65 million worth of initial margin;
- Expand the types of assets eligible to be posted as initial margin; and
- Phase in the new requirements between December 2015 and December 2019.
Utility special entities
CFTC Rule 1.3(ggg), which defines the term “swap dealer,” includes a general de minimis gross notional threshold of $3 billion (subject to an initial phase-in threshold of $8 billion), and a separate de minimis gross notional threshold of just $25 million for swaps with “special entities.” Dodd-Frank and CFTC rules define the term “special entity” to include, among others, a State, State agency, political subdivision of a State, or any instrumentality of (or established by) a State or subdivision of a State.
CFTC staff issued conditional no-action relief regarding the application of the $25 million special entity de minimis threshold to utility special entities in October 2012. The CFTC subsequently published a proposed rulemaking addressing the issue on June 2, 2014, stating that:
[B]ecause the swaps used by utility special entities are typically conducted in localized and specialized markets and the number of available counterparties may be limited, the . . . [CFTC] believes that the public interest would be better served if the likely counterparties for utility operations-related swaps are able to provide liquidity to this limited segment of the market without registering as swap dealers solely on account of exceeding the Special Entity De Minimis Threshold.
The proposal would allow “dealing swaps” with utility special entities to be excluded in calculating the $25 million special entity de minimis threshold (but they still would have to be counted towards the currently $8 billion general de minimis threshold), if certain conditions are satisfied. Reliance on representations by the utility special entity regarding those conditions generally would be permitted.
The CFTC’s open meeting will be held less than 4 months after the agency issued its proposed rulemaking regarding utility special entities. This may reflect the emphasis that Chairman Massad, along with Commissioner Mark Wetjen and new Commissioners Sharon Bowen and Christopher Giancarlo, are expected to place on assuring that the agency’s Dodd-Frank swap rules do not cause inappropriate burdens or unintended consequences for non-financial entities.