De Minimis Exception to the Swap Dealer Definition, 27444-27484 [2018-12362]
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Federal Register / Vol. 83, No. 113 / Tuesday, June 12, 2018 / Proposed Rules
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 1
RIN 3038–AE68
De Minimis Exception to the Swap
Dealer Definition
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is proposing to amend the de
minimis exception within the ‘‘swap
dealer’’ definition in the Commission’s
regulations by: Setting the aggregate
gross notional amount threshold for the
de minimis exception at $8 billion in
swap dealing activity entered into by a
person over the preceding 12 months;
excepting from consideration when
calculating the aggregate gross notional
amount of a person’s swap dealing
activity for purposes of the de minimis
threshold: Swaps entered into with a
customer by an insured depository
institution in connection with
originating a loan to that customer;
swaps entered into to hedge financial or
physical positions; and swaps resulting
from multilateral portfolio compression
exercises; and providing that the
Commission may determine the
methodology to be used to calculate the
notional amount for any group,
category, type, or class of swaps, and
delegating to the Director of the Division
of Swap Dealer and Intermediary
Oversight (‘‘DSIO’’) the authority to
make such determinations (collectively,
the ‘‘Proposal’’). In addition, the
Commission is seeking comment on the
following additional potential changes
to the de minimis exception: Adding a
minimum dealing counterparty count
threshold and a minimum dealing
transaction count threshold; excepting
from consideration when calculating the
aggregate gross notional amount for
purposes of the de minimis threshold
swaps that are exchange-traded and/or
cleared; and excepting from
consideration when calculating the
aggregate gross notional amount for
purposes of the de minimis threshold
swaps that are categorized as nondeliverable forward transactions.
DATES: Comments must be received on
or before August 13, 2018.
ADDRESSES: You may submit comments,
identified by RIN 3038–AE68, by any of
the following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this rulemaking and
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follow the instructions on the Public
Comment Form.
• Mail: Send to Christopher
Kirkpatrick, Secretary of the
Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail, above.
Please submit your comments using
only one of these methods. To avoid
possible delays with mail or in-person
deliveries, submissions through the
CFTC Comments Portal are encouraged.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
comments.cftc.gov. You should submit
only information that you wish to make
available publicly. If you wish for the
Commission to consider information
that is exempt from disclosure under the
Freedom of Information Act (‘‘FOIA’’),1
a petition for confidential treatment of
the exempt information may be
submitted according to the procedures
set forth in § 145.9 of the Commission’s
regulations.2
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse, or
remove any or all of your submission
from https://comments.cftc.gov that it
may deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under FOIA.
FOR FURTHER INFORMATION CONTACT:
Matthew Kulkin, Director, 202–418–
5213, mkulkin@cftc.gov, Erik Remmler,
Deputy Director, 202–418–7630,
eremmler@cftc.gov, Rajal Patel,
Associate Director, 202–418–5261,
rpatel@cftc.gov, or Jeffrey Hasterok, Data
and Risk Analyst, 646–746–9736,
jhasterok@cftc.gov, Division of Swap
Dealer and Intermediary Oversight;
Bruce Tuckman, Chief Economist, 202–
418–5624, btuckman@cftc.gov or Scott
Mixon, Associate Director, 202–418–
5771, smixon@cftc.gov, Office of the
Chief Economist; Mark Fajfar, Assistant
General Counsel, 202–418–6636,
mfajfar@cftc.gov, Office of General
Counsel, Commodity Futures Trading
Commission, Three Lafayette Centre,
15
U.S.C. 552.
CFR 145.9. Commission regulations referred
to herein are found at 17 CFR chapter I.
2 17
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1155 21st Street NW, Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Statutory Authority
B. Regulatory History
C. Policy Considerations
1. Swap Dealer Registration Policy
Considerations
2. De Minimis Exception Policy
Considerations
D. De Minimis Calculation
II. The Proposal
A. $8 Billion De Minimis Threshold
1. Methodology
2. Data and Analysis
3. Request for Comments
B. Swaps Entered Into by Insured
Depository Institutions in Connection
With Loans to Customers
1. Background
2. Proposal
3. Request for Comments
C. Swaps Entered Into To Hedge Financial
or Physical Positions
1. Background and Proposal
2. Request for Comments
D. Swaps Resulting From Multilateral
Portfolio Compression Exercises
1. Background and Proposal
2. Request for Comments
E. Methodology for Calculating Notional
Amounts
1. Background and Proposal
2. Request for Comments
III. Other Considerations
A. Dealing Counterparty Count and Dealing
Transaction Count Thresholds
1. Background
2. Potential Thresholds
B. Exchange-Traded and/or Cleared Swaps
C. Non-Deliverable Forwards
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. $8 Billion De Minimis Threshold
2. Swaps Entered Into by Insured
Depository Institutions in Connection
With Loans to Customers
3. Swaps Entered Into To Hedge Financial
or Physical Positions
4. Swaps Resulting From Multilateral
Portfolio Compression Exercises
5. Methodology for Calculating Notional
Amounts
6. Request for Comment
D. Antitrust Considerations
I. Background
A. Statutory Authority
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (‘‘DoddFrank Act’’) was signed into law on July
21, 2010.3 Title VII of the Dodd-Frank
Act established a statutory framework to
reduce risk, increase transparency, and
promote market integrity within the
3 Public Law 111–203, 124 Stat. 1376 (2010),
available at https://www.cftc.gov/idc/groups/public/
@swaps/documents/file/hr4173_enrolledbill.pdf.
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Federal Register / Vol. 83, No. 113 / Tuesday, June 12, 2018 / Proposed Rules
financial system by regulating the swap
market. Among other things, the DoddFrank Act amended the Commodity
Exchange Act (‘‘CEA’’) 4 to provide for
the registration and regulation of swap
dealers (‘‘SDs’’).5 The Dodd-Frank Act
directed the CFTC and the U.S.
Securities and Exchange Commission
(‘‘SEC’’ and together with the CFTC,
‘‘Commissions’’) to jointly further
define, among other terms, the term
‘‘swap dealer,’’ 6 and to exempt from
designation as an SD a person that
engages in a de minimis quantity of
swap dealing.7
CEA section 1a(49) defines the term
‘‘swap dealer’’ to include any person
who: (1) Holds itself out as a dealer in
swaps; (2) makes a market in swaps; (3)
regularly enters into swaps with
counterparties as an ordinary course of
business for its own account; or (4)
engages in any activity causing the
person to be commonly known in the
trade as a dealer or market maker in
swaps (collectively referred to as ‘‘swap
dealing,’’ ‘‘swap dealing activity,’’ or
‘‘dealing activity’’).8 The statute also
requires the Commission to promulgate
regulations to establish factors with
respect to the making of a determination
to exempt from designation as an SD an
entity engaged in a de minimis quantity
of swap dealing.9 CEA section 1a(49)
further provides that in no event shall
an insured depository institution be
considered to be an SD to the extent it
offers to enter into a swap with a
customer in connection with originating
a loan with that customer.10
B. Regulatory History
Pursuant to the statutory
requirements, in December 2010, the
Commissions issued a proposing release
further defining, among other things, the
term ‘‘swap dealer’’ (‘‘SD Definition
Proposing Release’’).11 Subsequently, in
May 2012, the Commissions issued an
adopting release (‘‘SD Definition
Adopting Release’’) 12 further defining,
4 The
CEA is found at 7 U.S.C. 1, et seq.
7 U.S.C. 6s(a)(1).
6 Dodd-Frank Act section 712(d)(1). See the
definitions of ‘‘swap dealer’’ in CEA section 1a(49)
and § 1.3 of Commission regulations. 7 U.S.C.
1a(49); 17 CFR 1.3.
7 See Dodd-Frank Act section 721.
8 7 U.S.C. 1a(49)(A). In general, a person that
satisfies any one of these prongs is deemed to be
engaged in swap dealing activity.
9 7 U.S.C. 1a(49)(D).
10 7 U.S.C. 1a(49)(A).
11 Further Definition of ‘‘Swap Dealer,’’
‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap
Participant,’’ ‘‘Major Security-Based Swap
Participant’’ and ‘‘Eligible Contract Participant,’’ 75
FR 80174 (proposed Dec. 21, 2010).
12 Further Definition of ‘‘Swap Dealer,’’
‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap
Participant,’’ ‘‘Major Security-Based Swap
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among other things, the term ‘‘swap
dealer’’ in § 1.3 of the CFTC’s
regulations (the ‘‘SD Definition’’) and
providing for a de minimis exception in
paragraph (4) therein.13 The de minimis
exception states that a person shall not
be deemed to be an SD unless its swaps
connected with swap dealing activities
exceed an aggregate gross notional
amount (‘‘AGNA’’) threshold of $3
billion (measured over the prior 12month period), subject to a phase-in
period during which the AGNA
threshold is set at $8 billion.14 The
phase-in period was originally
scheduled to terminate on December 31,
2017, and the de minimis threshold was
scheduled to decrease to $3 billion at
that time. However, as discussed below,
pursuant to paragraph (4)(i)(D) of the SD
Definition, the Commission issued two
successive orders to set new termination
dates, and the phase-in period is
currently scheduled to terminate on
December 31, 2019.15
When the $3 billion de minimis
exception threshold was established, the
Commissions explained that the
information then available regarding
certain portions of the swap market was
limited, and that they expected more
information to be available in the future
(following the implementation of swap
data reporting), which would enable the
Commissions to make a more informed
assessment of the proper level for the de
minimis exception and to revise it as
appropriate.16 In establishing the AGNA
threshold of $3 billion, the
Commissions stated that ‘‘there may be
some uncertainty regarding the exact
Participant’’ and ‘‘Eligible Contract Participant,’’ 77
FR 30596 (May 23, 2012).
13 See 17 CFR 1.3, Swap dealer. As discussed in
more detail in section II, the Commission notes that
a joint rulemaking with the SEC is not required to
amend the de minimis exception, pursuant to
paragraph (4)(v) of the SD Definition. See 17 CFR
1.3, Swap dealer, paragraph (4)(v); 77 FR at 30634
n.464.
14 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A).
Paragraph (4)(i)(A) also provides for a de minimis
threshold of $25 million with regard to swaps in
which the counterparty is a ‘‘special entity’’
(excluding ‘‘utility special entities’’ as provided in
paragraph (4)(i)(B) of the SD Definition) as defined
in CEA section 4s(h)(2)(C), 7 U.S.C. 6s(h)(2)(C). This
proposal would not change the de minimis
threshold for swaps with special entities.
15 See Order Establishing De Minimis Threshold
Phase-In Termination Date, 81 FR 71605 (Oct. 18,
2016); Order Establishing a New De Minimis
Threshold Phase-In Termination Date, 82 FR 50309
(Oct. 31, 2017).
16 See 77 FR at 30632–34. In making their
determination, the Commissions considered the
limited and incomplete swap market data that was
available at that time and concluded that the $3
billion level appropriately considers the relevant
regulatory goals. Id. at 30632. The Commissions
found merit in determining the threshold by
multiplying the estimated size of the domestic swap
market by a 0.001 percent ratio suggested by several
commenters. Id. at 30633.
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27445
level of swap dealing activity, measured
in terms of a gross notional amount of
swaps that should be regarded as de
minimis.’’ 17 In light of this uncertainty,
the Commissions provided for the
phase-in period during which the de
minimis threshold was set at $8 billion,
explaining that this would: (1) Permit
market participants and the
Commissions to become familiar with
the application of the SD Definition and
regulatory requirements; (2) afford the
Commissions time to study the swap
market as it evolved and to consider
new information about the swap market
that became available (e.g., through
swap data reporting); (3) provide
potential SDs that engage in smaller
amounts of activity additional time to
adjust their business practices, while at
the same time preserving a focus on the
regulation of the largest and most
significant SDs; and (4) address
comments suggesting that the de
minimis threshold be set higher initially
to provide for efficient use of regulatory
resources and that implementation of
SD requirements in general be phased.18
In recognition of these limitations and
in anticipation of additional swap
market data becoming available to the
CFTC through the reporting of
transactions to swap data repositories
(‘‘SDRs’’), paragraph (4)(ii)(B) of the SD
Definition was adopted, which directed
CFTC staff to complete and publish for
public comment a report on topics
relating to the definition of the term
‘‘swap dealer’’ and the de minimis
threshold as appropriate, based on the
availability of data and information.19
Paragraph (4)(ii)(C) of the SD Definition
provided that after giving due
consideration to the staff report and any
associated public comment, the CFTC
may either set a termination date for the
phase-in period or issue a notice of
proposed rulemaking to modify the de
minimis exception.20
In the interest of providing ample
opportunity for public input on the
relevant policy considerations, as well
as on staff’s preliminary analysis of the
SDR data, and to ensure that the
Commission had as much information
and data as practicable for purposes of
its determinations with respect to the de
minimis exception, in November 2015
staff issued a preliminary report
concerning the de minimis exception
(‘‘Preliminary Staff Report’’).21 The
17 Id.
at 30633.
id. at 30633–34.
19 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(B).
20 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(C).
21 See Swap Dealer De Minimis Exception
Preliminary Report (Nov. 18, 2015), available at
18 See
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Preliminary Staff Report sought to
analyze the available swap data, in
conjunction with relevant policy
considerations, to assess the $8 billion
AGNA de minimis threshold and
potential alternatives to the AGNA de
minimis exception.22 Commission staff
received 24 comment letters responsive
to the Preliminary Staff Report.23
After consideration of the public
comments received in response to the
Preliminary Staff Report, and further
data analysis, in August 2016 staff
issued a final staff report 24 concerning
the de minimis exception (‘‘Final Staff
Report,’’ and together with the
Preliminary Staff Report, ‘‘Staff
Reports’’). The Final Staff Report
refreshed much of the analysis
conducted in the Preliminary Staff
Report for a subsequent review period,25
and similar to the Preliminary Staff
Report, discussed observations with
respect to the $8 billion de minimis
threshold, as well as the de minimis
exception alternatives considered in the
Preliminary Staff Report, in light of
refreshed data and comments received.
The data analysis in the Staff Reports
provided some insights into the
effectiveness of the de minimis
exception as currently implemented.
For example, staff analyzed the number
of swap transactions involving at least
one registered SD,26 which is indicative
of the extent to which swaps are subject
to SD regulation at the current $8 billion
threshold. Data reviewed for the Final
Staff Report indicated that
approximately 96 percent of all reported
swap transactions involved at least one
registered SD.27
To provide additional time for more
information to become available to
reassess the de minimis exception, in
October 2016 the Commission issued an
order, pursuant to paragraph (4)(ii)(C)(1)
of the SD Definition, establishing
December 31, 2018, as the new
termination date for the $8 billion
https://www.cftc.gov/idc/groups/public/@swaps/
documents/file/dfreport_sddeminis_1115.pdf.
22 For the Preliminary Staff Report, staff analyzed
data from April 1, 2014 through March 31, 2015.
23 The comment letters are available on the
Commission website at https://comments.cftc.gov/
PublicComments/CommentList.aspx?id=1634.
24 See Swap Dealer De Minimis Exception Final
Staff Report (Aug. 15, 2016), available at https://
www.cftc.gov/idc/groups/public/@swaps/
documents/file/dfreport_sddeminis081516.pdf.
25 For the Final Staff Report, staff analyzed data
from April 1, 2015 through March 31, 2016.
26 Given that all of the CEA section 4s
requirements have not yet been implemented by
regulation, the term ‘‘registered SD’’ refers to an
entity that is a provisionally registered SD. See 17
CFR 3.2(c)(3)(iii).
27 See section II.A below for additional discussion
regarding the Staff Reports.
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phase-in period.28 As noted above,
absent any action, the phase-in period
would have terminated, and the de
minimis threshold would have
decreased to $3 billion, on December 31,
2017. To enable staff to conduct
additional analysis, in October 2017 the
Commission further extended the phasein period to December 31, 2019.29
Generally, the extensions provided
additional time for Commission staff to
conduct more complete data analysis
regarding the de minimis exception, and
gave market participants additional time
to begin preparing for a change, if any,
to the de minimis exception threshold.
counterparties that could potentially
benefit from those regulatory
protections.33
Increasing market efficiency,
orderliness, and transparency:
Increasing swap market efficiency,
orderliness, and transparency is another
goal of SD regulation.34 Regulations
requiring SDs, for example, to keep
detailed daily trading records, report
trade information, and engage in
portfolio reconciliation and
compression exercises help achieve
these market benefits.35
C. Policy Considerations
The Commissions also recognized
that, consistent with Congressional
intent, ‘‘an appropriately calibrated de
minimis exception has the potential to
advance other interests.’’ 36 The
Commissions explained that these
interests include increasing efficiency,
allowing limited swap dealing in
connection with other client services,
encouraging new participants to enter
the market, and focusing regulatory
resources.37 The policy objectives
underlying the de minimis exception
are designed to encourage participation
and competition by allowing persons to
engage in a de minimis amount of
dealing without incurring the costs of
registration and regulation.38
Increasing efficiency: A de minimis
exception based on an objective test
with a limited degree of complexity
enables entities to engage in a lower
level of swap dealing with limited
concerns about whether their activities
1. Swap Dealer Registration Policy
Considerations
In adopting the SD Definition, the
Commissions identified the policy goals
underlying SD registration and
regulation generally to include reducing
systemic risk, increasing counterparty
protections, and increasing market
efficiency, orderliness, and
transparency.
Reducing systemic risk: The DoddFrank Act was enacted in the wake of
the financial crisis of 2008, in
significant part, to reduce systemic risk,
including the risk to the broader U.S.
financial system created by
interconnections in the swap market.30
Pursuant to the Dodd-Frank Act, the
Commission has adopted regulations
designed to mitigate the potential
systemic risk inherent in the previously
unregulated swap market.31
Increasing counterparty protections:
Providing regulatory protections for
swap counterparties who may be less
experienced or knowledgeable about the
swap products offered by SDs
(particularly end-users who use swaps
for hedging or investment purposes) is
a fundamental policy goal advanced by
the regulation of SDs.32 The
Commissions recognized that a
narrower or smaller de minimis
exception would increase the number of
28 81
FR 71605.
FR 50309.
30 Dodd-Frank Act, Preamble (indicating that the
purpose of the Dodd-Frank Act was to promote the
financial stability of the United States by improving
accountability and transparency in the financial
system, to end ‘‘too big to fail,’’ to protect the
American taxpayer by ending bailouts, to protect
consumers from abusive financial services
practices, and for other purposes).
31 For example, registered SDs have specific
requirements for risk management programs and
margin. See, e.g., 17 CFR 23.600; 17 CFR 23.150–
23.161.
32 For example, registered SDs are subject to
rigorous external business conduct standard
regulations designed to provide counterparty
protections. See, e.g., 17 CFR 23.400–23.451.
29 82
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2. De Minimis Exception Policy
Considerations
33 77 FR at 30628 (‘‘On the one hand, a de
minimis exception, by its nature, will eliminate key
counterparty protections provided by Title VII for
particular users of swaps and security-based
swaps.’’).
34 Id. at 30629 (‘‘The statutory requirements that
apply to [SDs] . . . include requirements . . .
aimed at helping to promote effective operation and
transparency of the swap . . . markets.’’). See also
id. at 30703 (‘‘Those who engage in swaps with
entities that elude [SD] or major swap participant
status and the attendant regulations could be
exposed to increased counterparty risk; customer
protection and market orderliness benefits that the
regulations are intended to provide could be muted
or sacrificed, resulting in increased costs through
reduced market integrity and efficiency. . . .’’).
35 See, e.g., 17 CFR 23.200–23.205; 17 CFR part
45; 17 CFR 23.502–23.503.
36 See 77 FR at 30628.
37 See 77 FR at 30628–30, 30707–08.
38 In considering the appropriate de minimis
threshold, the Commissions stated that ‘‘exclud[ing]
entities whose dealing activity is sufficiently
modest in light of the total size, concentration and
other attributes of the applicable markets can be
useful in avoiding the imposition of regulatory
burdens on those entities for which dealer
regulation would not be expected to contribute
significantly to advancing the customer protection,
market efficiency and transparency objectives of
dealer regulation.’’ Id. at 30629–30.
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would require registration.39 The de
minimis exception thereby fosters
efficient application of the SD
Definition. Additionally, the
Commission is of the view that the
potential for regular or periodic changes
to the de minimis threshold may reduce
its efficacy by making it challenging for
persons to calibrate their swap dealing
activity as appropriate for their business
models. Further, the existing de
minimis exception reduces regulatory
uncertainty and increases efficiency by
establishing a simple threshold test for
all of a person’s swaps connected with
swap dealing activity. Conversely, the
more variables included in the de
minimis calculation, the more complex
the determination of whether a person
must register, potentially resulting in
less efficiency.40
Allowing limited ancillary dealing: A
de minimis exception allows persons to
accommodate existing clients that have
a need for swaps (on a limited basis)
along with other services.41 This interest
enables end-users to continue
transacting within existing business
relationships, for example to hedge
interest rate or currency risk.
Encouraging new participants: A de
minimis exception also promotes
competition by allowing a person to
engage in some swap dealing activities
without immediately incurring the
regulatory costs associated with SD
registration and regulation.42 Without a
de minimis exception, SD regulation
could become a barrier to entry that may
stifle competition. An appropriately
calibrated de minimis exception could
lower the barrier to entry of becoming
an SD by allowing smaller participants
to gradually expand their business until
the scope and scale of their activity
warrants regulation (and the costs
involved with compliance).
Focusing regulatory resources:
Finally, the de minimis exception also
increases regulatory efficiency by
enabling the Commission to focus its
limited resources on entities whose
swap dealing activity is sufficient in
size and scope to warrant oversight.43
39 Id. at 30628–29 (‘‘[T]he de minimis exception
may further the interest of regulatory efficiency
when the amount of a person’s dealing activity is,
in the context of the relevant market, limited to an
amount that does not warrant registration . . . . In
addition, the exception can provide an objective
test . . . .’’).
