Securities Regulation Daily CFTC broadens path for proprietary traders to act as market makers for swaps
Thursday, June 27, 2019

CFTC broadens path for proprietary traders to act as market makers for swaps

By Lene Powell, J.D.

New CFTC no-action relief would ease restrictions and clear up uncertainty for floor traders who wish to engage in swap dealing activity.

In a move designed to open swap dealing to new sources of liquidity, the CFTC issued no-action relief for registered floor traders relating to the need to register as swap dealers. The relief clarifies whether floor traders may enter into swaps other than those traded on registered venues, and eliminates the need to file periodic risk reports (CFTC Letter No. 19-14Re: No-Action Relief for Certain Conditions of the Floor Trader Provision, June 27, 2019).

According to Commissioner Dan Berkowitz, the relief should help a current rule work better and improve price discovery and the safety and resiliency of the swap markets. He noted that swap trading is currently highly concentrated, with the five largest swap dealing banking institutions party to 70 percent of all swaps, and said the relief should help diversify liquidity.

"I believe the floor trader registration category is appropriate for proprietary traders who provide liquidity on electronic trading platforms, but in so doing, do not act as traditional dealers by soliciting customers or negotiating swap terms other than price or quantity," said Berkowitz.

Berkowitz added that formally amending the swap dealer definition would be better than no-action relief, and that Chairman Giancarlo has agreed to direct the CFTC staff to draft a proposed amendment to the floor trader provision. In the meantime, however, he supports the issuance of no-action relief.

Swaps activity. As the CFTC explained in a press release, according to the swap dealer definition in CFTC regulation 1.3, a registered floor trader does not need to consider cleared swaps executed on or subject to the rules of a designated contract market or swap execution facility (DCM and SEF Cleared Swaps) when determining whether it is a swap dealer, provided certain conditions are satisfied.

However, the FIA Principal Traders Group, an industry group for proprietary traders, told the CFTC that its members have been reluctant to trade swaps on SEFs and DCMs because some of the conditions were overly restrictive and unclear. Specifically, members were not sure whether a Floor Trader may enter into any swaps other than DCM and SEF Cleared Swaps and nonetheless continue to benefit from the Floor Trader Provision. FIA PTG also requested relief from the requirement to file periodic risk reports under Regulation 23.600(c)(2).

No-action relief. The CFTC granted the requested no-action relief. The relief permits a registered floor trader to exclude DCM and SEF Cleared Swaps from the determination of whether it is a swap dealer, notwithstanding the registered floor trader: (1) entering into swaps other than DCM and SEF Cleared Swaps; (2) directly or through an affiliated person, negotiating the terms of swaps other than DCM and SEF Cleared Swaps; or (3) not submitting periodic risk reports as required by CFTC regulation 23.600(c)(2).

A floor trader relying on the relief must still comply with CFTC regulations 23.201, 23.202, 23.203, and 23.600 (other than 23.600(c)(2)) with respect to each of its swaps (including swaps that are not DCM and SEF Cleared Swaps) as if it were a swap dealer. In addition, Berkowitz noted that the relief is limited to cleared swap activities conducted on a SEF or DCM. Other off-facility or uncleared swaps that meet the definition of dealing swaps will still count towards the swap dealing registration threshold for these traders.

Quintenz criticism. Commissioner Brian Quintenz criticized the relief as falling short. In his view, the CFTC should amend its rules to allow all market participants—not just proprietary trading firms—to exclude cleared and exchange-traded swaps from their dealing threshold. Quintenz also believes the CFTC should propose to include a risk-sensitive factor within the de minimis exception, like entity-netted notionals (ENNs), to more accurately measure an entity’s swap dealing activity from a size and risk perspective.

MainStory: TopStory Derivatives ExchangesMarketRegulation Swaps

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