CFTC staff has published for public comment a Preliminary Report regarding the level of swap dealing activity that is considered “de minimis” and therefore does not require an entity to register as a swap dealer with the CFTC. Comments must be filed on or before January 19, 2016.
The de minimis threshold
CFTC rules adopted in 2012 set an initial de minimis threshold of $8 billion in aggregate gross notional swaps entered into for “dealing purposes” over a 12-month period for an entity (and certain of its affiliates) before that entity must register with the CFTC. Swap dealer registration subjects an entity to a multitude of business conduct standards, risk management requirements, and other regulatory obligations (e.g., capital, margin, reporting, recordkeeping, etc.) imposed by the CFTC in its implementation of the Dodd-Frank Act.
However, those rules also provided that the de minimis threshold will fall to $3 billion at the end of 2017 unless the agency takes action to modify it. The CFTC directed that, after data on swap transactions became available in swap data repositories (SDRs) pursuant to other CFTC rules, the staff prepare a report on the de minimis threshold in order to aid the agency in determining whether to alter the scheduled decrease in the de minimis threshold.
The staff’s Preliminary Report makes no recommendations on that question. But it does set out several findings (after making various assumptions necessitated by deficiencies that the staff identifies in the available SDR data). These findings include the following:
- At a $3 billion de minimis threshold, there would be up to approximately 83 additional potential swap dealers based on dealing activity relating to interest rate and credit default swaps, where SDRs have the most reliable data (there currently are about 104 registered swap dealers);
- Swap dealing activity may be concentrated among a small number of entities in the equity and FX asset classes;
- Non-financial entities play a significant part in the non-financial commodity swap market, and some of these entities enter into a sufficient number of such swaps, with a sufficient number of different counterparties, to indicate that they may be engaged in swap dealing activity;
- The volume of a small or mid-size banking enterprise’s swap activities is not directly correlated to its asset size; and
- Only a substantial increase or decrease in the de minimis threshold would have an appreciable impact on the amount of swap dealing activity that is subject to CFTC regulation.
The Preliminary Report also briefly discusses a few alternatives with respect to the de minimis swap dealer registration threshold, such as:
- Setting different de minimis thresholds for different asset classes;
- Setting the threshold based not just on gross notional swap dealing activity, but also on metrics such as number of counterparties and/or number of swap transactions (although staff finds the latter to be less indicative of swap dealing activity than the former);
- Utilizing multiple tiers of regulation based on different levels of swap dealing activity; and
- Excluding swaps executed on an exchange or swap execution facility (SEF), and/or cleared, from an entity’s de minimis calculation.
Again, the Preliminary Report makes no recommendations concerning these alternatives.
Commissioner Giancarlo’s statement
Commissioner Giancarlo issued a Statement in which he urged the CFTC to count only uncleared swaps towards the de minimis threshold. He also warned of the risks that a drop in the de minimis threshold from $8 billion to $3 billion would create for non-financial companies that engage in some swap dealing activity, other end-users, and the US financial system:
[T]he drop in threshold would create unnecessary burdens for non-financial companies that engage in relatively small levels of swap dealing to manage business risk for themselves and their customers. Undoubtedly, it would have the effect of causing many non-financial companies to curtail or terminate risk-hedging activities with their customers, limiting risk-management options for end-users and ultimately consolidating marketplace risk in only a few large swap dealers. Such risk consolidation runs counter to the goal of the Dodd-Frank Act to reduce systemic risk in the marketplace.
The road ahead
After considering comments on the Preliminary Report, staff will publish a final report. Whether the CFTC modifies the de minimis threshold thereafter, and if so, the specific actions it will take (and when it will act), remain to be seen.