40 Id. at 30707–08 (‘‘On the other hand, requiring
market participants to consider more variables in
evaluating application of the de minimis exception
would likely increase their costs to make this
determination.’’).
41 Id. at 30629, 30708.
42 Id. at 30629.
43 Id. at 30628–29.
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The Commissions explained that
‘‘implementing the de minimis
exception requires a careful balancing
that considers the regulatory interests
that could be undermined by an unduly
broad exception as well as those
regulatory interests that may be
promoted by an appropriately limited
exception.’’ 44 A narrower de minimis
exception would likely mean that a
greater number of entities would be
required to register as SDs and become
subject to the regulatory framework
applicable to registered SDs. However, a
de minimis exception that is too limited
could, for example, discourage persons
from engaging in swap dealing activity
in order to avoid the burdens associated
with SD regulation.
D. De Minimis Calculation
Whether a person’s activities
constitute swap dealing is based on a
facts and circumstances analysis.
Generally, a person must count towards
its AGNA de minimis threshold all
swaps it enters into for dealing purposes
over any rolling 12-month period. In
addition, each person whose own swaps
do not exceed the de minimis threshold
must also include in its de minimis
calculation the AGNA of swaps of any
other unregistered affiliate controlling,
controlled by, or under common control
with that person (referred to as
‘‘aggregation’’).45
Pursuant to various CFTC regulations,
certain swaps, subject to specific
conditions, need not be considered in
determining whether a person is an SD,
including: (1) Swaps entered into by an
insured depository institution (‘‘IDI’’)
with a customer in connection with
originating a loan to that customer; 46 (2)
swaps between affiliates; 47 (3) swaps
entered into by a cooperative with its
members; 48 (4) swaps hedging physical
positions; 49 (5) swaps entered into by
floor traders; 50 (6) certain foreign
44 Id. at 30628. See also SD Definition Proposing
Release, 75 FR at 80179 (The de minimis exception
‘‘should apply only when an entity’s dealing
activity is so minimal that applying dealer
regulations to the entity would not be warranted.’’).
45 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A);
Interpretive Guidance and Policy Statement
Regarding Compliance With Certain Swap
Regulations, 78 FR 45292, 45323 (July 26, 2013).
46 See 17 CFR 1.3, Swap dealer, paragraph (5); 77
FR at 30620–24.
47 See 17 CFR 1.3, Swap dealer, paragraph (6)(i);
77 FR at 30624–25.
48 See 17 CFR 1.3, Swap dealer, paragraph (6)(ii);
77 FR at 30625–26.
49 See 17 CFR 1.3, Swap dealer, paragraph (6)(iii);
77 FR at 30611–14.
50 See 17 CFR 1.3, Swap dealer, paragraph (6)(iv);
77 FR at 30614. The floor trader exclusion was also
addressed in no-action relief. See CFTC Staff Letter
No. 13–80, No-Action Relief from Certain
Conditions of the Swap Dealer Exclusion for
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exchange (‘‘FX’’) swaps and FX
forwards; 51 and (7) commodity trade
options.52 In addition, certain crossborder swaps 53 and swaps resulting
from multilateral portfolio compression
exercises 54 need not be counted
towards the person’s de minimis
threshold, subject to certain conditions,
pursuant to CFTC interpretive guidance
and staff letters. Further, certain intergovernmental or quasi-governmental
international financial institutions are
not included within the term ‘‘swap
dealer.’’ 55
II. The Proposal
Given the more complete information
now available regarding certain portions
of the swap market, the data analytical
capabilities developed since the SD
regulations were adopted, and five years
of implementation experience, the
Commission believes that modifications
to the de minimis exception are
necessary to increase efficiency,
flexibility, and clarity in the application
of the SD Definition.
Additionally, in March 2017,
Chairman Giancarlo initiated an agencywide internal review of CFTC
regulations and practices to identify
those areas that could be simplified to
make them less burdensome and costly
Registered Floor Traders (Dec. 23, 2013), available
at https://www.cftc.gov/idc/groups/public/@
lrlettergeneral/documents/letter/13-80.pdf.
51 See Determination of Foreign Exchange Swaps
and Foreign Exchange Forwards Under the
Commodity Exchange Act, 77 FR 69694, 69704–05
(Nov. 20, 2012); Further Definition of ‘‘Swap,’’
‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap
Agreement’’; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, 77 FR 48208, 48253
(Aug. 13, 2012).
52 17 CFR 32.3; Commodity Options, 77 FR
25320, 25326 n.39 (Apr. 27, 2012).
53 See 78 FR 45292; CFTC Staff Letter No. 12–61,
No-Action Relief: U.S. Bank Wholly Owned by
Foreign Entity May Calculate De Minimis
Threshold Without Including Activity From Its
Foreign Affiliates (Dec. 20, 2012), available at
https://www.cftc.gov/sites/default/files/idc/groups/
public/@lrlettergeneral/documents/letter/12-61.pdf;
CFTC Staff Letter No. 12–71, No-Action Relief: U.S.
Bank Wholly Owned by Foreign Entity May
Calculate De Minimis Threshold Without Including
Activity From Its Foreign Affiliates (Dec. 31, 2012),
available at https://www.cftc.gov/idc/groups/public/
%40lrlettergeneral/documents/letter/12-71.pdf; and
CFTC Letter No. 18–13, No-Action Position: Relief
for Certain Non-U.S. Persons from Including Swaps
with International Financial Institutions in
Determining [SD] and Major Swap Participant
Status (May 16, 2018), available at https://
www.cftc.gov/sites/default/files/idc/groups/public/
%40lrlettergeneral/documents/letter/2018-05/1813.pdf.
54 CFTC Staff Letter No. 12–62, No-Action Relief:
Request that Certain Swaps Not Be Considered in
Calculating Aggregate Gross Notional Amount for
Purposes of the Swap Dealer De Minimis Exception
for Persons Engaging in Multilateral Portfolio
Compression Activities (Dec. 21, 2012), available at
https://www.cftc.gov/idc/groups/public/@
lrlettergeneral/documents/letter/12-62.pdf.
55 See 77 FR at 30693.
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(‘‘Project KISS’’).56 The Commission
subsequently published in the Federal
Register a Request for Information
soliciting suggestions from the public
regarding how the Commission’s
existing rules, regulations, or practices
could be applied in a simpler, less
burdensome, and less costly manner.57
As discussed below, a number of
responses submitted pursuant to the
Project KISS Request for Information
also support modifications to the de
minimis exception.58
The amendments proposed herein
support a clearer and more streamlined
application of the SD Definition. They
also provide greater clarity regarding
which swaps need to be counted
towards the de minimis threshold and
consider the practical application of
swaps in different circumstances. This
Proposal includes amendments
regarding: (1) The appropriate de
minimis threshold level; and (2) the
swap transactions that are not required
to be counted towards that threshold.
With respect to the appropriate
threshold level, the Commission is
proposing to amend the de minimis
exception in paragraph (4) of the SD
Definition by setting the AGNA
threshold at $8 billion in swap dealing
activity. Additionally, to complement
the Commission’s definitions of the
types of activities that do not constitute
56 See Remarks of then-Acting Chairman J.
Christopher Giancarlo before the 42nd Annual
International Futures Industry Conference in Boca
Raton, FL (Mar. 15, 2017), available at https://
www.cftc.gov/PressRoom/SpeechesTestimony/
opagiancarlo-20.
57 Project KISS, 82 FR 21494 (May 9, 2017),
amended by 82 FR 23765 (May 24, 2017). The
Federal Register Request for Information, and the
suggestion letters filed by the public are available
at https://comments.cftc.gov/KISS/
KissInitiative.aspx.
58 See Letters from BP Energy Company and BP
Products North America Inc. (collectively, ‘‘BP’’)
(Sep. 29, 2017); Chatham Financial Corp.
(‘‘Chatham’’) (Sep. 29, 2017); Coalition for
Derivatives End-Users (‘‘CDE’’) (Sep. 29, 2017); The
Commercial Energy Working Group (‘‘CEWG’’)
(Sep. 30, 2017); Commodity Markets Council
(‘‘CMC’’) (Sep. 29, 2017); EDF Trading North
America, LLC (‘‘EDF’’) (Sep. 29, 2017); Edison
Electric Institute and the Electric Power Supply
Association (collectively, ‘‘EEI/EPSA’’) (Sep. 29,
2017); Financial Services Roundtable (‘‘FSR’’) (Sep.
30, 2017); Futures Industry Association (‘‘FIA’’)
(Sep. 28, 2017); Institute of International Bankers
(‘‘IIB’’) (Sep. 29, 2017); International Energy Credit
Association (‘‘IECA’’) (Sep. 30, 2017); International
Swaps and Derivatives Association, Inc. (‘‘ISDA’’)
(Sep. 29, 2017); Natural Gas Supply Association
(‘‘NGSA’’) (Sep. 29, 2017); Northern Trust Company
(‘‘Northern Trust’’) (Sep. 21, 2017); Securities
Industry and Financial Markets Association
(‘‘SIFMA’’) (Sep. 29, 2017); Custom House USA,
LLC and Western Union Business Solutions (USA),
LLC (collectively, ‘‘Western Union’’) (Sep. 25,
2017); and Custom House USA, LLC, Western
Union Business, GPS Capital Markets, Inc., and
Associated Foreign Exchange, Inc. (collectively,
‘‘WU/GPS/AFEX’’) (Sep. 29, 2017).
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swap dealing, the Commission is
proposing to add specific exceptions
from the de minimis threshold
calculation for certain swaps entered
into: (1) By IDIs in connection with
loans to customers; and (2) to hedge
financial or physical positions.59
Additionally, the Commission is
proposing to except from a person’s de
minimis threshold calculation swaps
that result from multilateral portfolio
compression exercises, in a manner
consistent with relief granted in a 2012
DSIO staff no-action letter.60 Lastly, the
Commission is proposing to provide
that, for purposes of paragraph (4) of the
SD Definition, the Commission may
determine the methodology to be used
to calculate the notional amount for any
group, category, type, or class of swaps.
The Commission is also proposing to
delegate authority to the Director of
DSIO to make such determinations.
The proposed rule changes would
amend the de minimis exception
provision in paragraph (4) of the SD
Definition, pursuant to the
Commission’s authority under CEA
section 1a(49), which requires the
Commission to promulgate regulations
to establish factors with respect to the
making of this determination to exempt
a de minimis quantity of swap
dealing.61 The Commissions issued the
SD Definition Adopting Release
pursuant to section 712(d)(1) of the
Dodd-Frank Act, which requires the
CFTC and SEC to jointly adopt rules
regarding the definition of, among other
things, the term ‘‘swap dealer.’’ The
CFTC continues to coordinate with the
SEC on SD and security-based swap
dealer regulations. However, as
discussed in the SD Definition Adopting
Release, a joint rulemaking is not
required with respect to the de minimis
exception-related factors.62 The
Commission notes that it is consulting
with the SEC and prudential regulators
regarding the changes to the SD
Definition discussed in this Proposal.63
Although this Proposal includes
several potential rule amendments in a
single notice, the CFTC may in the
59 These proposed exceptions would be in
addition to the existing exclusions in paragraphs (5)
and (6)(iii) of the SD Definition for swaps entered
into by IDIs and swaps entered into for the purpose
of hedging physical positions, respectively.
60 See CFTC Staff Letter No. 12–62, supra note 54.
61 7 U.S.C. 1a(49)(D). See also 17 CFR 1.3, Swap
dealer, paragraph (4)(v).
62 77 FR at 30634 n.464 (‘‘We do not interpret the
joint rulemaking provisions of section 712(d) of the
Dodd-Frank Act to require joint rulemaking here,
because such an interpretation would read the term
‘‘Commission’’ out of CEA section 1a(49)(D) (and
Exchange Act section 3(a)(71)(D)), which
themselves were added by the Dodd-Frank Act.’’).
63 As required by § 712(a)(1) of the Dodd-Frank
Act.
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future issue separate adopting releases
for any aspect of this Proposal that is
finalized.64
A. $8 Billion De Minimis Threshold
As discussed above, the de minimis
threshold for the AGNA of a person’s
swap dealing activity is scheduled to
decrease to $3 billion on December 31,
2019, requiring persons to begin
calculating towards the lower threshold
on January 1, 2019. Based on the data
and analysis described below, the
Commission is proposing to amend
paragraph (4)(i)(A) of the SD Definition
by setting the de minimis threshold at
$8 billion. For added clarity, the
Commission is also proposing to change
the term ‘‘swap positions’’ to ‘‘swaps’’
in paragraph (4)(i)(A). Additionally, the
Commission is proposing to delete a
parenthetical clause in paragraph
(4)(i)(A) referring to the period after
adoption of the rule further defining the
term ‘‘swap,’’ and to remove and reserve
paragraph (4)(ii) of the SD Definition,
which addresses the phase-in procedure
and staff report requirements of the de
minimis exception (discussed above in
section I.B), since both of those
provisions would no longer be
applicable.
The Commission recognizes the
benefits and drawbacks of an SD
Definition that relies upon AGNA for SD
registration purposes. The Commission
is aware of potential viable alternative
metrics and remains open to the
possibility of relying on a different
approach in the future, such as a
threshold based on entity-netted
notional amounts 65 or other risk
metrics, including, but not limited to,
initial margin, open positions, material
swaps exposure, net current credit
exposure, gross negative or positive fair
value, potential future exposure, valueat-risk, or expected shortfall. However,
at this time, the Commission continues
to believe that the de minimis exception
should include an AGNA threshold
component. As noted in the SD
Definition Adopting Release, a notional
value test is useful to measure the
relative amount of an entity’s swap
dealing activity, and it avoids potential
64 See ICI v. CFTC, 720 F.3d 370, 379 (D.C. Cir.
2013) (‘‘[A]s the Supreme Court has emphasized,
‘[n]othing prohibits federal agencies from moving in
an incremental manner.’ ’’) (quoting FCC v. Fox
Television Stations, Inc., 556 U.S. 502, 522 (2009)).
65 See Introducing ENNs: A Measure of the Size
of Interest Rate Swap Markets (Jan. 2018), available
at https://www.cftc.gov/idc/groups/public/@
economicanalysis/documents/file/oce_
enns0118.pdf; Remarks of Chairman J. Christopher
Giancarlo before Derivcon 2018, New York City, NY
(Feb. 1, 2018), available at https://www.cftc.gov/
PressRoom/SpeechesTestimony/opagiancarlo35.
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distorting effects from measures that
reflect netting or collateral offsets.66
1. Methodology
(i) Filters and Assumptions
For this Proposal, CFTC staff
conducted an analysis of SDR data from
January 1, 2017, through December 31,
2017 (the ‘‘review period’’).67 Generally,
employing methodologies similar to
those used for purposes of the Staff
Reports, staff attempted to calculate
persons’ swaps activity in terms of
AGNA to assess how the swap market
might be impacted by potential changes
to the current de minimis exception.
Given improvements in the quality of
data being reported to SDRs since the
Staff Reports were issued, Commission
staff was able to analyze the AGNA of
swaps activity for interest rate swaps
(‘‘IRS’’), credit default swaps (‘‘CDS’’),
FX swaps,68 and equity swaps (while by
comparison, in the Staff Reports, AGNA
analysis was limited to IRS and CDS).69
However, given certain limitations
discussed below, AGNA data was not
available for non-financial commodity
(‘‘NFC’’) swaps. In addition to nowavailable AGNA information for FX
swaps and equity swaps, there were also
continued improvements in the
consistency of legal entity identifier
(‘‘LEI’’) and unique swap identifier
reporting. However, as explained in the
Staff Reports, the SDR data lacks: (1) A
reporting field to indicate whether a
swap was entered into for dealing
purposes (as opposed to hedging,
investing, or proprietary trading); and
(2) a reporting field to indicate whether
a specific swap need not be considered
in determining whether a person is an
SD or need not be counted towards the
person’s de minimis threshold, pursuant
to one of the exclusions or exceptions
identified above in section I.D.70 These
constraints limited the usefulness of the
SDR data to identify which swaps
should be counted towards a person’s
de minimis threshold, and the ability to
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66 77
FR at 30630.
67 The data used in this Proposal was sourced
from data reported to the four registered SDRs:
BSDR LLC, Chicago Mercantile Exchange Inc.,
DTCC Data Repository, and ICE Trade Vault.
68 The term ‘‘FX swaps’’ is used in this Proposal
to only describe those FX transactions that are
counted towards a person’s de minimis calculation.
The term ‘‘FX swaps’’ does not refer to swaps and
forwards that are not counted towards the de
minimis threshold pursuant to the exemption
granted by the Secretary of the Treasury. See 77 FR
at 69704–05; 77 FR at 48253. Section III.C below
discusses the Secretary of the Treasury’s exemption
in more detail in the context of non-deliverable
forward transactions.
69 See Preliminary Staff Report, supra note 21, at
21–22; Final Staff Report, supra note 24, at 19.
70 See Preliminary Staff Report, supra note 21, at
15; Final Staff Report, supra note 24, at 19.
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precisely assess the current de minimis
threshold or the impact of potential
changes to the current exclusions.
As noted above, for purposes of this
Proposal, staff utilized assumptions and
methodologies similar to those detailed
in the Staff Reports to approximate
potential swap dealing activity.71 To
attempt to account for the various
exclusions relevant to the SD Definition,
filters were applied to the data to
exclude certain transactions and entities
from the analysis. The reason an entity
enters into a swap (e.g., dealing,
hedging, investing, proprietary trading)
is not collected under the reporting
requirements in part 45 of the
Commission’s regulations.72
Accordingly, staff used filters to identify
and exclude certain categories of
entities—such as funds, insurance
companies, cooperatives, governmentsponsored entities, most commercial
end-users, and international financial
institutions—as potential SDs because
these entities generally use swaps for
investing, hedging, or proprietary
trading and do not seem to be engaged
in swap dealing activity, or otherwise
enter into swaps that would not be
included in determining whether the
entity is an SD.73 Further, additional
filters allowed for the exclusion of interaffiliate 74 and non-U.S. swap
transactions.75
With the benefits of improved data
quality and analytical tools, staff was
able to conduct a more granular
analysis, as compared to the Staff
Reports, in order to more accurately
identify those entities that, based on
their observable business activities, are
potentially engaged in swap dealing
activity (‘‘In-Scope Entities’’) 76 versus
those likely engaged in other kinds of
transactions (e.g., entering into swaps
for investment purposes). Further, for
the purposes of this Proposal, a
minimum unique counterparty count of
10 counterparties was utilized to better
identify the entities that are likely to be
engaged in transactions that have to be
considered for the SD Definition. Each
distinct, unaffiliated counterparty of a
71 See Preliminary Staff Report, supra note 21, at
13–21; Final Staff Report, supra note 24, at 4–6, 19–
20.
72 See 17 CFR part 45 app.1.
73 See section I.D (discussing the de minimis
threshold calculation). The Commission notes that
entity-based exclusions are not a determinative
means of assessing whether any particular entity is
engaged in swap dealing. See Preliminary Staff
Report, supra note 21, at 12; Final Staff Report,
supra note 24, at 6.
74 See 17 CFR 1.3, Swap dealer, paragraph (6)(i).
75 See generally 78 FR 45292.
76 The majority of In-Scope Entities are banks,
broker-dealers, non-bank financial entities, and
affiliates thereof.
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person was regarded as one unique
counterparty (hereinafter referred to as
‘‘counterparty’’).77 A threshold of 10
counterparties was utilized because,
after excluding inter-affiliate and nonU.S. swap transactions, 83 percent of
registered SDs had 10 or more reported
counterparties, while approximately 97
percent of unregistered entities had
fewer than 10 counterparties. Therefore,
this appeared to be a reasonable
threshold to better identify entities
likely engaged in swap dealing. Adding
this filter to the analysis reduced the
likelihood of false positives—i.e.,
reduced the potential that entities likely
engaged in hedging or other non-dealing
activity would be identified as potential
SDs.
The updated analysis largely
confirmed the analysis conducted for
the Staff Reports; 78 however, there is
greater confidence in the results given
the improved data and refined
methodology. Nonetheless, given the
lack of a swap dealing indicator for
individual swaps, and the lack of an
indicator to identify whether a specific
swap need not be considered in
determining whether a person is an SD
or counted towards the person’s de
minimis threshold, staff’s analysis is
based on a person’s AGNA of swaps
activity, as opposed to AGNA of swap
dealing activity.
With respect to NFC swaps,
Commission staff encountered a number
of challenges in calculating notional
amounts. These included: (1) The vast
array of underlying commodities with
differing characteristics; (2) the multiple
types of swaps (e.g., fixed-float, basis,
options, multi-leg, exotic); (3) the
variety of data points required to
calculate notional amounts (e.g., price,
quantity, quantity units, location,
grades, exchange rate); (4) localityspecific terms; and (5) lack of industry
standards for notional amountequivalent calculations.79 However,
77 For example, if Bank A entered into swaps with
each of three entities that are all affiliated with
Bank B (i.e., Bank A entered into swaps with each
of Bank B–1, Bank B–2, and Bank B–3), and also
entered into a swap with Bank C, Bank A was
considered to have four counterparties (Bank B–1,
Bank B–2, Bank B–3, and Bank C). Additionally,
each invalid identifier (i.e., an invalid LEI or a nonLEI identifier) was considered its own counterparty.
However, it is possible that each invalid identifier
does not actually represent a distinct counterparty
because one counterparty may be associated with
multiple invalid identifiers.
78 See generally Final Staff Report, supra note 24;
Preliminary Staff Report, supra note 21.
79 Compare Letter from American Petroleum
Institute, Commodity Markets Council, Edison
Electric Institute, Electric Power Supply
Association, Independent Petroleum Association of
America, and Natural Gas Supply Association (Sep.
