CFTC staff released a final report examining the amount of swap dealing activity triggering the requirement to register as a swap dealer, which is currently set at $8 billion but scheduled to fall to $3 billion at the end of 2017. The report found that only a very large increase or decrease in the swap dealer de minimisthreshold would have an appreciable impact on regulatory coverage. The report summarized public comments, provided further data analysis, and discussed possible alternatives and issues for the Commission to consider in setting the threshold amount.
De minimis threshold. The Dodd-Frank Act directed the CFTC and SEC jointly to further define the term "swap dealer" and exempt from designation as a swap dealer an entity that engages in a de minimis quantity of swap dealing. In 2012, the CFTC and SEC jointly issued CFTC Regulation 1.3(ggg) defining the term "swap dealer" and providing for a de minimis exception.
The de minimis threshold is subject to a phase-in. Currently, a person is not considered a swap dealer unless its swap dealing activity exceeds an aggregate gross notional amount threshold of $8 billion over the prior 12-month period. The threshold amount will drop to $3 billion as of December 31, 2017 unless the Commission acts to modify the de minimis amount or set a different date. In November 2015, staff released a preliminary report for public comment.
What’s the right amount? The final report found that lowering the threshold to $3 billion would require many more entities to register, without appreciably increasing the amount of swaps activity subject to regulation. An additional 84 entities trading in interest rate swaps (IRS) and credit default swaps (CDS) would be required to register at the $3 billion threshold, but less than 1 percent of additional notional activity and swap transactions and less than 4 percent of additional unique counterparties would potentially be covered by swap dealer regulation as a result.
Conversely, at a $15 billion threshold, about 34 fewer entities might need to register, resulting in a decrease in coverage of less than 1 percent for notional activity, swap transactions, and unique counterparties, compared to the $8 billion level. Staff noted that the incremental changes might be smaller than estimated because hedging and proprietary trading activity could not be excluded from the gross notional amounts of potential swap dealing entities.
Many commenters said the de minimis threshold should be kept at $8 billion or increased. They warned of possible negative effects of a lower threshold including curtailed hedging, increased concentration of swap dealers, reduced liquidity, increased volatility, higher fees, and less competitive pricing. Many also pointed to the finding that a $3 billion threshold would require many additional entities to register without capturing significantly more swap dealing activity.
In contrast, some commenters including six U.S. senators recommended that the threshold should be allowed to drop to $3 billion as scheduled, or even lowered further due to the negative impact market manipulation can have on markets, in particular the non-financial commodity swap market. They were also concerned that more than a de minimis portion of energy swaps activity may be exempt from oversight under the $8 billion threshold. Other commenters said the CFTC should extend the phase-in period to allow time to obtain better data before making any adjustments.
Exclusions. Some commenters recommended that certain swaps be excluded from counting toward an entity’s de minimiscalculation. Several said an exclusion for swaps related to loans made by insured depository institutions (IDIs) should be expanded. Also, several commenters said that swaps executed on a swap execution facility (SEF) or designated contract market (DCM) should be excluded because these swaps are already effectively regulated. Americans for Financial Reform opposed this approach, saying the aim of the Dodd-Frank Act was to require registration of all entities holding themselves out as dealers, regardless of execution and clearing.
Possible alternatives. The report identified alternatives to the single gross notional de minimis threshold. One possibility is a multi-factor threshold based on some combination of gross notional swap dealing activity, counterparty count, and transaction count. Or, there could be different de minimisnotional thresholds for each asset class.
Issues to consider. Staff did not recommend any specific actions the Commission should take. The report identified issues for the Commission to consider:
- whether to set the threshold at $8 billion, let it fall to $3 billion as scheduled, or delay the reduction to allow for data improvements and further analysis;
- whether to exclude swaps traded on a SEF or DCM from an entity’s de minimis calculation;
- whether to request staff to obtain further information to continue to assess the IDI Exclusion to determine whether its conditions are overly restrictive.
Giancarlo support for higher threshold. CFTC Commissioner J. Christopher Giancarlo criticized the Commission for not giving the marketplace clarity on plans for the de minimis threshold, warning that the potential drop to a $3 billion threshold is already hurting smaller players who have fewer swap counterparties with which to hedge. Many non-financial companies would have 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, he said.
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