20, 2012) (stating that ‘‘The notional amount for
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given the limitations in the AGNA data,
counterparty counts and transaction
counts were used to analyze likely swap
dealing activity for participants in the
NFC swap market.
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(ii) Regulatory Coverage Analysis
To assess the relative impact on the
swap market of potential changes to the
de minimis exception, CFTC staff
analyzed the extent to which the swap
market was subject to SD regulation
during the review period because at
least one counterparty to a swap was a
registered SD (‘‘2017 Regulatory
Coverage’’). For purposes of this
analysis, any person listed as a
provisionally registered SD on
December 31, 2017, was considered to
be a registered SD. Specifically, with
regard to 2017 Regulatory Coverage,
staff identified the extent to which: (1)
Swaps activity, measured in terms of
AGNA, was subject to SD regulation
during the review period because at
least one counterparty to a swap was a
registered SD (‘‘2017 AGNA Coverage’’);
(2) swaps activity, measured in terms of
number of transactions, was subject to
SD regulation during the review period
because at least one counterparty to a
swap was a registered SD (‘‘2017
Transaction Coverage’’); and (3) swaps
activity was subject to SD regulation
during the review period, measured in
terms of number of counterparties who
transacted with at least one registered
SD (‘‘2017 Counterparty Coverage’’).
Additionally, staff estimated
regulatory coverage by assessing the
extent to which the swap market would
have been subject to SD regulation at
different de minimis thresholds because
at least one counterparty to a swap was
identified as a ‘‘Likely SD’’ (‘‘Estimated
Regulatory Coverage’’). For purposes of
options should be based on the absolute value of
the product of the notional quantity of the option
(without adjustment for the option delta) multiplied
by the transaction value for the option (i.e., the
premium).’’), attached to a 2016 comment letter
available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=60595&SearchText, with
Letter from Futures Industry Association Principal
Traders Group (Dec. 20, 2012) (proposing a
methodology that does not utilize premium value
or the strike price, but does include option delta in
the calculation), available at https://ptg.fia.org/file/
487/download?token=HSUPcHmL. See also Ernst &
Young, Notional value under Dodd-Frank: survey of
energy commodities participants (2013) (‘‘While the
term notional value is commonly used in industry,
in practice there isn’t a single accepted
definition.’’), available at https://www.ey.com/
Publication/vwLUAssets/Notional_value_-_under_
Dodd-Frank/$FILE/Notional_value_under_Dodd_
Frank.pdf.
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this analysis, the term ‘‘Likely SD’’
refers to an In-Scope Entity that exceeds
a specified AGNA threshold level, and
trades with at least 10 counterparties.
With regard to Estimated Regulatory
Coverage, staff identified the extent to
which: (1) Swaps activity, measured in
terms of AGNA, would have been
subject to SD regulation during the
review period, at a specified de minimis
threshold, because at least one
counterparty to a swap was identified as
a Likely SD at that de minimis threshold
(‘‘Estimated AGNA Coverage’’); (2)
swaps activity, measured in terms of
number of transactions, would have
been subject to SD regulation during the
review period, at a specified de minimis
threshold, because at least one
counterparty to a swap was identified as
a Likely SD at that de minimis threshold
(‘‘Estimated Transaction Coverage’’);
and (3) counterparties in the swap
market would have transacted with at
least one Likely SD during the review
period, at a specified de minimis
threshold (‘‘Estimated Counterparty
Coverage’’).
2. Data and Analysis
For this Proposal, the Commission
considered reducing the AGNA de
minimis threshold to $3 billion,
maintaining the threshold at $8 billion,
or increasing the threshold. Based on
the data and related policy
considerations discussed below, the
Commission is of the view that
maintaining the current $8 billion
AGNA de minimis threshold is
appropriate. The policy objectives
underlying SD regulation—reducing
systemic risk, increasing counterparty
protections, and increasing market
efficiency, orderliness, and
transparency—would not be
significantly advanced if the threshold
were to decrease to $3 billion or to
increase from the current $8 billion
level.80 Nor does the Commission
believe that the policy objectives
furthered by a de minimis exception—
increasing efficiency, allowing limited
ancillary dealing, encouraging new
participants, and focusing regulatory
resources—would be significantly
advanced if the threshold were to be
changed.81
80 As discussed below, the analysis explored the
hypothetical effects on the swap market of changing
the AGNA threshold to various amounts between $3
billion and $100 billion.
81 The Commission also notes that setting the
threshold at $8 billion would be consistent with a
non-binding Congressional Directive stating that the
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Analysis of the data indicates that: (1)
The current $8 billion threshold
subjects almost all swap transactions (as
measured by AGNA or transaction
count) to SD regulations; 82 (2) at a lower
threshold of $3 billion, there would
only be a small amount of additional
AGNA and swap transactions subject to
SD regulation, and potentially reduced
liquidity in the swap market, as
compared to the $8 billion threshold; (3)
counterparty protections may be
reduced at higher thresholds; and (4) a
lower threshold could lead to reduced
liquidity for NFC swaps, negatively
impacting end-users and commercial
entities who utilize NFC swaps for
hedging purposes. Additionally, the
Commission expects that maintaining
an $8 billion threshold would foster the
efficient application of the SD
Definition by providing continuity and
addressing the uncertainty associated
with the end of the phase-in period.
The analysis below is based on a
January 1, 2017, through December 31,
2017, review period, and includes swap
transactions reported to SDRs,
excluding inter-affiliate and non-U.S.
transactions.83 The total size of the swap
market that was analyzed, after
excluding inter-affiliate and non-U.S.
transactions, was approximately $221.1
trillion in AGNA of swaps activity
(excluding NFC swaps), approximately
4.4 million transactions, and 39,107
counterparties.
(i) Regulatory Coverage at $8 Billion
Threshold
As shown below, the data indicates
that, at the $8 billion threshold, there
was nearly complete 2017 Regulatory
Coverage as measured by 2017 AGNA
Coverage and 2017 Transaction
Coverage.
Commission should establish a de minimis
threshold of $8 billion or greater within 60 days of
enactment of the Consolidated Appropriations Act
of 2016. See Accompanying Statement to the
Consolidated Appropriations Act of 2016,
Explanatory Statement Division A at 32 (Dec. 2015),
available at https://docs.house.gov/meetings/RU/
RU00/20151216/104298/HMTG-114-RU0020151216-SD002.pdf; H.Rpt. 114–205 at 76 (July 14,
2015), available at https://www.congress.gov/114/
crpt/hrpt205/CRPT-114hrpt205.pdf.
82 SD regulations include, among other things,
registration, internal and external business conduct
standards, reporting, recordkeeping, risk
management, margin, and chief compliance officer
requirements. However, the requirement to report a
swap to an SDR applies regardless of whether an
SD is a counterparty to the swap.
83 See section II.A.1 above for additional
discussion regarding the methodology utilized to
conduct the analysis.
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27451
TABLE 1—SWAPS SUBJECT TO SD REGULATION
2017 TRANSACTION COVERAGE
Number of
transactions
including at
least one
registered SD
Total
number of
transactions
Asset class
2017
transaction
coverage
(%)
IRS .........................................................................................................................................
CDS .......................................................................................................................................
FX swaps ...............................................................................................................................
Equity swaps ..........................................................................................................................
NFC swaps ............................................................................................................................
945,593
133,570
2,443,659
281,219
633,943
937,975
132,899
2,435,537
281,211
546,823
99.19
99.50
99.67
>99.99
86.26
Total ................................................................................................................................
4,437,984
4,334,445
97.67
As seen in Table 1, at the $8 billion
threshold, almost all swap transactions
involved at least one registered SD as a
counterparty, greater than 99 percent for
IRS, CDS, FX swaps, and equity swaps.
For NFC swaps, approximately 86
percent of transactions involved at least
one registered SD as a counterparty. As
discussed in more detail in section
II.A.2.iv, although that percentage is
lower than the approximately 99
percent for the other asset classes, the
Commission is of the view that with
respect to NFC swaps, lower SD
regulatory coverage is acceptable given
the unique characteristics of the NFC
swap market. Overall, approximately 98
percent of transactions involved at least
one registered SD.
TABLE 2—SWAPS SUBJECT TO SD REGULATION
2017 AGNA COVERAGE
AGNA including
at least one
registered SD
($Bn)
Total AGNA
($Bn)
Asset class
2017 AGNA
coverage
(%)
182,961
7,527
28,794
1,850
182,847
7,490
28,775
1,850
99.94
99.51
99.93
99.99
Total ................................................................................................................................
pmangrum on DSK30RV082PROD with PROPOSALS2
IRS .........................................................................................................................................
CDS .......................................................................................................................................
FX swaps ...............................................................................................................................
Equity swaps 84 ......................................................................................................................
221,132
220,963
99.92
As seen in Table 2, at the $8 billion
threshold, almost all AGNA of swaps
activity included at least one registered
SD, greater than 99 percent for IRS,
CDS, FX swaps, and equity swaps.
The 2017 Transaction Coverage and
2017 AGNA Coverage ratios indicate
that SD regulations covered nearly all
swaps in these asset classes, signifying
that nearly all swaps already benefited
from the policy considerations
discussed above (e.g., reducing systemic
risk, increasing counterparty
protections, and increasing market
efficiency, orderliness, and
transparency) at the existing $8 billion
threshold.
The Commission notes the 2017
Counterparty Coverage was
approximately 83.5 percent—i.e.,
approximately 16.5 percent of the
counterparties in the swap market did
not transact with at least one registered
SD on at least one swap (6,440
counterparties out of a total of 39,107),
and therefore potentially did not benefit
84 Coverage is approximately 99.99 percent due to
rounding.
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from the counterparty protection aspects
of SD regulations.85 However, given the
2017 AGNA Coverage and 2017
Transaction Coverage statistics, these
6,440 entities overall had limited swaps
activity. Collectively, the 6,440 entities
entered into 77,333 transactions, an
average of approximately 12
transactions per entity, and represented
only approximately 1.7 percent of the
overall number of transactions during
the review period. Additionally,
collectively, the 6,440 entities had an
AGNA of approximately $68 billion in
swaps activity, an average of
approximately $10.6 million per entity,
and they represented only
approximately 0.03 percent of the
overall AGNA of swaps activity during
85 The actual number of entities without a single
transaction with a registered SD is likely lower than
6,440. Of the 6,440 entities, 1,780 have invalid
identifiers that staff was unable to manually replace
with a valid LEI. It is possible that these 1,780
invalid identifiers actually represent fewer than
1,780 distinct counterparties because one
counterparty may be associated with multiple
invalid identifiers.
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the review period in IRS, CDS, FX
swaps, and equity swaps.
The Commission also believes that
this limited activity indicates that, to
the extent these 6,440 entities are
engaging in swap dealing activities,
such activity is likely ancillary and in
connection with other client services,
potentially advancing the policy
rationales behind a de minimis
exception. For example, of the 6,440
entities, 5,302 are active in IRS,
indicating that these entities may be
entering into loan-related swaps with
banks. These banks may be entering into
an outright amount of swap dealing
activity at a level below the de minimis
threshold, or do not have to register
because of the exclusion for swaps
entered into by IDIs in connection with
originating loans.86
Generally, the Commission is of the
view that the policy considerations
underlying SD regulation—reducing
systemic risk, increasing counterparty
protections, and increasing market
efficiency, orderliness, and
86 See
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17 CFR 1.3, Swap dealer, paragraph (5).
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transparency—are being appropriately
advanced at the current $8 billion
threshold given the regulatory coverage
statistics discussed above. Only a low
percentage of swaps activity is not
currently covered by SD regulationrelated requirements,87 indicating that
the current threshold is appropriate.
Additionally, as discussed below in
sections II.A.2.ii and II.A.2.iv, a
reduction in the de minimis threshold
could negatively affect the policy
considerations underlying the de
minimis exception, as compared to the
current $8 billion threshold.
(ii) Regulatory Coverage at Lower
Threshold
Given the high percentage of swaps
that were subject to SD regulation at the
existing $8 billion threshold during the
review period, a lower threshold of $3
billion would result in only a small
amount of additional activity being
directly subjected to SD regulation. To
estimate the effect of a lower de minimis
threshold during the review period, staff
compared the number of Likely SDs and
the Estimated AGNA Coverage,
Estimated Transaction Coverage, and
Estimated Counterparty Coverage at $8
billion and $3 billion thresholds.
Table 3 estimates the percentage of
IRS, CDS, FX swaps, and equity swaps
that would involve at least one Likely
SD at de minimis thresholds of $3
billion and $8 billion. To make these
calculations, staff used the methodology
described in section II.A.1 to determine
Likely SDs at the indicated thresholds.88
Because SDR data does not include
information indicating the underlying
purposes of a swap,89 the analysis likely
includes swaps that were not required
to be counted under the SD Definition
(e.g., swaps entered into for hedging,
investing, or proprietary trading
purposes). Therefore, the estimates of
the number of Likely SDs at various
AGNA thresholds may differ from the
actual number of entities that would be
required to register at those thresholds.
For example, Table 3 shows that an
estimated 108 entities could be required
to register as SDs at the $8 billion
threshold, whereas the figures in Table
1 are based on the 100 actual registered
SDs.90 Nevertheless, the Commission
believes that Table 3 presents a
reasonably accurate estimate of how the
number of SDs that are required to
register will fluctuate with changes in
the threshold.
TABLE 3—NUMBER OF LIKELY SDS AND ESTIMATED REGULATORY COVERAGE
IRS, CDS, FX SWAPS, AND EQUITY SWAPS
[Minimum 10 counterparties]
AGNA threshold
($Bn)
Number of
likely SDs
Likely SD
count
change vs.
$8 Bn
threshold
Estimated
AGNA
coverage
(%)
Estimated
transaction
coverage
(%)
Estimated
counterparty
coverage
(%)
1
2
3
4
5
6
3 ...........................................................................................
8 ...........................................................................................
Column 1 of Table 3 lists the AGNA
thresholds for which information is
being presented. Column 2 is the
number of Likely SDs at each given
threshold as determined using the
methodology described above, including
a 10 counterparty minimum. Column 3
is the change in the number of Likely
SDs, as compared to the current $8
billion threshold. Columns 4, 5, and 6
illustrate the Estimated Regulatory
121
108
13
........................
99.96
99.95
Coverage, in percentage terms, for the $3
billion and $8 billion de minimis
thresholds during the review period.
The percentages are based on a total
market size in IRS, CDS, FX swaps, and
equity swaps of approximately $221.1
trillion in AGNA of swaps activity, 3.8
million transactions, and 34,774
counterparties, after excluding interaffiliate and non-U.S. transactions.91
99.83
99.77
90.75
88.80
As columns 2 and 3 indicate, the
number of Likely SDs increases from
108 at an $8 billion AGNA threshold to
121 at a $3 billion AGNA threshold—an
increase of 13 entities. However, as
columns 4 through 6 indicate, and as
explained in more detail below in
Tables 4 through 6, if these 13 entities
were all registered as SDs, the increase
in Estimated Regulatory Coverage would
be small.
TABLE 4—ESTIMATED AGNA COVERAGE ($3 Bn and $8 Bn)
IRS, CDS, FX SWAPS, AND EQUITY SWAPS
[Minimum 10 counterparties]
Estimated
AGNA
coverage
(%)
pmangrum on DSK30RV082PROD with PROPOSALS2
AGNA threshold
($Bn)
3 .......................................................................................................................
8 .......................................................................................................................
87 Transactions that do not include at least one
registered SD as a counterparty would generally not
be subject to SD-specific regulations (e.g., margin,
business conduct standard, and risk management
requirements). However, such transactions would
still be subject to swap reporting requirements (e.g.,
17 CFR part 45), among other regulations.
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99.96
99.95
88 The term ‘‘Likely SD’’ refers to an In-Scope
Entity that exceeds a notional threshold test, and
trades with at least 10 counterparties.
89 See 17 CFR part 45 app. 1.
90 Some registered SDs were not captured in the
Estimated Regulatory Coverage analysis since they
primarily are involved in the NFC swap market,
which is excluded from this AGNA-based analysis.
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Change in
estimated
AGNA
coverage
(pct. point)
0.01
........................
Estimated
AGNA
coverage
($Bn)
221,039
221,020
Change in
estimated
AGNA
coverage
($Bn)
19
........................
In addition, some of the existing registered SDs
reported AGNA of swaps activity below $8 billion
in 2017 but remained registered SDs.
91 Note that the market totals of 3.8 million
transactions and 34,774 counterparties exclude NFC
swaps, whereas the market totals, in section II.A.2.i
above, of 4.4 million transactions and 39,107
counterparties include NFC swaps.
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As seen in Table 4, at a $3 billion
threshold, the Estimated AGNA
Coverage would have increased from
approximately $221,020 billion (99.95
percent) to $221,039 billion (99.96
percent)—an increase of $19 billion (a
0.01 percentage point increase).
TABLE 5—ESTIMATED TRANSACTION COVERAGE ($3 Bn and $8 Bn)
IRS, CDS, FX SWAPS, AND EQUITY SWAPS
[Minimum 10 counterparties)
AGNA threshold
($Bn)
3 .......................................................................................................................
8 .......................................................................................................................
As seen in Table 5, at a $3 billion
threshold, the Estimated Transaction
Coverage would have increased from
Change in
estimated
transaction
coverage
(pct. point)
Estimated
transaction
coverage
(%)
99.83
99.77
Estimated
transaction
coverage
(number of
trades)
0.06
........................
3,795,330 trades (99.77 percent) to
3,797,734 trades (99.83 percent)—an
3,797,734
3,795,330
Change in
estimated
transaction
coverage
(number of
trades)
2,404
........................
increase of 2,404 trades (a 0.06
percentage point increase).
TABLE 6—ESTIMATED COUNTERPARTY COVERAGE ($3 Bn and $8 Bn)
IRS, CDS, FX SWAPS, AND EQUITY SWAPS
[Minimum 10 counterparties]
AGNA threshold
($Bn)
3 .......................................................................................................................
8 .......................................................................................................................
As seen in Table 6, at a $3 billion
threshold, the Estimated Counterparty
Coverage would have increased from
30,879 counterparties (88.80 percent) to
31,559 counterparties (90.75 percent)—
an increase of 680 counterparties (a 1.96
percentage point increase).
The Commission is of the view that
these small increases in Estimated
AGNA Coverage, Estimated Transaction
Coverage, and Estimated Counterparty
Coverage indicate that the systemic risk
mitigation, counterparty protection, and
market efficiency benefits of SD
regulation would be enhanced in only a
very limited manner if the de minimis
threshold decreased from $8 billion to
Change in
estimated
counterparty
coverage
(pct. point)
Estimated
counterparty
coverage
(%)
90.75
88.80
1.96
........................
$3 billion. Additionally, the limited
regulatory and market benefits of a $3
billion threshold should be considered
in conjunction with the costs associated
with a lower threshold. In particular,
the persons required to register would
incur the likely significant costs of
implementing, among other things,
policies and procedures, technology
systems, and training programs to
address requirements imposed by SD
regulations.92
Further, if the de minimis threshold
decreases to $3 billion, it is possible that
the number of Likely SDs would be
smaller than estimated because the
analysis includes swaps that would not
Estimated
counterparty
coverage
(number of
counterparties)
Change in
estimated
counterparty
coverage
(number of
counterparties)
31,559
30,879
680
........................
be required to be counted under the SD
Definition (e.g., swaps entered into for
hedging, investing, or proprietary
trading purposes). Further, persons
engaged in swap dealing in amounts
between $3 billion and $8 billion may
also reduce their swap dealing activity
to remain under a lower threshold, thus
further reducing the actual incremental
change.
To more fully understand the
potential market impact of a lower
threshold, the Commission also
analyzed the 13 entities that were
identified as Likely SDs at a $3 billion
threshold but not at an $8 billion
threshold.
TABLE 7—CATEGORIES OF LIKELY SDS ($3 Bn and $8 Bn)
IRS, CDS, FX SWAPS, AND EQUITY SWAPS
pmangrum on DSK30RV082PROD with PROPOSALS2
[Minimum 10 counterparties]
Category
$3 Bn
$8 Bn
Difference
Bank/Bank subsidiary/Bank affiliate ............................................................................................
Non-bank financial .......................................................................................................................
Other 93 ........................................................................................................................................
105
14
2
95
11
2
10
3
0
Total ......................................................................................................................................
121
108
13
92 Registered SDs are subject to a broad range of
regulatory requirements. See, e.g., supra note 82.
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93 ‘‘Other’’ refers to commercial entities, such as
consumers, merchants, producers, or traders of
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physical commodities, who appear to be engaging
in some swap dealing activity.
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As seen in Table 7, for IRS, CDS, FX
swaps, and equity swaps, entities that
would potentially have to register at a
lower threshold primarily include banks
or bank affiliates, 10 of the 13 entities
in total. In the aggregate, these 13
entities have only approximately $19
billion in AGNA of swaps activity
(approximately 0.01 percent of the
overall market) and 2,406 transactions
(approximately 0.06 percent of the
overall market) with currently
unregistered market participants, further
indicating that decreasing the threshold
to $3 billion would yield only a small
increase in Estimated Regulatory
Coverage. After reviewing the list of the
10 banking entities’ counterparties, it is
also likely that some of the activity for
the 10 banking entities consists of swaps
that would be excluded from the de
minimis calculation pursuant to the
exclusion for swaps entered into by IDIs
in connection with loans to customers
(as provided for in paragraph (5) of the
SD Definition), potentially reducing the
likelihood that all or some of these
entities would be required to register at
a lower threshold.
In addition to a negligible increase in
the AGNA or number of transactions
that would be subject to SD regulation
at a $3 billion threshold, policy
considerations may indicate that
lowering the threshold would not be
beneficial to the market. A number of
Project KISS suggestions addressed
these policy-related concerns.94
The Commission believes that a $3
billion AGNA de minimis threshold
could lead certain entities to reduce or
cease swap dealing activity to avoid
registration and its related costs.
Generally, the costs associated with
registering as an SD may exceed the
revenue from dealing swaps for many
small or mid-sized banks and nonfinancial entities. Additionally, some
persons engaged in swap dealing
activities below the current $8 billion
threshold have indicated that swap
dealing is not a major source of revenue
and is only complementary to other
client-facing businesses, suggesting that
these smaller dealing entities could
reduce or eliminate their swap dealing
activities if the threshold is lowered.
Although the magnitude of this effect is
not certain, reduced swap dealing
activity could lead to increased
concentration in the swap dealing
market, reduced availability of potential
swap counterparties, reduced liquidity,
increased volatility, higher fees, wider
bid/ask spreads, or reduced competitive
pricing. The end-user counterparties of
these smaller swap dealing entities may
be adversely impacted by the above
consequences and could face a reduced
ability to use swaps to manage their
business risks.95
Based on the likely small increase in
regulatory coverage, and the potential
negative market effects of a $3 billion de
minimis threshold, the Commission is
of the view that, on balance, the overall
policy goals of SD registration and the
de minimis exception would not be
advanced by lowering the threshold
from $8 billion.
(iii) Regulatory Coverage at Higher
Thresholds
To assess the effect of a higher de
minimis threshold, staff compared the
number of Likely SDs and the Estimated
AGNA Coverage, Estimated Transaction
Coverage, and Estimated Counterparty
Coverage at $8 billion, $20 billion, $50
billion, and $100 billion thresholds. As
with the analysis above regarding $3
billion and $8 billion thresholds, to
make these calculations, staff used the
methodology described in section II.A.1
to determine Likely SDs at the indicated
thresholds.96 As discussed, if a swap
transaction includes at least one Likely
SD, that transaction would theoretically
be subject to SD-related regulations.
TABLE 8—NUMBER OF LIKELY SDS AND REGULATORY COVERAGE
IRS, CDS, FX SWAPS, AND EQUITY SWAPS
[Minimum 10 counterparties]
AGNA threshold
($Bn)
Number of
likely SDs
Likely SD
count
change vs.
$8 Bn
threshold
Estimated
AGNA
coverage
(%)
Estimated
transaction
coverage
(%)
Estimated
counterparty
coverage
(%)
1
2
3
4
5
6
8 ...........................................................................................
20 .........................................................................................
50 .........................................................................................
100 .......................................................................................
108
93
81
72
........................
(15)
(27)
(36)
99.95
99.94
99.91
99.88
99.77
99.72
99.35
99.20
88.80
86.00
83.09
81.19
pmangrum on DSK30RV082PROD with PROPOSALS2
As seen in Table 8, the number of
Likely SDs decreases from 108 at an $8
billion AGNA threshold to 93, 81, and
72 Likely SDs, at the $20 billion, $50
billion, and $100 billion thresholds,
respectively. As columns 4 and 5
indicate, and as explained in more
detail below in Tables 9 and 10, the
reduction in the number of Likely SDs
would lead to only a relatively small
decrease in Estimated AGNA Coverage
and Estimated Transaction Coverage at
higher AGNA thresholds of up to $100
billion. However, as column 6 indicates,
and as explained in more detail below
in Table 11, there would potentially be
a more pronounced reduction in
Estimated Counterparty Coverage at
higher AGNA thresholds.
94 See Letters from BP, Chatham, CDE, CMC, EDF,
EEI/EPSA, FSR, IIB, IECA, ISDA, NGSA, SIFMA,
Western Union, and WU/GPS/AFEX, supra note 58.
95 See generally Letters from BP, Chatham, CDE,
CMC, EDF, EEI/EPSA, FSR, IIB, IECA, ISDA, NGSA,
SIFMA, Western Union, and WU/GPS/AFEX, supra
note 58; Final Staff Report, supra note 24, at 11–
12 (citing comment letters submitted in response to
Preliminary Staff Report, supra note 21).
96 Additionally, as discussed in section II.A.2.ii,
the percentages are based on a total market size in
IRS, CDS, FX swaps, and equity swaps of
approximately $221.1 trillion in AGNA of swaps
entered into, 3.8 million transactions, and 34,774
counterparties, after excluding inter-affiliate and
non-U.S. transactions.
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TABLE 9—ESTIMATED AGNA COVERAGE ($8 Bn, $20 Bn, $50 Bn, and $100 Bn)
IRS, CDS, FX SWAPS, AND EQUITY SWAPS
[Minimum 10 counterparties]
Estimated
AGNA
coverage
(%)
AGNA threshold
($Bn)
8 .......................................................................................................................
20 .....................................................................................................................
50 .....................................................................................................................
100 ...................................................................................................................
As seen in Table 9, at a $100 billion
threshold, the Estimated AGNA
Coverage would have decreased from
approximately $221,020 billion (99.95
99.95
99.94
99.91
99.88
percent) to $220,877 billion (99.88
percent)—a decrease of $143 billion (a
0.06 percentage point decrease). The
decrease would be lower at thresholds
Change in
estimated
AGNA
coverage
(pct. point)
........................
(0.01)
(0.04)
(0.06)
Estimated
AGNA
coverage
($Bn)
221,020
221,005
220,935
220,877
Change in
estimated
AGNA
coverage
($Bn)
........................
(15)
(85)
(143)
of $20 billion and $50 billion, at 0.01
percentage points and 0.04 percentage
points, respectively.
TABLE 10—ESTIMATED TRANSACTION COVERAGE ($8 Bn, $20 Bn, $50 Bn, and $100 Bn)
IRS, CDS, FX SWAPS, AND EQUITY SWAPS
[Minimum 10 counterparties]
Estimated
transaction
coverage
(%)
AGNA threshold
($Bn)
8 .......................................................................................................................
20 .....................................................................................................................
50 .....................................................................................................................
100 ...................................................................................................................
As seen in Table 10, at a $100 billion
threshold, the Estimated Transaction
Coverage would have decreased from
3,795,330 trades (99.77 percent) to
99.77
99.72
99.35
99.20
3,773,440 trades (99.20 percent)—a
decrease of 21,890 trades (a 0.58
percentage point decrease). The
decrease would be lower at thresholds
Change in
estimated
transaction
coverage
(pct. point)
........................
(0.05)
(0.42)
(0.58)
Estimated
transaction
coverage
(number of
trades)
3,795,330
3,793,454
3,779,466
3,773,440
Change in
estimated
transaction
coverage
(number of
trades)
........................
(1,876)
(15,864)
(21,890)
of $20 billion and $50 billion, at 0.05
percentage points and 0.42 percentage
points, respectively.
TABLE 11—ESTIMATED COUNTERPARTY COVERAGE ($8 Bn, $20 Bn, $50 Bn, and $100 Bn)
IRS, CDS, FX SWAPS, AND EQUITY SWAPS
[Minimum 10 counterparties]
Estimated
counterparty
coverage
(%)
AGNA threshold
($Bn)
pmangrum on DSK30RV082PROD with PROPOSALS2
8 .......................................................................................................................
20 .....................................................................................................................
50 .....................................................................................................................
100 ...................................................................................................................
As seen in Table 11, at a $100 billion
threshold, the Estimated Counterparty
Coverage would have decreased from
30,879 counterparties (88.80 percent) to
28,234 counterparties (81.19 percent)—
a decrease of 2,645 counterparties (a
7.61 percentage point decrease). The
decrease would be lower at thresholds
of $20 billion and $50 billion, at 2.80
percentage points and 5.71 percentage
points, respectively.
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88.80
86.00
83.09
81.19
The small decrease in Estimated
AGNA Coverage and Estimated
Transaction Coverage at higher
thresholds potentially indicates that
increasing the threshold to up to $100
billion may have a limited effect on the
systemic risk and market efficiency
policy considerations of SD regulation.
Additionally, a higher threshold could
enhance the benefits associated with a
de minimis exception, for example by
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Change in
estimated
counterparty
coverage
(pct. point)
........................
(2.80)
(5.71)
(7.61)
Estimated
counterparty
coverage
(number of
counterparties)
Change in
estimated
counterparty
coverage
(number of
counterparties)
30,879
29,907
28,893
28,234
........................
(972)
(1,986)
(2,645)
allowing entities to increase ancillary
dealing activity. However, the decrease
in Estimated Counterparty Coverage
indicates that fewer entities would be
transacting with registered SDs, and
therefore, the counterparty protection
benefits of SD regulation might be
reduced if the de minimis threshold
increased from $8 billion to $20 billion,
$50 billion, or $100 billion.
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Also, the Commission is preliminarily
of the view that maintaining the status
quo signals long-term stability of the de
minimis threshold. This should provide
for the efficient application of the SD
Definition as it allows for long-term
planning based on the current AGNA de
minimis threshold.
(iv) Regulatory Coverage of NFC Swap
Market
As indicated in Table 1 above,
approximately 86 percent of NFC swaps
involved at least one registered SD.
Although that percentage is lower than
the approximately 99 percent for other
asset classes, as discussed below, the
Commission is of the view that lower
SD regulatory coverage is acceptable
given the unique characteristics of the
NFC swap market. Table 12 presents
information on the category and SD
registration status of In-Scope Entities
with at least 10 NFC swap
counterparties.
TABLE 12—CATEGORIES AND REGISTRATION STATUS
IN-SCOPE ENTITIES
[Minimum 10 NFC counterparties]
Registered
SDs
Category
Unregistered
entities
Bank/Bank subsidiary/Bank affiliate ........................................................................................................................
Non-bank financial entity (e.g., traders without physical assets) ............................................................................
Other (e.g., commercial entities, such as consumers, merchants, producers, or traders of physical commodities, who appear to be engaging in some swap dealing activity) .......................................................................
39
2
12
8
3
22
Total ..................................................................................................................................................................
44
42
Analysis of SDR data indicates that
were 86 In-Scope Entities with 10 or
more NFC swap counterparties during
the review period. As seen in Table 12,
of these 86 entities, 44 are registered
SDs and 42 are unregistered entities. Of
the 42 unregistered entities, 22 have a
primary business that is non-financial in
nature. Specifically, these are
commercial entities, such as consumers,
merchants, producers, or traders of
physical commodities, who appear to be
engaging in some swap dealing activity.
Moreover, half of the 12 unregistered
banks or bank affiliates active in the
NFC swap market are small or mid-sized
in nature. Further, of the 42
unregistered entities, only seven have
AGNA of swaps activity greater than $3
billion in IRS, CDS, FX swaps, and
equity swaps, indicating that the
majority of these entities are primarily
or exclusively active in NFC swaps.97 In
addition to the fact that entering into
NFC swaps is the primary swaps
activity for the majority of these 42
entities, a review of these entities’
transaction data indicates that they
appear to provide NFC swaps generally
to smaller end-user counterparties,
potentially to permit these
counterparties to hedge risks associated
with physical commodities.
TABLE 13—NFC SWAP TRANSACTION STATISTICS
IN-SCOPE ENTITIES
[Minimum 10 NFC counterparties] 98
Registered
SDs
(44 total)
Statistic
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Transactions:
Mean .................................................................................................................................................................
Total ..................................................................................................................................................................
Total as Percent of all NFC transactions .........................................................................................................
Counterparties:
Mean .................................................................................................................................................................
Total ..................................................................................................................................................................
Total as Percent of all NFC counterparties ......................................................................................................
Unregistered
entities
(42 total)
12,638
546,656
86%
2,195
85,025
13%
176
4,626
83%
40
1,207
22%
Table 13 indicates that registered SDs
with 10 or more counterparties entered
into 86 percent of the transactions in the
NFC swap market, and faced 83 percent
of counterparties in at least one
transaction,99 indicating that the
existing $8 billion de minimis threshold
has helped extend the benefits of SD
registration to much of the NFC swap
market. The trading activity of the 42
unregistered entities represents
approximately 13 percent of the overall
NFC swap market by transaction count.
However, as compared to the existing 44
registered SDs with at least 10
counterparties, these 42 unregistered
entities have significantly lower mean
transaction and counterparty counts,
indicating that they may only be
providing ancillary dealing services to
accommodate commercial end-user
clients, and/or be engaged in non-swap
dealing activity, such as hedging
activity or proprietary trading.
Lacking notional-equivalent data for
NFC swaps, it is unclear how many of
the 42 entities would actually be subject
to SD registration at any given de
minimis threshold. It is possible that a
portion of the swaps activity for some or
all of these entities qualifies for the
physical hedging exclusion in paragraph
(6)(iii) of the SD Definition or is
97 Five have greater than $8 billion in AGNA of
swaps activity.
98 The transaction and counterparty totals are not
mutually exclusive, as some of the 44 registered
SDs transact with the 42 unregistered entities. The
44 registered SDs also transact with some of the
same counterparties as the 42 unregistered entities.
99 Including existing registered SDs with fewer
than 10 counterparties would only add 167 trades
to the analysis.
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otherwise not swap dealing activity,
regardless of the de minimis threshold
level.100
The Commission believes that the
available data, related policy
considerations, and comments from
market participants 101 demonstrate that
maintaining an $8 billion threshold is
also appropriate with respect to the NFC
swap asset class.
First, a reduced de minimis threshold
likely would have negative impacts on
NFC swap liquidity. Specifically, some
entities may reduce dealing to avoid
registration and its related costs. Many
of the entities identified in Table 12 that
are not registered as SDs are nonfinancial in nature and trade in physical
commodity markets, or are small or
mid-sized banks. Based on analysis of
data and comments from swap market
participants, it is likely that much of the
swap dealing by these entities serves
small or mid-sized end-users in their
localized markets. Often, the end-users
served by these entities do not have
trading relationships with larger,
financial-entity SDs, and the end-users
rely on these small to mid-sized and/or
non-financial entities to access liquidity
provided by larger dealers.
For example, the 42 unregistered InScope Entities described above entered
into NFC swaps with 1,207
counterparties, 1,174 of which were not
registered SDs. Of these 1,174 entities,
705 had no transactions with registered
SDs. Almost all of the 705 entities are
commercial end-users.102 Of the 52,396
NFC swaps that these 705 entities
entered into, 48,813 were entered into
with the 42 unregistered In-Scope
Entities discussed above.103 Therefore,
it is likely that these 705 entities are
generally relying on the 42 unregistered
In-Scope Entities for access to the NFC
swap market. It is unclear if these 705
entities would be able to establish
trading lines with registered SDs if some
of the 42 entities reduced or eliminated
their NFC swap dealing activities.
If the de minimis threshold is
decreased, the Commission is of the
view that this would negatively affect
swap market access and liquidity for
commercial end-user counterparties of
currently unregistered entities that are
active in NFC swaps. Specifically, these
100 Hypothetically, if all 42 entities registered, the
percentage of all NFC swaps facing at least one
registered SD would rise from approximately 86
percent to 98 percent.
101 See Letters from BP, CDE, CMC, EDF, EEI/
EPSA, FSR, IIB, IECA, ISDA, NGSA, and SIFMA,
supra note 58.
102 The 705 entities comprise 12.6 percent of the
5,578 counterparties who entered into NFC swaps.
103 The 48,413 NFC swaps comprise 7.6 percent
of the 633,943 NFC swaps entered into during the
review period.
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entities may reduce or stop dealing
activity if a lower threshold would
subject them to SD registration.104 The
swap dealing activity of unregistered
entities dealing in NFC swaps is likely
a smaller part of those entities’ overall
business activities, and may not support
the costs associated with SD registration
and compliance.105
Generally, a reduction in the
threshold could negatively affect the
ability of these entities to provide
ancillary services involving swap
transactions, a stated benefit for having
a de minimis exception. Further, if the
threshold is maintained at $8 billion, it
is possible that unregistered entities that
currently limit trading activity to below
$3 billion may increase dealing volumes
to levels closer to $8 billion, potentially
increasing liquidity in the NFC swap
market. As the Commission has stated:
The futures and swaps markets are
essential to our economy and the way that
businesses and investors manage risk.
Farmers, ranchers, producers, commercial
companies, municipalities, pension funds,
and others use these markets to lock in a
price or a rate. This helps them focus on
what they do best: innovating, producing
goods and services for the economy, and
creating jobs. The CFTC works to ensure
these hedgers and other market participants
can use markets with confidence.106
Allowing small to mid-sized nonfinancial entities with a presence in the
physical commodity markets to provide
ancillary services involving swap
transactions helps fulfill this goal.
Second, even if the threshold were
decreased, it is unclear if or to what
extent the 2017 Counterparty Coverage
statistic of 86 percent would increase for
NFC swaps since several of those
entities likely already have less than $3
billion in AGNA of swap dealing
activity. Additionally, as discussed
above, many of these entities would
likely reduce activity to remain below
the SD de minimis threshold, further
reducing any increase in Estimated
Counterparty Coverage from a lower
threshold.
Third, many of the entities engaged in
limited swap dealing activity for NFC
104 Comments from market participants have
specifically indicated that some entities would
reduce or stop dealing activity if the de minimis
threshold is reduced. See generally Letters from BP,
CMC, EDF, IIB, and NGSA; Final Staff Report, supra
note 24, at 11–12, 16–17 (citing comment letters
submitted in response to Preliminary Staff Report,
supra note 21).
105 See generally Letters from BP, CDE, CMC,
EDF, EEI/EPSA, FSR, IIB, IECA, ISDA, NGSA, and
SIFMA, supra note 58; Final Staff Report, supra
note 24, at 11–12, 16–17 (citing comment letters
submitted in response to Preliminary Staff Report,
supra note 21).
106 CFTC Responsibilities, available at https://
www.cftc.gov/About/MissionResponsibilities/
index.htm.
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swaps appear to have a unique role in
the market in that their primary
business is generally non-financial in
nature and the swap dealing activity is
ancillary to their primary role in the
market. Further, these firms generally
pose less systemic risk than financial
market SDs.107 For these reasons, the
Commission believes that there are
strong public policy arguments not to
require that all of these entities register
with the Commission.
Fourth, although it has not conducted
an analysis of AGNA activity in NFC
swaps,108 the Commission is of the
preliminary view that increasing the de
minimis threshold could potentially
lead to fewer entities being required to
register as SDs due to their NFC swap
market activity. This could reduce the
number of entities transacting with
registered SDs, and therefore also
reduce the benefits of those SD
regulations concerned with
counterparty protections.
Preliminarily, the Commission does
not believe that decreasing or increasing
the de minimis threshold would have
much benefit for the NFC swap market.
Rather, there is a concern that a change
in the threshold would cause harm to
that market.
(v) Setting an $8 Billion Threshold
Avoids Potential Administrative
Burdens
The Commission notes that setting the
de minimis threshold at $8 billion
would allow persons to continue to use
existing calculation procedures and
business processes that are geared
towards the $8 billion threshold.
Modifying the threshold could require
entities to revise monitoring processes,
modify internal systems, and amend
policies and procedures tied to an $8
billion threshold, leading to increased
costs. Further, as discussed, the
Commission expects that maintaining
an $8 billion threshold would foster the
efficient application of the SD
Definition by providing continuity and
addressing the uncertainty associated
with the end of the phase-in period.
Based on the available data and policy
considerations discussed above, the
Commission proposes to maintain the
de minimis threshold for AGNA of swap
dealing at $8 billion.
107 See e.g., Letter from CDE, supra note 58; Final
Staff Report, supra note 24, at 12 (citing comment
letters submitted in response to Preliminary Staff
Report, supra note 21).
108 As discussed above in section II.A.1.i, there
were challenges in calculating notional amounts for
NFC swaps.
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3. Request for Comments
The Commission requests comments
on the following questions. To the
extent possible, please quantify the
impact of issues discussed in comments,
including costs and benefits, as
applicable.
(1) Based on the data and related
policy considerations, is an $8 billion
de minimis threshold appropriate? Why
or why not?
(2) Should the de minimis threshold
be reduced to $3 billion? Why or why
not?
(3) Should the de minimis threshold
be increased? If so, to what threshold?
Why or why not?
(4) Are the assumptions discussed
above regarding a $3 billion de minimis
threshold, an $8 billion de minimis
threshold, or a higher de minimis
threshold accurate, including, but not
limited to, compliance costs and market
liquidity assumptions?
(5) As an alternative or in addition to
maintaining an $8 billion threshold,
should the Commission consider a
tiered SD registration structure that
would establish various exemptions
from SD compliance requirements for
SDs whose AGNA of swap dealing
activity is between the $3 billion and $8
billion?
(6) What is the impact of the de
minimis threshold level on market
liquidity? Are there entities that would
increase their swap dealing activities if
the Commission raised the de minimis
exception, or decrease their swap
dealing activities if the Commission
lowered the threshold? How might these
changes affect the swap market?
(7) Are there additional policy or
statutory considerations underlying SD
regulation or the de minimis exception
that the Commission should consider?
(8) Have there been any structural
changes to the swap market such that
the policy considerations have evolved
since the adoption of the SD Definition?
(9) Are entities curtailing their swap
dealing activity to avoid SD registration
at $8 billion or $3 billion thresholds,
and if so, what impact is that having on
the swap market? Are certain asset
classes or product types more affected
by such curtailed dealing activity than
others?
(10) Does registration as an SD allow
persons to substantially increase their
swap dealing activity, or is increased
swap dealing activity constrained by
capital requirements at the firm level
and other considerations?
(11) Should an entity’s AGNA of swap
dealing activity continue to be tested
against the de minimis threshold for any
rolling 12-month period, only for
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calendar year periods, or for some other
regular 12-month period such as
quarterly or semi-annual testing?
(12) What are the benefits and
detriments to using AGNA of swap
dealing activity as the relevant criterion
for SD registration, as compared to other
options, including, but not limited to,
entity-netted notional amounts or credit
exposures?
B. Swaps Entered Into by Insured
Depository Institutions in Connection
With Loans to Customers
1. Background
The CEA provides that in no event
shall an IDI be considered to be an SD
to the extent it offers to enter into a
swap with a customer in connection
with originating a loan with that
customer.109 With respect to the
statutory exclusion, the Commissions
jointly adopted paragraph (5) of the SD
Definition, which allows an IDI to
exclude—when determining whether it
is an SD—certain swaps it enters into
with a customer in connection with
originating a loan to that customer (the
‘‘IDI Swap Dealing Exclusion’’).110
For a swap to be considered to have
‘‘been entered into . . . in connection
with originating a loan,’’ the IDI Swap
Dealing Exclusion requires that: (1) The
IDI enter into the swap no earlier than
90 days before and no later than 180
days after execution of the loan
agreement (or transfer of principal); 111
(2) the rate, asset, liability, or other
notional item underlying the swap be
tied to the financial terms of the loan or
be required as a condition of the loan to
hedge risks arising from potential
changes in the price of a commodity; 112
(3) the duration of the swap not extend
beyond termination of the loan; 113 (4)
the IDI be the source of at least 10
percent of the principal amount of the
loan, or the source of a principal
amount greater than the notional
amount of swaps entered into by the IDI
with the customer in connection with
the loan; 114 (5) the AGNA of swaps
entered into in connection with the loan
not exceed the principal amount
outstanding; 115 (6) the swap be reported
as required by other CEA provisions if
it is not accepted for clearing; 116 (7) the
transaction not be a sham, whether or
not the transaction is intended to
qualify for the IDI Swap Dealing
109 7
U.S.C. 1a(49)(A).
CFR 1.3, Swap dealer, paragraph (5).
111 17 CFR 1.3, Swap dealer, paragraph (5)(i)(A).
112 17 CFR 1.3, Swap dealer, paragraph (5)(i)(B).
113 17 CFR 1.3, Swap dealer, paragraph (5)(i)(C).
114 17 CFR 1.3, Swap dealer, paragraph (5)(i)(D).
115 17 CFR 1.3, Swap dealer, paragraph (5)(i)(E).
116 17 CFR 1.3, Swap dealer, paragraph (5)(i)(F).
110 17
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Exclusion; 117 and (8) the loan not be a
synthetic loan, including, without
limitation, a loan credit default swap or
a loan total return swap.118 A swap that
meets the above requirements would not
be considered when assessing whether a
person is an SD.
Based on information gained from
market participants,119 as well as
analysis of data submitted to SDRs, the
Commission believes that the IDI Swap
Dealing Exclusion: (1) Has
unnecessarily restrictive conditions; (2)
is not clear in certain instances; and (3)
limits the ability of IDIs to provide
swaps that would allow their customers
to properly hedge risks associated with
bank loans. In general, these issues
make it more difficult for IDIs that are
not registered as SDs to provide swaps
to loan customers because of the
concern that certain swaps would not
qualify for the IDI Swap Dealing
Exclusion. Certain IDIs are restricting
loan-related swaps because of the
potential that such swaps would have to
be counted towards an IDI’s de minimis
threshold, leading the IDI to register as
an SD and incur registration-related
costs. The restrictions on loan-related
swaps by IDIs may result in reduced
availability of swaps for the loan
customers of these IDIs, potentially
hampering the ability of end-user
borrowers to enter into hedges in
connection with their loans.
The Commission is not at this time
proposing to amend the IDI Swap
Dealing Exclusion in paragraph (5) of
the SD Definition. As discussed above,
pursuant to requirements of section
712(d)(1) of the Dodd-Frank Act, the
CFTC and SEC jointly adopted the IDI
Swap Dealing Exclusion in paragraph
(5) as part of the definition of what
constitutes swap dealing activity. Rather
than proposing to revise the scope of
activity that constitutes swap dealing,
the Commission is proposing to amend
paragraph (4) of the SD Definition,
which addresses the de minimis
exception.120 In particular, the
117 17
CFR 1.3, Swap dealer, paragraph (5)(iii)(A).
CFR 1.3, Swap dealer, paragraph (5)(iii)(B).
119 See, e.g., Letters from Chatham, FSR, and
Northern Trust, supra note 58; Final Staff Report,
supra note 24, at 17 (citing comment letters
submitted in response to Preliminary Staff Report,
supra note 21).
120 A joint rulemaking is not required with
respect to changes to the de minimis exceptionrelated factors. 77 FR at 30634 n.464 (‘‘We do not
interpret the joint rulemaking provisions of section
712(d) of the Dodd-Frank Act to require joint
rulemaking here, because such an interpretation
would read the term ‘‘Commission’’ out of CEA
section 1a(49)(D) (and Exchange Act section
3(a)(71)(D)), which themselves were added by the
Dodd-Frank Act.’’). As noted above, pursuant to
section 712(a)(1) of the Dodd-Frank Act, the
Commission is consulting with the SEC and
118 17
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Commission is proposing to add specific
factors that an IDI can consider when
assessing whether swaps entered into
with customers in connection with
loans to those customers must be
counted towards the IDI’s de minimis
calculation. The IDI could assess these
factors and exclude qualifying swaps
from the de minimis calculation
regardless of whether the swaps would
qualify for the IDI Swap Dealing
Exclusion.
Specifically, the Commission is
proposing new paragraph (4)(i)(C) of the
SD Definition, which would except from
the calculation of the de minimis
threshold certain loan-related swaps
entered into by IDIs (the ‘‘IDI De
Minimis Provision’’). The IDI De
Minimis Provision would have
requirements that are similar to the IDI
Swap Dealing Exclusion, but would
encompass a broader scope of loanrelated swaps. The proposed IDI De
Minimis Provision includes: (1) A
lengthier timing requirement for when
the swap must be entered into; (2) an
expansion of the types of swaps that are
eligible; (3) a reduced syndication
percentage requirement; (4) an
elimination of the notional amount cap;
and (5) a refined explanation of the
types of loans that would qualify.
The Commission notes that any swap
that meets the requirements of the IDI
Swap Dealing Exclusion in paragraph
(5) of the SD Definition would also meet
the requirements of the proposed IDI De
Minimis Provision. However, proposed
paragraph (4)(i)(C) provides additional
flexibility as to what swaps need to be
counted towards an IDI’s de minimis
calculation. The Commission believes
that the broader scope of the proposed
IDI De Minimis Provision, described in
further detail below, may advance the
policy objectives of the de minimis
exception by allowing some IDIs to
provide swaps to customers in
connection with loans without having to
register as an SD. In other words, the
proposed provision would facilitate
swap dealing in connection with other
client services and may encourage more
IDIs to participate in the swap market—
two policy objectives of the de minimis
exception. Greater availability of loanrelated swaps may also improve the
ability of customers to hedge their loanrelated exposure. The Commission also
believes that the more flexible
provisions of the proposed IDI De
Minimis Provision may allow for more
focused, efficient application of the SD
Definition to the activities of IDIs that
offer swaps in connection with loans.
Commission staff reviewed data to
assess the potential impact of the IDI De
Minimis Provision. Table 14 below
provides information regarding the
AGNA of swaps activity entered into by
entities that were identified as IDIs 121
with at least 10 counterparties in IRS,
CDS, FX swaps, and equity swaps.122
The table summarizes the AGNA of
swaps activity of smaller IDIs within
various AGNA ranges from $1 billion to
$50 billion. Note that persons that are
affiliated with IDIs were not included in
this analysis (e.g., broker-dealer
subsidiaries, other non-IDI affiliates).
TABLE 14—IDI ACTIVITY (RANGES BETWEEN $1 Bn AND $50 Bn) IRS, CDS, FX SWAPS, AND EQUITY SWAPS
[Minimum 10 counterparties]
AGNA of swaps activity 123
Number of IDIs
Range of AGNA of swaps activity
($Bn)
1–3 .......................................................................................
3–8 .......................................................................................
8–20 .....................................................................................
20–50 ...................................................................................
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Not registered
as SDs
Registered
as SDs
Total with at
least one
registered SD
($Bn)
Total with no
registered SDs
($Bn)
Total with no
registered SDs
(percent of
overall market)
13
10
4
3
13.5
37.5
42.6
160.7
8.9
16.5
6.5
14.2
0.004
0.007
0.003
0.006
0
0
0
2
As seen in Table 14, there are a
number of IDIs that have 10 or more
counterparties and are active in the
swap market at lower AGNAs.124 For
example, there are 13 IDIs that are not
currently registered as SDs and have
between $1 billion and $3 billion in
AGNA of swaps activity. Based on
market participant comments 125 and
review of the trading data, the
Commission believes that many of the
unregistered entities engaged in $1
billion to $50 billion in AGNA of swaps
activity are entering into swaps with
customers in connection with loans to
those customers. Additionally, many of
these IDIs could be restricting their
swaps activity because the IDI Swap
Dealing Exclusion limits, or is
ambiguous regarding, which swaps are
considered to be ‘‘in connection with’’
originating a loan (and therefore are
excluded from the SD analysis).
As Table 14 indicates, the AGNA of
swaps activity that these unregistered
IDIs enter into with other non-registered
entities is low relative to the total swap
market analyzed. For example, there are
10 IDIs that have between $3 billion and
$8 billion each in AGNA of swaps
activity—none of which are registered
SDs. In aggregate, these IDIs entered into
approximately $54.0 billion in AGNA of
swaps activity. However, only $16.5
billion of that activity was between two
entities not registered as SDs,
representing only 0.007 percent of the
total AGNA of swaps activity during the
review period. Depending on the range
of AGNA of swaps activity examined,
the level of activity occurring between
two entities not registered as SDs (at
least one of which is an IDI) varies
between only approximately 0.003
percent and 0.007 percent of the total
AGNA of swaps activity.
Given those low percentages, the
Commission is of the view that the
policy benefits of SD regulation likely
would not be significantly diminished if
the proposed IDI De Minimis Provision
prudential regulators regarding the changes to the
de minimis exception discussed in this Proposal.
121 Based on information on the Federal Deposit
Insurance Corporation website, available at https://
www5.fdic.gov/idasp/advSearch_warp_download_
all.asp.
122 As discussed above in section II.A.1.i, there
were challenges in calculating notional amounts for
NFC swaps. Therefore, the analysis in this section
focuses on the other asset classes.
123 The AGNA totals are not mutually exclusive
across rows, and therefore cannot be added together
without double counting. For example, some IDIs
in the $1 billion to $3 billion range transact with
IDIs in the $3 billion to $8 billion range.
Transactions that involve entities from multiple
rows are reported in both rows.
124 Although staff did not manually identify the
category of every counterparty with less than $1
billion of activity, there are at least 200 entities
generally identified as banks, each with AGNA of
swaps activity below $1 billion and with at least 10
counterparties.
125 See generally supra note 119.
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is adopted and some of the unregistered
IDIs marginally expand the number and
AGNA of swaps they enter into with
customers in connection with loans to
those customers. This low percentage of
swap activity between two unregistered
entities may also indicate that the limits
of the IDI Swap Dealing Exclusion are
restricting certain IDIs from taking full
advantage of the exclusion. Further,
though these entities are active in the
swap market, the Commission is of the
view that their activity poses less
systemic risk as compared to larger IDIs
because of their limited AGNA of swaps
activity as compared to the overall size
of the market. Generally, the reduced
potential for risk, combined with the
potential that end-user loan customers
may benefit from increased access to
loan-related swaps, provides support for
the proposed IDI De Minimis Provision.
The proposed rule text described
below may provide greater ability for
IDIs to not count loan-related swaps
towards their de minimis threshold
calculations, potentially increasing the
availability of loan-related swaps for
their borrowers and advancing the
stated policy goals of the de minimis
exception.
2. Proposal
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(i) Timing Requirement
Pursuant to the IDI Swap Dealing
Exclusion in paragraph (5) of the SD
Definition, if an IDI enters into a swap
in connection with originating a loan to
a customer, that swap must be entered
into no more than 90 days before or 180
days after the date of execution of the
loan agreement (or date of transfer of
principal to the customer) for the IDI
Swap Dealing Exclusion to apply.126
The Commission is proposing new
paragraph (4)(i)(C)(1) of the SD
Definition, which, for purposes of an
IDI’s de minimis calculation, does not
include the 180-day restriction.
Therefore, an IDI would not have to
count towards its de minimis
calculation any swap entered into in
connection with a loan after the date of
execution of the loan agreement (or date
of transfer of principal). Additionally,
the Commission is proposing to
generally maintain the restriction for
swaps entered into more than 90 days
before loan funding, except where an
executed commitment or forward
agreement for the applicable loan exists,
in which case the 90-day restriction
would not apply.
The Commission believes that the
timing restrictions in the IDI Swap
Dealing Exclusion limit the ability of
126 17
CFR 1.3, Swap dealer, paragraph (5)(i)(A).
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IDIs to effectively provide hedging
solutions to end-user borrowers.
Depending on market conditions or
business needs, it is not uncommon for
a borrower to wait for a period of time
greater than 180 days after a loan is
originated to enter into a hedging
transaction. For example, if an IDI
provides a loan with a 10-year term, and
the borrower chooses to wait until 181
days after the loan to hedge interest rate
risk underlying that loan, the swap
would not qualify for the IDI Swap
Dealing Exclusion. However, under the
proposed IDI De Minimis Provision, if
the borrower entered into the hedge 181
days after execution, the swap would
not have to be counted towards an IDI’s
de minimis calculation. Given that
many of the entities that the
Commission expects to utilize the IDI
De Minimis Provision are small and
mid-sized banks, not including this
timing restriction could lead to
increased swap availability for the
borrowing customers that rely on such
IDIs for access to swaps (and thereby
advance a policy objective of the de
minimis exception).
For a swap to be considered ‘‘in
connection with’’ a loan for the
purposes of the IDI De Minimis
Provision, the Commission believes
there should be a reasonable expectation
that the loan will be entered into with
a customer. Therefore, the proposed 90day restriction is suitable because it
requires that the swap be entered into
within an appropriate period of time
prior to the execution of the loan.
However, where an executed
commitment or forward agreement to
loan money exists between the IDI and
the borrower prior to the 90-day limit,
the Commission believes a reasonable
expectation for the loan is
demonstrated. Accordingly, for
purposes of the IDI De Minimis
Provision, the Commission is proposing
that an IDI may enter into a swap with
a customer, in connection with a loan to
that customer, more than 90 days prior
to the execution of the loan where there
is an executed commitment or forward
agreement to loan money.
(ii) Relationship of Swap to Loan
The IDI Swap Dealing Exclusion
requires that the rate, asset, liability, or
other notional item underlying such
swap is, or is directly related to, a
financial term of such loan or that such
swap is required, as a condition of the
loan under the insured depository
institution’s loan underwriting criteria,
to be in place in order to hedge price
risks incidental to the borrower’s
business and arising from potential
changes in the price of a commodity
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(other than an excluded commodity).127
As explained in the SD Definition
Adopting Release, the first category is
for ‘‘adjusting the borrower’s exposure
to certain risks directly related to the
loan itself, such as risks arising from
changes in interest rates or currency
exchange rates,’’ and the second
category is to ‘‘mitigate risks faced by
both the borrower and the lender, by
reducing risks that the loan will not be
repaid.’’ 128 Therefore, both categories of
swaps are directly related to repayment
of the loan.
The Commission is proposing new
paragraph (4)(i)(C)(2), which states that
for purposes of the IDI De Minimis
Provision, a swap is ‘‘in connection
with’’ a loan if the rate, asset, liability
or other term underlying such swap is,
or is related to, a financial term of such
loan, or if such swap is required as a
condition of the loan, either under the
insured depository institution’s loan
underwriting criteria or as is
commercially appropriate, in order to
hedge risks incidental to the borrower’s
business (other than for risks associated
with an excluded commodity) that may
affect the borrower’s ability to repay the
loan.
The Commission is of the view that
the proposed language would further
the policy objectives of the de minimis
exception by providing flexibility to
reflect the actual market practices of
end-users who hedge their risk. The first
provision refers to a ‘‘term’’ rather than
a ‘‘notional item,’’ and does not include
the word ‘‘directly,’’ for added
flexibility. Because the second provision
in the proposed language allows for
swaps that are not explicitly required as
a condition of the IDI’s underwriting
criteria, it provides flexibility for IDIs to
enter into certain swaps with borrowers
to hedge risks (e.g., commodity price
risks) that may not have been evident at
the time the loan was entered into or
that are determined based on the unique
characteristics of the borrower rather
than the standard bank underwriting
criteria. For example, physical
commodity-related hedging decisions
may not be made at the time the loan
is entered into, but rather at a future
point when inventory is purchased or
produced. Additionally, in these cases,
the underwriting criteria may not
explicitly require that the borrower
enter into swaps to hedge commodity
price risk. This additional flexibility
allows IDIs to enter into swaps, as
commercially appropriate, with
borrowers to hedge risks—in this case,
127 See 17 CFR 1.3, Swap dealer, paragraph
(5)(i)(B); 77 FR at 30622.
128 77 FR at 30622.
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commodity price risk—that may affect
the borrower’s ability to repay the loan
without the limitation that such swaps
must be contemplated in the original
underwriting criteria in order not to be
counted towards an IDI’s de minimis
calculation. The Commission believes
that this proposal benefits both IDIs and
customers and serves the purposes of
the de minimis exception by allowing
for greater use of swaps in effective and
dynamic hedging strategies. The
Commission also believes that this
aspect of the proposed new provision
would facilitate efficient application of
the SD Definition by reducing the
concern that ancillary dealing activity
may subject the IDI to SD registrationrelated requirements.
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(iii) Syndicated Loan Requirement
For a loan-related swap with a
notional amount equal to the full
principal amount of the loan to qualify
for the IDI Swap Dealing Exclusion, an
IDI must be responsible for at least 10
percent of a syndicated loan.129 In the
proposed IDI De Minimis Provision,
new paragraph (4)(i)(C)(4)(i) requires an
IDI to be, under the terms of the
agreements related to the loan, the
source of at least five percent of the
maximum principal amount under the
loan for a related swap not to be
counted towards its de minimis
calculation.130 In addition to this
different syndication requirement,
proposed paragraph (4)(i)(C)(4)(i) also
includes a single provision that
consolidates the separate provisions in
paragraphs (5)(i)(D)(1) and (5)(i)(D)(2) of
the IDI Swap Dealing Exclusion.
For loans that are widely syndicated,
lenders may not have control over their
final share of the syndication. It is not
uncommon for borrowers to enter into
negotiations regarding related swaps
before the underlying loan has been
executed. The need to have at least a 10
percent share of the syndicate can make
it more difficult for IDIs to determine, in
advance, whether a swap they have
negotiated with a borrower will qualify
for the IDI Swap Dealing Exclusion. The
lower syndication threshold of five
percent in this Proposal provides
additional flexibility for IDIs to enter
into a greater range of loan-related
swaps without having those swaps
count towards their de minimis
calculations.
129 17
CFR 1.3, Swap dealer, paragraph (5)(i)(D).
as discussed below in section
II.B.2.iv, if the IDI is responsible for at least five
percent of a syndicated loan, the Commission is
proposing to not include the restriction that the
AGNA of swaps entered into in connection with the
loan not exceed the principal amount outstanding.
130 Moreover,
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The Commission is also proposing to
add paragraph (4)(i)(C)(4)(ii), which
states that if an IDI is a source of less
than a five percent of the maximum
principal amount of the loan, the
notional amount of all swaps the IDI
enters into in connection with the
financial terms of the loan cannot
exceed the principal amount of the IDI’s
loan in order to qualify for the IDI De
Minimis Provision. This provision is
similar to existing paragraph (5)(i)(D)(3)
of the IDI Swap Dealing Exclusion,
except that it uses a five percent
participation threshold.
(iv) Total Notional Amount of Swaps
The IDI Swap Dealing Exclusion
requires that the AGNA of swaps
entered into in connection with the loan
not exceed the principal amount
outstanding.131 The Commission is
proposing to not include this restriction
in the IDI De Minimis Provision in the
case of IDIs responsible for at least five
percent of the loan principal.132 It is not
uncommon for an IDI-related loan to
have related swaps that hedge multiple
categories of exposure. For example, it
is possible for a borrower to hedge some
combination of interest rate, foreign
exchange, and/or commodity risk in
connection with a loan. The
Commission notes that the AGNA of
such swaps entered into in connection
with the loan could exceed the principal
amount outstanding; therefore, this
restriction might unduly restrict the
ability of certain IDIs to provide loanrelated swaps to their borrowing
customers to more effectively allow the
customers to hedge loan-related risks.
Not including this restriction in the IDI
De Minimis Provision would thereby
advance the policy objectives of the de
minimis exception noted above.
(v) Types of Loans
The requirements of the IDI Swap
Dealing Exclusion do not account for
types of credit financings that are
similar to loans (e.g., credit enhanced
bonds, letters of credit, leases, revolving
credit facilities). When the Commission
adopted the IDI Swap Dealing
Exclusion, it generally referenced
existing common law definitions for the
term ‘‘loan,’’ 133 stating that ‘‘[r]ather
131 17
CFR 1.3, Swap dealer, paragraph (5)(i)(E).
discussed above in section II.B.2.iii in
connection with proposed paragraph (4)(i)(C)(4)(ii),
if an IDI is a source of less than a five percent of
the maximum principal amount of the loan, the
notional amount of all swaps the IDI enters into in
connection with the financial terms of the loan
cannot exceed the principal amount of the IDI’s
loan.
133 77 FR at 30622 n.326 (‘‘To constitute a loan
there must be (i) a contract, whereby (ii) one party
transfers a defined quantity of money, goods, or
132 As
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27461
than examine at this time the many
particularized examples of financing
transactions cited by some commenters,
the term ‘loan’ for purposes of this
exclusion should be interpreted in
accordance with this settled legal
meaning.’’ 134 Additionally, to prevent
evasion, the Commission adopted
restrictions stating that the term ‘‘loan’’
shall not include any synthetic loan,
including, without limitation, a loan
credit default swap or loan total return
swap, and stating that the term ‘‘loan’’
does not include sham loans, whether or
not intended to qualify for the exclusion
from the definition of the term swap
dealer in this rule.135
Similarly, to prevent evasion, the
Commission is proposing new
paragraph (4)(i)(C)(6), which states that
the IDI De Minimis Provision shall not
apply to any transaction that is a sham
and shall not apply to any synthetic
loan. The Commission believes it is
appropriate to continue to require that
swaps associated with synthetic loans
be counted towards the de minimis
exception. However, for added
simplicity, the Commission has not
included the provision specifically
listing ‘‘a loan credit default swap or
loan total return swap.’’ The
Commission notes that certain loan
credit default swaps and loan total
return swaps may be valid loan
structures. Nonetheless, to the extent a
credit default swap, loan total return
swap, or any other financial instrument
would be considered a synthetic lending
arrangement, swaps entered into in
connection with such a synthetic
lending arrangement would not qualify
for the IDI De Minimis Provision.
The Commission is of the view that
swaps entered into in connection with
non-synthetic lending arrangements that
are commonly known in the market as
‘‘loans’’ would generally not need to be
counted towards an IDI’s de minimis
calculation if the other requirements of
the IDI De Minimis Provision are also
met. Although the Commission is not
proposing to assess individual
categories of transactions to determine
whether they qualify as loans, it
recognizes the common law definition
cited in the SD Definition Adopting
Release. Additionally, the Commission’s
regulations in part 75 (regarding
‘‘Proprietary Trading and Certain
Interests in and Relationships with
Covered Funds’’) define a loan as any
loan, lease, extension of credit, or
services, to another, and (iii) the other party agrees
to pay for the sum or items transferred at a later
date.’’ (internal citations omitted)).
134 Id. at 30622.
135 17 CFR 1.3, Swap dealer, paragraph (5)(iii).
See 77 FR at 30622, 30708.
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secured or unsecured receivable that is
not a security or derivative.136 The
Commission is of the view that this
definition would also apply for
purposes of the IDI De Minimis
Provision. Generally, allowing swaps
entered into in connection with other
forms of financing commonly known as
loans not to be counted towards the de
minimis threshold calculation better
reflects the breadth of lending products
and credit financings that borrowers
often utilize and thereby advances the
policy objectives of the de minimis
exception noted above.
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(vi) Additional Requirements
The remaining requirements for the
IDI De Minimis Provision are
substantively identical to the IDI Swap
Dealing Exclusion provisions in
paragraph (5) of the SD Definition.
Proposed paragraph (4)(i)(C)(3) is
identical to paragraph (5)(i)(C), stating
that the termination date of the swap
cannot extend beyond termination of
the loan.
Proposed paragraph (4)(i)(C)(5) states
that a swap is considered to have been
entered into in connection with
originating a loan to a customer if the
IDI: (1) Directly transfers the loan
amount; (2) is part of a syndicate of
lenders that is the source of the loan
amount; (3) purchases or receives a
participation in the loan; or (4) under
the terms of the agreements related to
the loan, is, or is intended to be, the
source of funds for the loan. This
provision is similar to paragraph (5)(ii)
of the IDI Swap Dealing Exclusion,
except that it also encompasses a loanrelated swap if the IDI ‘‘is intended to
be’’ the source of the funds. This
difference is consistent with the timing
requirement provision, discussed above
in section II.B.2.i, which does not
include the 90 days before execution of
the loan restriction in situations where
an executed commitment or forward
agreement for the applicable loan exists.
3. Request for Comments
The Commission requests comments
on the following questions. To the
extent possible, please quantify the
impact of issues discussed in the
comments, including costs and benefits,
as applicable.
(1) Based on the data and related
policy considerations, is the proposed
IDI De Minimis Provision appropriate?
Why or why not?
(2) How will the proposed IDI De
Minimis Provision impact IDIs who
enter into swaps with customers in
connection with loans? Will IDIs enter
136 17
CFR 75.2(s).
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into more swaps with loan customers as
result of the proposed IDI De Minimis
Provision?
(3) If the underlying loan is called,
put, accelerated, or if it goes into default
before the scheduled termination date,
should the related swap be required to
be terminated to remain eligible for the
IDI De Minimis Provision?
(4) Are there circumstances that can
be anticipated at the time of loan
origination that would support
permitting the termination date of the
swap to extend beyond termination of
the loan?
(5) Does the provision in proposed
paragraph (4)(i)(C)(1) referencing
‘‘executed commitment’’ or ‘‘forward
agreement’’ sufficiently reflect market
practice regarding how swaps may be
entered into in connection with a loan
in advance of the loan being executed?
(6) Is it common for an IDI to have as
low as five percent participation in a
syndicated loan and also provide swaps
in connection with the loan?
(7) Is it common for the AGNA of
loan-related swaps to exceed the
outstanding principal amount of the
loan? In what circumstances?
(8) Should the Commission define
‘‘synthetic loan’’? How should that term
be defined?
(9) Are there circumstances in which
a loan credit default swap or loan total
return swap would not be considered a
synthetic lending arrangement?
(10) If an IDI would have to register
as an SD but for the IDI De Minimis
Provision, should that IDI be required to
provide notice to the Commission,
Commission staff, or the National
Futures Association? Alternatively, to
utilize the proposed IDI De Minimis
Provision, should IDIs be required to
directly reference the related loan in the
written swap confirmation?
C. Swaps Entered Into To Hedge
Financial or Physical Positions
1. Background and Proposal
In adopting the SD Definition, the
Commission provided that, subject to
certain requirements, swaps entered
into by a person for purposes of hedging
physical positions are not considered in
determining whether the person is an
SD (the ‘‘Physical Hedging
Exclusion’’).137 However, the regulatory
text does not include a specific
exclusion for swaps entered into for
purposes of hedging financial positions.
Rather, the Commission stated that
swaps entered into for hedging purposes
that did not fall within the SD
Definition, including those that qualify
137 17
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for an exclusion in the SD Definition,
would not count towards the de
minimis threshold.138
Based on feedback from swap market
participants during implementation of
the SD regulations and in connection
with Project KISS,139 the Commission
believes that although there is a specific
exclusion for swaps entered into in
connection with hedging physical
positions, the absence of an explicit
exclusion in the regulations for swaps
entered into for purposes of hedging
financial positions has caused
uncertainty in the marketplace
regarding whether swaps that hedge, for
example, interest rate risk, credit risk, or
foreign exchange risk, would also need
to be counted towards a person’s de
minimis threshold. This uncertainty
could cause inefficient application of
the SD Definition by leading some
persons to: (1) Count swaps that they
enter into to hedge financial positions as
swap dealing activity for purposes of
assessing whether the persons would
need to register as SDs; or (2) not enter
into swaps to hedge financial positions
for fear of exceeding the de minimis
threshold.
The Commission is of the view that an
explicit statement of the factors that
indicate when a swap entered into to
hedge financial or physical positions
(‘‘hedging swap’’) is excluded from
counting towards the de minimis
threshold would help swap market
participants know with greater certainty
what swaps have to be counted towards
the de minimis threshold, and thereby
help market participants apply the SD
Definition more efficiently. The
Commission is proposing to add a
hedging exception in new paragraph
(4)(i)(D) of the SD Definition, permitting
entities to not count towards their de
minimis calculations hedging swaps,
when such swaps meet certain
conditions (the ‘‘Hedging De Minimis
Provision’’). Similar to the proposed IDI
De Minimis Provision, the Hedging De
Minimis Provision does not revise the
scope of activity that constitutes swap
dealing. Rather, the new provision
would set out explicit factors an entity
can consider for purposes of assessing
whether hedging swaps must be
counted towards the de minimis
138 77 FR at 30631 n.433 (‘‘For purposes of the de
minimis exception to the [SD Definition] . . . the
relevant question in determining whether swaps
count as dealing activity against the de minimis
thresholds is whether the swaps fall within the [SD
Definition] . . . . If hedging or proprietary trading
activities did not fall within the definition,
including because of the application of [paragraph
(6) of the SD Definition in § 1.3], they would not
count against the de minimis thresholds.’’).
139 See Letters from IIB, Western Union, and WU/
GPS/AFEX, supra note 58.
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calculation.140 The Commission notes
that any swap that meets the
requirements of the Physical Hedging
Exclusion in paragraph (6)(iii) of the SD
Definition would also meet the
requirements of the proposed Hedging
De Minimis Provision, but meeting the
requirements of the Physical Hedging
Exclusion is not a prerequisite for
application of the Hedging De Minimis
Provision. In addition, as the
Commission noted in the SD Definition
Adopting Release, if a swap does not
satisfy the criteria of the Hedging De
Minimis Provision, this does not mean
the swap is necessarily swap dealing
activity.141 Rather, such hedging activity
should then be considered in light of all
the other relevant facts and
circumstances to determine whether the
person is engaging in activity (e.g.,
market making, accommodating
demand) that brings the person within
the SD Definition.
Proposed paragraph (4)(i)(D) states
that to qualify for the Hedging De
Minimis Provision, a swap must be
entered into by a person for the primary
purpose of reducing or otherwise
mitigating one or more of the specific
risks to which it is subject, including,
but not limited to, market risk,
commodity price risk, rate risk, basis
risk, credit risk, volatility risk,
correlation risk, foreign exchange risk,
or similar risks arising in connection
with existing or anticipated identifiable
assets, liabilities, positions, contracts or
other holdings of the person or any
affiliate. Additionally, the person
entering into the hedging swap must
not: (1) Be the price maker of the
hedging swap; (2) receive or collect a
bid/ask spread, fee, or commission for
entering into the hedging swap; and (3)
receive other compensation separate
from the contractual terms of the
hedging swap in exchange for entering
into the hedging swap.
The requirements that the person not
be a price maker of the swap or receive
compensation for the swap should
ensure that the Hedging De Minimis
Provision does not improperly exclude
swap dealing activity. As discussed in
the SD Definition Adopting Release, in
connection with swaps that hedge
physical positions:
When a person enters into a swap for the
purpose of hedging the person’s own risks in
specified circumstances, an element of the
[SD] definition—the accommodation of the
counterparty’s needs or demands—is absent.
Therefore, consistent with our overall
140 See section II.B.1. As discussed, a joint
rulemaking with the SEC is not required under the
statute with respect to the de minimis exceptionrelated factors. 77 FR at 30634 n.464.
141 77 FR at 30613.
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interpretive approach to the definition, the
activity of entering into such swaps (in the
particular circumstances defined in the rule)
does not constitute swap dealing. Providing
an exception for such swaps from the [SD]
analysis reduces costs that persons using
such swaps would incur in determining if
they are [SDs].142
The Commission believes that this
rationale applies broadly to swaps that
hedge both financial and physical
positions. When the person is not the
price maker of the hedging swap, or
otherwise receiving compensation, the
person is not accommodating the needs
of a counterparty, such swap is
generally not swap dealing activity, and
therefore should not be counted for
purposes of the de minimis exception.
Adding this specific exception as a
factor to be considered for purposes of
the de minimis calculation provides
additional clarity which advances the
policy objectives of the de minimis
threshold. In particular, the Commission
believes that the scope of the Hedging
De Minimis Provision would encourage
greater use of swaps (i.e., greater
participation in the swap market) to
hedge risks. Additionally, the proposed
rule accounts for circumstances where
entities may hedge risks using affiliates.
The flexible terms of the Hedging De
Minimis Provision should facilitate an
efficient application of the SD
Definition that is more focused on
activity that is covered by the statutory
and regulatory definition of swap
dealing. As noted below, the Hedging
De Minimis Provision contains elements
to ensure that it does not improperly
exclude swap dealing activity that
should be counted against the de
minimis threshold.
The SD Definition Adopting Release
also states that, generally, swaps that
hedge positions that were entered into
as part of swap dealing activity would
also not need to be counted towards a
person’s de minimis threshold
calculation if they meet the
requirements of the proposed
exception.143 The proposed Hedging De
Minimis Provision is consistent with the
142 77
FR at 30710.
CFTC stated that ‘‘the relevant question in
determining whether swaps count as dealing
activity against the de minimis thresholds is
whether the swaps fall within the [SD Definition]
. . . . If hedging or proprietary trading activities
did not fall within the definition . . . they would
not count against the de minimis thresholds.’’ Id.
at 30631 n.433. DSIO later stated that back-to-back
swaps should each undergo a facts and
circumstances analysis to determine if they should
be considered swap dealing activity. See Frequently
Asked Questions (FAQ)—[DSIO] Responds to FAQs
About Swap Entities (Oct. 12, 2012), available at
https://www.cftc.gov/idc/groups/public/@
newsroom/documents/file/swapentities_faq_
final.pdf.
143 The
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CFTC’s position in the SD Definition
Adopting Release.
Lastly, the proposed Hedging De
Minimis Provision also includes, in
paragraphs (D)(3) through (D)(5), the
following requirements that are in the
Physical Hedging Exclusion: (1) The
swap must be economically appropriate
to the reduction of risks that may arise
in the conduct and management of an
enterprise engaged in the type of
business in which the person is
engaged; (2) the swap must be entered
into in accordance with sound business
practices; and (3) the swap is not in
connection with activity structured to
evade designation as an SD. The
Commission believes that these
requirements are also appropriate for
this broader Hedging De Minimis
Provision to ensure that swap dealing
activity is not improperly being
excluded from a person’s de minimis
threshold calculation.
2. Request for Comments
The Commission requests comments
on the following questions. To the
extent possible, please quantify the
impact of issues discussed in the
comments, including costs and benefits
as applicable.
(1) Based on the policy
considerations, is the proposed Hedging
De Minimis Provision appropriate? Why
or why not?
(2) Is the proposed Hedging De
Minimis Provision too narrowly or
broadly tailored?
(3) How will the proposed Hedging De
Minimis Provision impact entities that
enter into swaps to hedge financial or
physical positions?
(4) The proposed Hedging De Minimis
Provision would be used to determine
whether a person has exceeded the
AGNA threshold set forth in paragraph
(4)(i)(A) of the SD Definition, whereas
the Physical Hedging Exclusion in
paragraph (6)(iii) of the SD Definition
addresses when a swap is not
considered in determining whether a
person is an SD. How might this
distinction impact how entities analyze
their swap dealing activity and whether
they would exceed the de minimis
threshold?
D. Swaps Resulting From Multilateral
Portfolio Compression Exercises
1. Background and Proposal
The Commission is proposing new
paragraph (4)(i)(E) of the SD Definition,
which would allow a person to exclude
from its de minimis calculation swaps
that result from multilateral portfolio
compression exercises (‘‘MPCE De
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Minimis Provision’’).144 The MPCE De
Minimis Provision is consistent with
DSIO no-action relief issued on
December 21, 2012 (‘‘Staff Letter 12–
62’’).145 Specifically, DSIO stated that it
would not recommend that the
Commission take enforcement action
against any person for failure to include
in its de minimis calculation the
terminations of swaps (in whole or in
part) or swaps entered into as
replacement swaps as part of a
multilateral portfolio compression
exercise (as defined in paragraph
23.500(h) of the Commission’s
regulations). The relief provided was
not time-limited.
The Commission concurs with the
position taken in Staff Letter 12–62.
Generally, multilateral portfolio
compression allows swap market
participants with large portfolios to ‘‘net
down’’ the size and number of
outstanding swaps between them. The
Commission is of the view that this
advances the policy considerations
behind SD regulation by reducing
counterparty credit risk, lowering the
AGNA of outstanding swaps, and
reducing operational risks by decreasing
the number of outstanding swaps. The
Commission understands that
multilateral portfolio compression
exercises do not permit participants to
provide liquidity or set prices in the
market. A participant in a multilateral
portfolio compression exercise submits
some criteria for its participation in the
exercise (e.g., credit or counterparty
limits), but the outcome of a
compression cycle will depend on
several variables that the participants
cannot know or control, such as the
positions in counterparties’ portfolios
and the criteria set by other participants.
Given this process, the Commission is of
the view that multilateral portfolio
compression exercise swaps generally
do not involve any of the attributes the
Commission has identified as indicative
of swap dealing activity.146 Further, the
Commission notes that counting such
swaps towards a person’s de minimis
threshold could discourage
participation in multilateral portfolio
compression exercises, reducing the
144 Similar to the proposed IDI De Minimis
Provision and the Hedging De Minimis Provision,
the MPCE De Minimis Provision does not revise the
scope of activity that constitutes swap dealing.
Rather, the new provision sets out factors an entity
can consider for purposes of assessing whether
swaps resulting from multilateral portfolio
compression exercises need to be counted towards
the de minimis calculation.
145 CFTC Staff Letter No. 12–62, supra note 54.
146 See, e.g., 77 FR at 30606–19 (e.g.,
accommodating demand, market making, holding
oneself out as a dealer in swaps, seeking to profit
by providing liquidity, etc.).
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market benefit of the risk reduction such
exercises provide.
To advance the policy objectives of
the de minimis exception discussed
above, proposed paragraph (4)(i)(E)
would allow a person to exclude from
its de minimis calculation swaps that
result from multilateral portfolio
compression exercises. In particular, the
MPCE De Minimis Provision’s explicit
statement that such swaps do not need
to be counted towards the de minimis
threshold would facilitate efficient
application of the SD Definition.
Moreover, adding this proposed
exception to the regulatory text would
therefore be consistent with the goals of
Project KISS. Additionally, to ensure
that the scope of this exception is not
improperly exceeded, the proposed rule
includes an anti-evasion provision.
2. Request for Comments
The Commission requests comments
on the following questions. To the
extent possible, please quantify the
impact of issues discussed in the
comments, including costs and benefits,
as applicable.
(1) Is the proposed MPCE De Minimis
Provision appropriate? Why or why not?
(2) Is the proposed MPCE De Minimis
Provision too narrowly or broadly
tailored? Are there additional
restrictions or conditions that should
apply in order for swaps resulting from
multilateral portfolio compression
exercises to not count towards a
person’s de minimis threshold?
(3) How will the proposed MPCE De
Minimis Provision impact entities that
enter into multilateral portfolio
compression exercises?
E. Methodology for Calculating Notional
Amounts
1. Background and Proposal
Given the potential variety of methods
that could be used to calculate the
notional amount for certain swaps,
particularly for swaps where notional
amount is not a contractual term of the
transaction (e.g., NFC swaps), the
Commission is proposing new
paragraph (4)(vii) of the SD Definition,
which provides that the Commission
may approve or establish methodologies
for calculating notional amounts for
purposes of determining whether a
person exceeds the AGNA de minimis
threshold. Further, the Commission is
proposing to delegate to the Director of
DSIO the authority to make such
determinations.
In the SD Definition Adopting
Release, the Commission did not
prescribe specific calculation
methodologies for notional amounts
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(except for leveraged swaps),147 and in
the context of calculating notional
amounts to determine whether an entity
was a major swap participant (‘‘MSP’’),
the Commission explicitly stated that it
‘‘contemplate[d] the use of industry
standard practices.’’ 148 Subsequent to
issuance of the SD Definition Adopting
Release, DSIO issued interpretive
responses to frequently asked questions
regarding calculating notional amounts
for purposes of the de minimis
exception (the ‘‘DSIO FAQ
Guidance’’).149
Further, for purposes of reporting
swaps to trade repositories, the
Committee on Payments and Market
Infrastructures (‘‘CPMI’’) and the Board
of the International Organization of
Securities Commissions (‘‘IOSCO’’)
recently issued guidance regarding the
definition, format, and usage of key
over-the-counter derivative data
elements, which included guidance on
calculating certain notional amounts
(the ‘‘Technical Guidance’’).150 The
calculation methodologies described in
the Technical Guidance will be
considered for adoption by the
Commission in future rulemakings
related to swap data reporting.151
However, the Commission recognizes
that the Technical Guidance does not
necessarily address how notional
amounts should be calculated for
purposes of the de minimis exception
under CFTC regulations.
The Commission notes that market
participants have already requested
clarity regarding how notional amounts
should be calculated for NFC swaps for
purposes of determining whether a
person exceeds the AGNA de minimis
147 The Commission noted that ‘‘effective
notional’’ should be used if the swap is leveraged
or structurally enhanced. See 17 CFR 1.3, Swap
dealer, paragraph (4)(i)(A); 77 FR at 30630.
148 77 FR at 30670 n. 902.
149 See Frequently Asked Questions (FAQ)—
[DSIO] Responds to FAQs About Swap Entities
(Oct. 12, 2012), available at https://www.cftc.gov/
idc/groups/public/@newsroom/documents/file/
swapentities_faq_final.pdf.
150 See CPMI and Board of IOSCO, Technical
Guidance—Harmonisation of critical OTC
derivatives data elements (other than UTI and UPI)
(Apr. 2018), available at https://www.bis.org/cpmi/
publ/d175.pdf.
151 See Technical Guidance, supra note 150, at 7
(‘‘The responsibility for issuing requirements for
market participants on the reporting of OTC
derivative transactions to [trade repositories] falls
within the remit of the relevant authorities.
Therefore, this document does not represent
guidance on which critical data elements will be
required to be reported in a given jurisdiction.
Rather, if such data elements are required to be
reported in a given jurisdiction, this document
represents guidance to the authorities in that
jurisdiction on the definition, the format and the
allowable values that would facilitate consistent
aggregation at a global level.’’).
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threshold.152 Additionally, the notional
amount calculation methodologies
described in the DSIO FAQ Guidance,
the methodologies used by market
participants as industry standard
practice, and the methodologies
described in the Technical Guidance
differ from one another in some
respects. Thus, the Commission believes
additional clarity about the appropriate
notional amount calculation
methodologies for purposes of the SD de
minimis threshold would be beneficial.
Further, additional questions may arise
regarding notional amount calculations,
as it relates to the AGNA de minimis
threshold, given the broad array of
swaps available across all asset classes
and the potential for new types of swap
products becoming available in the
future. Therefore, the Commission is
proposing new paragraph (4)(vii)(A) of
the SD Definition, which sets out a
mechanism for the Commission, on its
own or upon written request by a
person, to determine the methodology to
be used to calculate the notional amount
for any group, category, type, or class of
swaps for purposes of whether a person
exceeds the AGNA de minimis
threshold. The Commission notes that
the process for submitting a written
request regarding the methodology for
notional amount calculations would be
consistent with the process described in
§ 140.99 of the Commission’s
regulations.153 Further, the proposed
rule requires that such methodology be
economically reasonable and
analytically supported, and that any
such determination be made publicly
available and posted on the CFTC
website.154
152 See, e.g., Letter from CEWG; Letter from
Natural Gas Supply Association (Jan. 15, 2016),
available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=60595&SearchText=.
153 See 17 CFR 140.99.
154 Pursuant to this proposed rule, it is possible
that methodologies for calculating notional amounts
for the de minimis calculation could be approved
or established that differ from methodologies in the
Technical Guidance. However, the purpose of the
Technical Guidance was not to consider specific
requirements that jurisdictions may have with
respect to calculating notional amount for
registration purposes. The Commission notes that
the proposed approach is similar to one taken by
the Canadian Securities Administrators. See
Proposed National Instrument 93–102 Derivatives:
Registration and Proposed Companion Policy 93–
102 Derivatives: Registration (Apr. 19, 2018)
(collectively, the ‘‘Proposed Instrument’’), available
at https://www.albertasecurities.com/
Regulatory%20Instruments/5399899%20_
%20CSA%20Notice%2093-102.pdf. The Proposed
Instrument includes an alternative notional
calculation methodology—for the purpose of
derivative dealer registration thresholds—that
differs from the Technical Guidance. See Proposed
Instrument at 6–7, 24–26.
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From time to time, DSIO issues
interpretive guidance or no-action
letters to registrants on a variety of
issues, often to address uncertainty
regarding the application of
Commission regulations (e.g., the DSIO
FAQ Guidance). Consistent with that
practice, the Commission also believes
it is important to provide clarity
regarding calculation methodologies, as
it relates to the AGNA de minimis
threshold, to market participants on a
timely basis. Doing so would ensure that
persons are fully aware of whether their
activities could lead to (or presently
entail) SD registration requirements in
the event of market or regulatory
changes. Delegation by the Commission
of this function to DSIO should help to
provide clarity on a timely basis, and
provide certainty that DSIO has the
authority to make notional amount
calculation determinations. Therefore,
the Commission is proposing new
paragraph (4)(vii)(B)(i) of the SD
Definition, which delegates to the
Director of DSIO, or such other
employee(s) that the Director may
designate, the authority to determine the
methodology to be used to calculate the
notional amount for any group,
category, type, or class of swaps for
purposes of whether a person exceeds
the AGNA de minimis threshold.
Additionally, the Director of DSIO
would be able to submit any matter
delegated pursuant to proposed
paragraph (4)(vii)(A) to the Commission
for its consideration. Further, as is the
case with existing delegations to staff,
the Commission would continue to
reserve the right to exercise the
delegated authority itself at any time.
Consistent with the requirements of
proposed paragraph (4)(vii)(A), any
determination made pursuant to this
proposed delegation must be
economically reasonable and
analytically supported, and be made
publicly available and posted on the
CFTC website. As is the case with staff
interpretive letters, once a
determination is made, either by the
Commission or the Director of DSIO, all
persons may rely on the determination.
Rather than codifying all permitted
notional amount calculation
methodologies for purposes of the
AGNA de minimis threshold, or
requiring other Commission action each
time new methodologies are approved,
the Commission believes that providing
delegated authority gives the
Commission and staff appropriate
flexibility to promptly respond to future
market developments regarding notional
amount calculation methodologies. The
Commission expects that subsequent to
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27465
adopting this delegation of authority,
either the Commission or the Director of
DSIO will determine methodologies for
calculating notional amounts for certain
categories of swaps.
2. Request for Comments
The Commission welcomes comments
on the following questions regarding the
proposed process for determining
methodologies for calculating notional
amounts, and the proposed delegation
of authority. To the extent possible,
please quantify the impact of issues
discussed in the comments, including
costs and benefits, as applicable.
(1) Is the proposed process to
determine the methodology to be used
to calculate the notional amount for any
group, category, type, or class of swaps
appropriate? Why or why not?
(2) Is the proposed process too
narrowly or broadly tailored?
(3) Is the restriction that a
methodology be economically
reasonable and analytically supported
appropriate? Why or why not? What
other standards may be appropriate for
this purpose?
(4) How will the proposed process
impact persons that enter into swaps
where notional amount is not a stated
contractual term?
(5) Is the proposed delegation of
authority too narrowly or broadly
tailored?
(6) How will the proposed delegation
of authority impact persons that enter
into swaps where notional amount is
not a stated contractual term?
(7) Is there a better alternative to this
proposed process? If so, please describe.
The Commission also welcomes
comments on the following questions
regarding calculation of notional
amounts for purposes of the de minimis
exception. Comments regarding the
calculation of notional amounts should
focus on the de minimis exception
(rather than other Commission
regulations, such as the reporting
requirements in part 45). To the extent
possible, please quantify the comments,
including costs and benefits, as
applicable.
(1) Should the notional amount
(either stated or calculated) for
transactions with embedded optionality
be delta-adjusted by the delta of the
underlying options, provided that the
methods are economically reasonable
and analytically supported? Should
delta-adjusted notional amounts be used
for all asset classes and product types,
or only some?
(2) For swaps without stated
contractual notional amounts, should
‘‘price times volume’’ generally be used
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as the basis for calculating the notional
amount?
(3) What other notional amount
calculation methods, aside from ‘‘price
times volume,’’ could be used for swaps
without a stated notional amount that
renders a calculated notional amount
equivalent more directly comparable to
the stated contractual notional amount
typically available in IRS, CDS, and FX
swaps? 155
(4) For swaps without a stated
contractual notional amount, does
calculation guidance exist in other
jurisdictions and/or regulatory
frameworks, such as in banking,
insurance, or energy market regulations?
Should persons be permitted to use
such guidance to calculate notional
amounts for purposes of a de minimis
threshold calculation?
(5) What should be used for ‘‘price’’
when calculating notional amounts for
swaps without a stated contractual
notional? Contractual stated price, such
as a fixed price, spread, or option strike?
The spot price of the underlying index
or reference? The implied forward price
of the underlying? A different measure
of price not listed here? Should the
price of the last available transaction in
the commodity at the time the swap is
entered into be used for this
calculation? Is it appropriate to use a
‘‘waterfall’’ of prices to calculate
notional amount, depending on the
availability of a price type? 156
(6) What metric should be used for
‘‘price’’ for certain basis swaps with no
fixed price or fixed spread?
(7) How should the ‘‘price’’ of swaps
be calculated for swaps with varying
prices per leg, such as a predetermined
rising or falling price schedule?
(8) What metric should be used for
‘‘volume’’ when calculating notional
amounts for swaps without a stated
contractual notional amount? Should
the Commission assume that swaps with
volume optionality will be exercised for
the full quantity or should volume
options be delta-adjusted, too?
(9) Should the total quantity for a
‘‘leg’’ be used, or an approximation for
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155 ‘‘Price
times volume’’ is similar to a cash flow
calculation, while ‘‘stated contractual notional’’ is
usually the basis that forms a cash flow calculation
when combined with price, strike, fixed rate,
coupon, or reference index. Therefore, ‘‘stated
contractual notional amount’’ may be described as
more similar to ‘‘volume’’ than ‘‘price times
volume.’’ For example, for a $100 million interest
rate swap, the stated notional amount is typically
the basis of the periodic calculated cash flows
instead of the actual cash flows, which are
calculated using the stated notional amount and the
stated ‘‘price’’ per leg (such as a fixed or floating
rate index).
156 For example, contractual stated fixed price
might be required to be used first. Lacking a stated
fixed price in the swap, spot price of the underlying
would then be used instead.
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a pre-determined time period, such as a
monthly or annualized quantity
approximation? 157
(10) How should the ‘‘volume’’ of
swaps be calculated for swaps with
varying notional amount or volume per
leg, such as amortizing or accreting
swaps?
(11) Should the U.S. dollar equivalent
notional amount be calculated across all
‘‘legs’’ of a swap by calculating the U.S.
dollar equivalent notional amount for
each leg and then calculating the
minimum, median, mean, or maximum
notional amount of all legs of the swap?
(12) Should the absolute value of a
price times volume calculation be used,
or should the calculation allow for
negative notional amounts?
(13) Given that a derivatives clearing
organization (‘‘DCO’’) has to mark a
swap to market on a daily basis, it may
be possible to determine ‘‘implied
volatilities’’ for swaptions and options
that are regularly marked-to-market,
such as cleared swaps, in order to deltaadjust them. Should DCO evaluations be
used when there are not better market
prices available?
III. Other Considerations
In addition to the proposed rule
amendments discussed above, the
Commission is seeking comment on
other potential considerations for the de
minimis threshold, including: (1)
Adding a minimum dealing
counterparty count and a minimum
dealing transaction count threshold; (2)
excepting from the de minimis
threshold calculation swaps that are
exchange-traded and/or cleared; and (3)
excepting from the de minimis
threshold calculation swaps that are
categorized as non-deliverable forwards.
The Commission may take into
consideration comments received
regarding any of these factors in
formulating the final rule or may in the
future consider proposing an
amendment to the SD Definition to
reflect any of these factors for purposes
of the de minimis threshold calculation.
A. Dealing Counterparty Count and
Dealing Transaction Count Thresholds
1. Background
The Commission is re-considering the
merits of using AGNA, by itself, to
determine if an entity’s swap dealing
activity is de minimis. Specifically, the
Commission is seeking comment on
whether an entity should be able to
qualify for the de minimis exception if
157 For an example of ‘‘monthly notional amount
approximation’’ rather than aggregated total
notional quantity, see Proposed Instrument, supra
note 154, at 24–26.
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its level of swap dealing activity is
below any of the following three
criteria: (1) An AGNA threshold, (2) a
proposed dealing counterparty count
threshold, or (3) a proposed dealing
transaction count threshold.
Section 1a(49)(D) of the CEA directs
the Commission to exempt from
designation as an SD an entity that
engages in a de minimis quantity of
swap dealing, and provides the
Commission with broad discretion to
promulgate regulations to establish
factors with respect to the making of
this determination to exempt.158 The SD
Definition Proposing Release suggested
three possible criteria for determining
when an entity engaged in more than a
de minimis quantity of dealing activity:
AGNA of swap dealing activity, number
of dealing transactions, and number of
dealing counterparties.159 In selecting
these three factors as possible
appropriate measurements of an entity’s
‘‘quantity’’ of swap dealing activity, the
Commission also noted that ‘‘a range of
alternative approaches may be
reasonable.’’ 160 The Commission stated
that it selected the proposed factors in
an effort to focus the de minimis
exception on ‘‘entities for which
registration would not be warranted
from a regulatory point of view in light
of the limited nature of their dealing
activities.’’ 161 The SD Definition
Adopting Release did not include
factors beyond an AGNA threshold in
the de minimis exception.162
The Commission seeks comment on
whether and how the inclusion of these
additional factors might account for
modest variations in an entity’s level of
dealing activity that occur over time and
provide entities with enhanced
flexibility to manage their dealing
activity below the registration threshold.
The Commission also seeks comment on
whether these additional criteria could
better assist the Commission in
identifying those entities whose dealing
activity is limited and reduce instances
of ‘‘false positives’’ of any one measure
of activity, such as where an entity’s
dealing activity may marginally exceed
158 7
U.S.C. 1a(49)(D).
Definition Proposing Release, 75 FR at
159 SD
80180.
160 Id. (‘‘Thus, while the proposed factors
discussed below reflect our attempt to delimit the
de minimis exemption appropriately, we recognize
that a range of alternative approaches may be
reasonable, and we are particularly interested in
commenters’ suggestions as to the appropriate
factors.’’).
161 Id.
162 In reaching this conclusion, the Commissions
considered concerns expressed by commenters that
‘‘a standard based on the number of swaps . . . or
counterparties can produce arbitrary results by
giving disproportionate weight to a series of smaller
transactions or counterparties.’’ 77 FR at 30630.
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the current $8 billion AGNA threshold,
but still be so ‘‘limited in nature’’ that
it does not warrant SD regulation.
For example, the inclusion of dealing
counterparty count and dealing
transaction count thresholds in the de
minimis exception could help account
for differences in transaction sizes
across asset classes. As commenters
have noted, certain asset classes tend to
have higher average notional amounts
per swap than others.163 As a result, a
market participant that executes a small
number of dealing transactions with
only a few counterparties in an asset
classes for which the notional amount of
each transaction is comparatively large
may be required to register, whereas a
market participant with the exact same
number of dealing transactions and
dealing counterparties in an asset class
with a smaller average notional amount
may not be required to register.
Moreover, differences in the average
tenor and frequency of swap
transactions also exist across asset
classes. For example, depending upon
the underlying activity that the
counterparty is trying to hedge, a person
may prefer to enter into a single oneyear, $1 billion swap, or four
consecutive three-month, $1 billion
swaps. One hedging strategy results in
a calculation of $1 billion for purposes
of the de minimis threshold, the other
in a calculation of $4 billion for
purposes of the threshold. The
Commission seeks comment on whether
consideration of dealing counterparty
count and dealing transaction count
could address the impact of such
differences and facilitate relatively
equal amounts of de minimis dealing
across asset classes.
In addition to differences across asset
classes, the Commission recognizes that
an entity’s swap dealing volume may
fluctuate over time. For example, as
compared to the first quarter of 2017,
during the first quarter of 2018, overall
IRS notional amount activity rose by
approximately 25 percent, while trade
count grew by approximately 16
percent.164 The Commission seeks
comment on whether the inclusion of
additional metrics in the de minimis
exception could provide market
participants with greater flexibility to
163 See, e.g., Preliminary Report, supra note 21, at
52; Letter from American Bankers Association (Jan.
19, 2016) (‘‘Risk mitigating commodity swaps are
. . . of a shorter tenor and a smaller average
notional size as compared to other asset classes.’’),
available at https://comments.cftc.gov/
PublicComments/
ViewComment.aspx?id=60596&SearchText=.
164 Based on historical information from archived
CFTC Swaps Reports, available at https://
www.cftc.gov/MarketReports/SwapsReports/
Archive/index.htm.
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serve their existing customer base
during periods of volatility or economic
stress, without the concern that such
episodic increases in dealing activity
may somehow trigger SD registration.
The Commission notes this result could
also further one of the policy goals of
the de minimis exception, which is to
enable end-user counterparties to
execute hedging swaps with firms with
whom they have ongoing business
relationships, rather than forcing such
entities to establish separate
relationships with registered SDs. It
could also potentially provide increased
liquidity in the swap market during
periods of financial stress.
The Commission seeks comment on
whether including dealing counterparty
count and dealing transaction count
thresholds in the de minimis exception,
in conjunction with an AGNA
calculation, would further the policy
goals underlying the exception. The
Commission also seeks comment on
whether adding minimum dealing
counterparty count and dealing
transaction count thresholds would be
consistent with the Commission’s goal
of ensuring that person’s engaged in
more than a de minimis level of dealing
are subject to SD regulation.
2. Potential Thresholds
The Commission recognizes the
importance of appropriately calibrating
potential dealing counterparty count
and dealing transaction count
thresholds in order to further the
Commission’s interest in identifying
and exempting de minimis dealing
activity. As part of its preliminary
consideration of this approach, the
Commission performed an analysis of
the counterparty counts and transaction
counts of Likely SDs and registered SDs
to determine at what thresholds certain
entities might be required to register
using a multi-factor approach. The
Commission notes that it was unable to
exclude non-dealing counterparties and
non-dealing trades.
As discussed above in section
II.A.2.ii, there were 108 Likely SDs at
the $8 billion AGNA threshold with at
least 10 counterparties (in IRS, CDS, FX
swaps, and equity swaps). The median
counterparty count for these 108 Likely
SDs was 132 counterparties and the
median transaction count was 5,233
trades. Of these 108 Likely SDs with at
least 10 counterparties, 106 also had at
least 100 transactions, and there were 88
Likely SDs that had at least 15
counterparties and 500 transactions.
There were 78 registered SDs that had
at least $8 billion in AGNA of swaps
activity. The median counterparty count
for these 78 entities was 186
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27467
counterparties and the median
transaction count was 12,004 trades. Of
these 78 registered SDs, 72 had at least
10 counterparties and at least 100
transactions. Additionally, 70 of the 78
registered SDs had at least 15
counterparties and 500 transactions.
Based on this preliminary analysis,
the Commission is seeking comment on
whether it would be appropriate to
establish a dealing counterparty count
threshold of 10 counterparties and a
dealing transaction count threshold of
500 transactions.
For purposes of calculating a person’s
counterparty count under this approach,
the Commission seeks comment on
whether it should allow counterparties
that are members of a single group of
persons under common control to be
treated as a single counterparty. In
addition, the Commission seeks
comment whether it should consider
excluding registered SDs and MSPs
from an entity’s counterparty count.
Similar to the current dealing AGNA
threshold, the de minimis calculation
for counterparty counts and transaction
counts could also incorporate
aggregation (after application of relevant
de minimis calculation-related
exclusions) of the counterparty counts
and transaction counts of affiliated
entities that are not registered SDs.165
The Commission understands that the
use of additional criteria could lead to
entities that engage in high levels of
AGNA of swap dealing activity not
having to register as SDs if they have
low counterparty counts or low
transaction counts. In order to account
for this possibility, the Commission
seeks comment on whether it would be
appropriate to include an AGNA
backstop above which entities would
have to register as SDs, regardless of
their counterparty counts or transaction
counts. For example, under this
approach, if an entity exceeds some
level of AGNA of dealing activity greater
than $8 billion, it would be required to
register as an SD, regardless of its
number of dealing counterparties or
dealing transactions. With respect to a
potential AGNA backstop, the
Commission seeks comment on whether
a $20 billion AGNA threshold would be
appropriate.
A minimum dealing counterparty and
dealing transaction threshold, in
combination with an AGNA amount
backstop, might provide a higher AGNA
de minimis threshold to small dealers
that only plan to occasionally deal
swaps with a limited number of
counterparties or execute a limited
number of transactions. As noted above,
165 See
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17 CFR 1.3, Swap dealer, paragraph (4).
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this higher effective threshold could
also provide additional flexibility for
small dealers to provide clients with
dealing services without the costs of
registration, as long as the dealer can
structure the business to remain below
the counterparty count and transaction
count limits and the higher AGNA
backstop. Generally, adding additional
metrics could potentially serve to better
identify the types of entities that are
engaged in swap dealing activity.
However, as commenters have noted
previously, the use of additional metrics
could make the de minimis calculation
more complex.
Given these considerations, the
Commission welcomes comments on
the following:
(1) Taking into account the
Commission’s policy objectives, should
minimum dealing counterparty counts
and minimum dealing transaction
counts be considered in determining an
entity’s eligibility for the de minimis
exception?
(2) Would a dealing counterparty
count threshold of 10 dealing
counterparties be appropriate? Why or
why not? Is another dealing
counterparty count threshold more
appropriate?
(3) Would a dealing transaction count
threshold of 500 dealing transactions be
appropriate? Why or why not? Is
another dealing transaction count
threshold more appropriate?
(4) Under what circumstances might
entities have a relatively high AGNA of
swap dealing activity, but low dealing
counterparty counts or low dealing
transaction counts?
(5) Would an AGNA backstop of $20
billion be appropriate? Why or why not?
Is another AGNA backstop level more
appropriate?
(6) Would adding dealing
counterparty count and dealing
transaction count thresholds simplify
the SD analysis for certain market
participants, and if so, how and for
which categories of participants?
(7) Would adding dealing
counterparty count and dealing
transaction count thresholds complicate
the SD analysis for certain market
participants, and if so, how and for
which categories of participants?
(8) Should registered SDs or MSPs be
counted towards the dealing
counterparty count threshold?
(9) Should dealing counterparty and
dealing transaction counts be aggregated
across multiple potential swap dealing
entities, similar to the existing AGNA
aggregation standard? 166
166 17 CFR 1.3, Swap dealer, paragraph (4); 78 FR
at 45323.
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(10) For counterparty count purposes,
should counterparties that are all part of
one corporate family be counted as
distinct counterparties, or as one
counterparty?
(11) Should a facts and circumstances
analysis apply to determine if an
amendment or novation to an existing
swap is swap dealing activity that
counts towards a person’s dealing
transaction count? Why or why not?
(12) Would adding dealing
counterparty count and dealing
transaction count thresholds address the
impact of differences in transaction
sizes across asset classes?
(13) Would it be more appropriate for
a multi-factor threshold to only include
a dealing counterparty count threshold
or a dealing transaction count threshold,
rather than adding both criteria?
(14) Are there other criteria that
should be included in the de minimis
exception? If so, what are they and how
could the Commission efficiently
collect, calculate, and track them?
B. Exchange-Traded and/or Cleared
Swaps
The Commission is seeking comment
on whether an exception from the de
minimis calculation for swaps that are
executed on an exchange (e.g., a swap
execution facility (‘‘SEF’’) or designated
contract market (‘‘DCM’’)) and/or
cleared by a DCO is appropriate,167 and
may take into consideration comments
received regarding possible exceptions
based on these factors in formulating the
final rule. The Commission is mindful
of the need to consider how the existing
de minimis exception may be affecting
the utilization of exchange trading 168
and/or clearing in the swap market, as
well as the extent to which the policy
goals of SD registration and regulation
may be advanced through exchange
trading and clearing.
The Commission believes that
excepting such swaps from the de
minimis calculation could improve
utilization of exchanges and/or
clearing.169 Generally, systemic risk
considerations for SD regulation should
be less significant for swaps that are
167 The Commission notes that swap market
participants have submitted comments that address
this topic. See, e.g., Letters from FIA, FSR, Northern
Trust, and SIFMA, supra note 58; Final Staff
Report, supra note 24, at 14 (citing comment letters
submitted in response to Preliminary Staff Report,
supra note 21).
168 For example, one of the CEA’s objectives is to
promote the trading of swaps on swap execution
facilities and to promote pre-trade price
transparency in the swaps market. 7 U.S.C. 7b–3(e).
169 Swaps subject to a clearing requirement
pursuant to CEA section 2(h) must be executed on
a SEF or DCM, unless no SEF or DCM makes the
swap available to trade or a clearing exception
under CEA section 2(h)(7) applies. 7 U.S.C. 2(h)(8).
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cleared because risk management is
handled centrally by the DCO.
Counterparties to the swap post margin
with the DCO and firms clearing swaps
on behalf of customers are registered
with the Commission as futures
commission merchants and subject to
capital requirements.170 In addition,
clearing would potentially be
encouraged if the Commission adds an
exception for cleared swaps for
purposes of the de minimis threshold
calculation, furthering one of the key
tenets of the Dodd-Frank Act.
Additionally, counterparty protection
policy considerations for SD regulation
may be less significant for exchangetraded swaps because the counterparty
protections and trade terms would
generally be provided by the exchange.
Through execution of swaps on
exchanges, counterparties benefit from
viewing the prices of available bids and
offers and from having access to
transparent and competitive trading
systems or platforms. Further, a number
of the external business conduct
standard requirements otherwise
applicable to SDs do not apply when a
swap is executed anonymously on an
exchange. These requirements are either
inapplicable to such transactions by
their terms (because, for example, the
counterparty is anonymous), or do not
apply to the SD because the exchange
fulfills the requirements.171 However,
counterparties could receive reduced
levels of protection if trades previously
executed over-the-counter move to
anonymous trading on exchanges,
though this concern is partially
mitigated because products traded on
exchanges are generally standardized
and non-negotiated.
In addition to the benefits described
above, the market efficiency,
orderliness, and transparency goals of
SD regulation would also potentially be
enhanced since the obligations of, for
example, reporting trade information
and engaging in portfolio reconciliation
and compression exercises would be
centrally (and more efficiently) managed
by the exchange and/or DCO, as
applicable.
170 See
CEA section 4d(f), 7 U.S.C. 6d(f); 17 CFR
1.17.
171 See, e.g., 17 CFR 23.402 (‘‘know your
counterparty’’ requirements only apply when the
counterparty’s identity is known to the SD prior to
execution); 17 CFR 23.430 (requirements to verify
counterparty eligibility are not applicable when the
swap is executed on a DCM, or on a SEF if the
identity of the counterparty is not known to the
SD), 17 CFR 23.431 (disclosure of material
information and scenario analysis is not required
when the SD does not know the identity of
counterparty prior to initiation of a transaction on
a SEF or DCM).
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The Commission notes that an
exclusion exists in paragraph (6)(iv) of
the SD Definition for certain exchangetraded and cleared swaps entered into
by floor traders (‘‘Floor Trader
Exclusion’’). In the SD Definition
Adopting Release, the Commission
declined to distinguish exchange-traded
swaps under the SD Definition, noting,
among other things, that:
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[A] variety of exchanges, markets, and
other facilities for the execution of swaps are
likely to evolve in response to the
requirements of the Dodd-Frank Act, and
there is no basis for any bright-line rule
excluding swaps executed on an exchange,
given the impossibility of obtaining
information about how market participants
will interact and execute swaps in the future,
after the requirements under the Dodd-Frank
Act are fully in effect.172
Nonetheless, the Commission created
a carve-out for exchange-traded and
cleared swaps executed by floor traders.
Subject to certain conditions, the Floor
Trader Exclusion allows registered floor
traders who trade swaps solely using
proprietary funds for their own account
to exclude exchange-traded and cleared
swaps from their de minimis
calculation. Therefore, while execution
and clearing are factors in the Floor
Trader Exclusion, they are not the sole
basis for it. The Floor Trader Exclusion
enables floor traders to provide liquidity
to exchanges in non-dealing capacities,
such as proprietary trading, without
potentially triggering SD regulation.
However, the Commission notes that the
market benefits of the Floor Trader
Exclusion may be complemented if the
de minimis exception also applied to all
exchange-traded and/or cleared swaps.
The CFTC has not conducted robust
data analysis regarding the potential
impact of an exception from the de
minimis calculation for swaps that are
exchange-traded and/or cleared.
However, excepting such swaps from
the de minimis calculation would also
likely lead to adjustments in how the
swap market operates; therefore, it is
difficult to forecast what percentage of
transactions would ultimately be
exchange-traded and/or cleared if such
an exception were implemented. The
Commission also notes that clearing is
a post-execution activity and is not tied
to the pre-execution swap dealing
activities that determine whether a
person needs to register as an SD.
Therefore, adding a clearing-related
factor to the de minimis exception may
cause conflation between swap dealing
and clearing.
The Commission understands that
this exception could result in entities
172 See
77 FR at 30610.
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that engage in a significant amount of
swap dealing activity in exchangetraded and/or cleared swaps not having
to register as SDs. In order to account for
this possibility, the Commission seeks
comment on whether it would be
appropriate to establish a AGNA
backstop such that once an entity’s
swap dealing activity in exchangetraded and/or cleared swaps exceeds a
certain notional amount, it would be
required to register as an SD.
Alternatively, the Commission is also
considering whether it may be
appropriate to apply a haircut to the
notional amounts of exchange-traded
and/or cleared swaps for purposes of the
de minimis calculation. Under this
approach, persons would only need to
count a certain percentage of their total
notional amount of exchange-traded
and/or cleared swaps towards their de
minimis threshold. These alternatives
would ensure that persons with
significant amounts of exchange-traded
and cleared swaps would still likely be
required to register as SDs.
Given these considerations, the
Commission welcomes comments on
the following:
(1) How would an exception for
exchange-traded swaps from a person’s
de minimis calculation impact the
policy considerations underlying SD
regulation and the de minimis
exception?
(2) How would an exception for
cleared swaps from a person’s de
minimis calculation impact the policy
considerations underlying SD regulation
and the de minimis exception?
(3) How would an exception for
exchange-traded and cleared swaps
from a person’s de minimis calculation
impact the policy considerations
underlying SD regulation and the de
minimis exception?
(4) Should all exchange-traded swaps
be excepted from the de minimis
calculation, or only certain transactions?
If so, which transactions? Should only
those trades that are anonymously
executed be excepted? How would the
Commission judiciously differentiate,
monitor, and track such transactions
apart from other exchange-traded
swaps?
(5) Should all cleared swaps be
excepted from the de minimis
calculation, or only certain transactions?
If so, which transactions? Should the
Commission differentiate between
trades that are intended to be cleared
and trades that are actually cleared?
How would the Commission judiciously
differentiate, monitor, and track such
transactions apart from other cleared
swaps?
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27469
(6) Should all exchange-traded and
cleared swaps be excepted from the de
minimis calculation, or only certain
transactions? If so, which transactions?
How would the Commission judiciously
differentiate, monitor, and track such
transactions apart from other exchangetraded and cleared swaps?
(7) If exchange-traded swaps are
excepted from a person’s de minimis
calculation, what other conditions, if
any, should apply for the trade to
qualify for the exception?
(8) If cleared swaps are excepted from
a person’s de minimis calculation, what
other conditions, if any, should apply
for the trade to qualify for the
exception?
(9) If exchange-traded and cleared
swaps are excepted from a person’s de
minimis calculation, what other
conditions, if any, should apply for the
trade to qualify for the exception?
(10) If exchange-traded swaps are
excepted from the de minimis
calculation, should the Commission
establish a notional backstop above
which an entity must register? If so,
what is the appropriate level for the
backstop?
(11) If cleared swaps are excepted
from the de minimis calculation, should
the Commission establish a notional
backstop above which an entity must
register? If so, what is the appropriate
level for the backstop?
(12) If exchange-traded and cleared
swaps are excepted from the de minimis
calculation, should the Commission
establish a notional backstop above
which an entity must register? If so,
what is the appropriate level for the
backstop?
(13) Should persons be able to haircut
the notional amounts of their exchangetraded swaps for purposes of the de
minimis calculation? If so, would a 50
percent haircut be appropriate? Why or
why not?
(14) Should persons be able to haircut
the notional amounts of their cleared
swaps for purposes of the de minimis
calculation? If so, would a 50 percent
haircut be appropriate? Why or why
not?
(15) Should persons be able to haircut
the notional amounts of their exchangetraded and cleared swaps for purposes
of the de minimis calculation? If so,
would a 50 percent haircut be
appropriate? Why or why not?
(16) Would an exception for
exchange-traded swaps increase the
volume of swaps executed on SEFs or
DCMs?
(17) Would an exception for cleared
swaps increase the volume of swaps that
are cleared?
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(18) Would an exception for
exchange-traded and cleared swaps
increase the volume of swaps executed
on SEFs or DCMs and the volume of
swaps that are cleared?
(19) Are there any unique costs or
benefits associated with excepting
exchange-traded swaps from an entity’s
de minimis calculation?
(20) Are there any unique costs or
benefits associated with excepting
cleared swaps from an entity’s de
minimis calculation?
(21) Are there any unique costs or
benefits associated with excepting
exchange-traded and cleared swaps
from an entity’s de minimis calculation?
(22) Has the Floor Trader Exclusion
encouraged additional trading on SEFs
and DCMs?
(23) Has the Floor Trader Exclusion
encouraged additional clearing of
swaps?
(24) Should the Commission consider
additional modifications to the Floor
Trader Exclusion in lieu of a broader
exception for all exchange-traded and/or
cleared swaps?
(25) How should transactions
executed on exempt multilateral trading
facilities, exempt organized trading
facilities, and/or exempt DCOs be
treated?
as defined by CEA sections 1a(25) and
1a(24), respectively).
In November 2012, the Secretary of
the Treasury signed a determination that
exempts both foreign exchange swaps
and foreign exchange forwards from the
definition of ‘‘swap,’’ in accordance
with the CEA (‘‘Treasury
Determination’’).177 The Treasury
Determination further explained that
foreign exchange options, currency
swaps, and non-deliverable forwards
(‘‘NDFs’’) may not be exempted from the
CEA’s definition of ‘‘swap’’ because
they do not satisfy the statutory
definitions of a foreign exchange swap
or foreign exchange forward.178 The
Treasury Determination explained that:
C. Non-Deliverable Forwards
The Commission understands from
market participants that NDFs provide
an important market function because
they are used to hedge exposures to
restricted currencies when the exposure
is held by someone outside of the home
jurisdiction. The Commission also
understands that NDFs are economically
and functionally similar to deliverable
foreign exchange forwards in that the
same net value is transmitted in either
structure.
Further, the Commission has learned
from market participants that markets
continue to treat both NDFs and
deliverable foreign exchange forwards
as the same functional product. Like
deliverable foreign exchange forwards,
NDFs settle on a net rather than gross
basis, which significantly mitigates
counterparty risk in this context. In
some cases, market participants that
previously had settled deliverable
foreign exchange forwards on a net basis
(whether to minimize counterparty risk
or for other reasons) now take steps so
as to ensure they are able to avail
themselves of the exemption from swap
status afforded by the Treasury
Determination, including settlement of
Section 1a(47) of the CEA defines the
term ‘‘swap,’’ 173 and establishes that
foreign exchange swaps 174 and foreign
exchange forwards 175 shall be
considered swaps unless the Secretary
of the Treasury makes a written
determination that either foreign
exchange swaps or foreign exchange
forwards or both should be not be
regulated as swaps 176 (to avoid
confusion with the term ‘‘FX swap’’ as
otherwise used in this release, the terms
‘‘foreign exchange swap’’ and ‘‘foreign
exchange forward’’ as used in this
section III.C refer only to those products
173 7
U.S.C. 1a(47).
defined in CEA section 1a(25). 7 U.S.C.
1a(25) (The term ‘‘foreign exchange swap’’ is
defined to mean a transaction that solely involves
an exchange of two different currencies on a
specific date at a fixed rate that is agreed upon on
the inception of the contract covering the exchange;
and a reverse exchange of those two currencies at
a later date and at a fixed rate that is agreed upon
on the inception of the contract covering the
exchange.).
175 As defined in CEA section 1a(24). 7 U.S.C.
1a(24) (The term ‘‘foreign exchange forward’’ is
defined to mean a transaction that solely involves
the exchange of two different currencies on a
specific future date at a fixed rate agreed upon on
the inception of the contract covering the
exchange.).
176 7 U.S.C. 1a(47)(E).
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174 As
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[A]n NDF is a swap that is cash-settled
between two counterparties, with the value
of the contract determined by the movement
of exchange rates between two currencies. On
the contracted settlement date, the profit to
one party is paid by the other based on the
difference between the contracted NDF rate
(set at the trade’s inception) and the
prevailing NDF fix (usually a close
approximation of the spot foreign exchange
rate) on an agreed notional amount. NDF
contracts do not involve an exchange of the
agreed-upon notional amounts of the
currencies involved. Instead, NDFs are cash
settled in a single currency, usually a reserve
currency. NDFs generally are used when
international trading of a physical currency
is relatively difficult or prohibited.179
177 77
FR 69694.
178 Id. at 69695.
179 Id. at 69703 (citing 77 FR at 48254–55).
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foreign exchange forwards on a gross
basis.
The Commission could determine to
amend the de minimis exception in
paragraph (4) of the ‘‘swap dealer’’
definition in § 1.3 of the Commission’s
regulations by excepting NDFs from
consideration when calculating the
AGNA of swap dealing activity for
purposes of the de minimis threshold.
Excepting NDFs would result in a more
comparable regulatory treatment for
these transactions when compared with
foreign exchange swaps and foreign
exchange forwards pursuant to the
Treasury Determination.
Given these considerations, the
Commission welcomes comments on
the following:
(1) Should the Commission except
NDFs from consideration when
calculating the AGNA of swap dealing
activity for purposes of the de minimis
exception? Why or why not?
(2) Are there other foreign exchange
derivatives that the Commission should
except from consideration for counting
towards the de minimis threshold?
(3) Do NDFs pose any particular
systemic risk in a manner distinct from
foreign exchange swaps and foreign
exchange forwards?
(4) If the Commission were to except
NDFs from consideration when
calculating the AGNA for purposes of
the de minimis exception, are there
particular limits that the Commission
should consider in connection with this
exception?
(5) What would be the market
liquidity impact if the Commission were
to except NDFs from counting towards
the de minimis threshold?
(6) Is there material benefit to the
market in requiring participants that
transact in NDFs to register with the
Commission, while not imposing
similar obligations on participants that
transact in deliverable foreign exchange
forwards? If so, what benefits accrue
from imposing such registration
obligations?
(7) Please provide any relevant data
that may assist the Commission in
evaluating whether to except NDFs from
counting towards the de minimis
threshold.
(8) Please provide any additional
comments on other factors or issues the
Commission should consider when
evaluating whether to except NDFs from
counting towards the de minimis
threshold.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that agencies consider
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whether the regulations they propose
will have a significant economic impact
on a substantial number of small
entities.180 This Proposal only affects
certain entities that are close to the de
minimis threshold in the SD Definition.
For example, the Proposal would affect
entities with a relevant AGNA of swap
dealing activity between $3 billion and
$8 billion. Moreover, it also would
affect entities that engage in swap
dealing activity above an AGNA of $3
billion that also enter into hedging
swaps, or, in the case of IDIs, that enter
into loan-related swaps. That is, the
Proposal is relevant to entities that
engage in swap dealing activity with a
relevant AGNA measured in the billions
of dollars. The Commission does not
believe that these entities would be
small entities for purposes of the RFA.
Therefore, the Commission believes that
this Proposal will not have a significant
economic impact on a substantial
number of small entities, as defined in
the RFA.
Accordingly, the Chairman, on behalf
of the Commission, hereby certifies
pursuant to 5 U.S.C. 605(b) that this
Proposal will not have a significant
economic impact on a substantial
number of small entities. The
Commission invites comment on the
impact of this Proposal on small
entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1955
(‘‘PRA’’) 181 imposes certain
requirements on Federal agencies,
including the Commission, in
connection with their conducting or
sponsoring any collection of
information, as defined by the PRA. The
Commission may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
Office of Management and Budget
(‘‘OMB’’) control number. The proposed
rules will not impose any new
recordkeeping or information collection
requirements, or other collections of
information that require approval of
OMB under the PRA.
The Commission notes that all
reporting and recordkeeping
requirements applicable to SDs result
from other rulemakings, for which the
CFTC has sought OMB approval, and
are outside the scope of rulemakings
related to the SD Definition.182 The
180 5
U.S.C. 601 et seq.
U.S.C. 3501 et seq.
182 Parties wishing to review the CFTC’s
information collections on a global basis may do so
at www.reginfo.gov, at which OMB maintains an
inventory aggregating each of the CFTC’s currently
approved information collections, as well as the
181 44
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CFTC invites public comment on the
accuracy of its estimate that no
additional recordkeeping or information
collection requirements, or changes to
existing collection requirements, would
result from the Proposal.
C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the
CEA or issuing certain orders.183
Section 15(a) further specifies that the
costs and benefits shall be evaluated in
light of five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. In this
section, the Commission considers the
costs and benefits resulting from its
determinations with respect to the
Section 15(a) factors, and seeks
comments from interested persons
regarding the nature and extent of such
costs and benefits.
The Proposal amends the de minimis
exception in paragraph (4) of the SD
Definition in § 1.3 by: (1) Setting the de
minimis exception threshold at $8
billion in AGNA of swap dealing
activity, the same as the current phasein level, and removing the phase-in
process; (2) adding an exception from
the de minimis threshold calculation for
swaps entered into by IDIs in
connection with originating loans to
customers; (3) adding an exception from
the de minimis threshold calculation for
swaps entered into by a person for
purposes of hedging financial or
physical positions; (4) codifying prior
DSIO guidance regarding the treatment
of swaps that result from multilateral
portfolio compression exercises; and (5)
providing that the Commission may
determine the methodology to be used
to calculate the notional amount for any
group, category, type, or class of swaps,
and delegating to the Director of DSIO
the authority to make such
determinations.
As part of this cost-benefit
consideration, the Commission will: (1)
Discuss the costs and benefits of each of
the proposed changes; and (2) analyze
the proposed amendments as they relate
to each of the 15(a) factors.
information collections that presently are under
review.
183 7 U.S.C. 19(a).
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27471
1. $8 Billion De Minimis Threshold
As discussed above, the SD Definition
provides an exception from the SD
Definition for persons who engage in a
de minimis amount of swap dealing
activity. Currently, a person shall not be
deemed to be an SD unless swaps
entered into in connection with swap
dealing activity exceed an AGNA
threshold of $3 billion (measured over
the prior 12-month period), subject to a
phase-in period that is currently in
effect, during which the AGNA
threshold is set at $8 billion. The
Commission is proposing to amend the
de minimis exception to the SD
Definition to set the de minimis
threshold at the current $8 billion
phase-in level.
There are general policy-related costs
and benefits associated with the
proposal to set the de minimis threshold
at $8 billion. In addition to these policy
considerations, the proposal to set the
de minimis threshold at $8 billion
would also have specific monetary costs
and benefits as compared to a lower or
higher threshold. The current $8 billion
phase-in level threshold, along with the
prospect that the threshold would
decrease to $3 billion after December 31,
2019 in the absence of further
Commission action, sets the baseline for
the Commission’s consideration of the
costs and benefits of the proposed
alternatives. Accordingly, the
Commission considers the costs and
benefits that would result from
maintaining the current $8 billion
phase-in level threshold, or
alternatively, a threshold level below or
above the current $8 billion threshold.
The status quo baseline also includes
other aspects of existing rules related to
the de minimis exception. The analysis
also takes into account any no-action
relief, to the extent such relief is being
relied upon. As the Commission is of
the preliminary belief that the existing
no-action relief related to the de
minimis exception is being fully relied
upon by market participants, the costbenefit discussion that follows also
considered the effects of that relief.
(i) Policy-Related Costs and Benefits
There are several policy objectives
underlying SD regulation and the de
minimis exception to SD registration. As
discussed above in section I.C, the
primary policy objectives of SD
regulation include reducing systemic
risk, increasing counterparty
protections, and increasing market
efficiency, orderliness, and
transparency.184 To achieve these policy
184 See
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objectives, registered SDs are subject to
a broad range of requirements,
including, among other things,
registration, internal and external
business conduct standards, reporting,
recordkeeping, risk management,
posting and collecting margin on
uncleared swaps, and chief compliance
officer designation and responsibilities.
The Commission also considers policy
objectives furthered by a de minimis
exception, which include increasing
efficiency, allowing limited ancillary
dealing, encouraging new participants
to enter the swap dealing market, and
focusing regulatory resources.185 These
policy considerations have general costs
and benefits associated with them
depending on the level of the de
minimis threshold.
As noted in the SD Definition
Adopting Release, generally, the lower
the de minimis threshold, the greater
the number of entities that are subject to
the SD-related regulatory requirements,
which could decrease systemic risk,
increase counterparty protections, and
promote swap market efficiency,
orderliness, and transparency.186
However, a lower threshold could have
offsetting effects that might decrease the
policy benefits of lowering the de
minimis exception threshold. For
example, it is likely that a lower
threshold would lead to reduced
ancillary dealing activity and discourage
new participants from entering into the
swap market.
(a) Maintaining the $8 Billion De
Minimis Phase-In Threshold
At the $8 billion threshold, the 2017
Transaction Coverage and 2017 AGNA
Coverage ratios indicate that nearly all
swaps were covered by SD regulation,
giving rise to the benefits from the
policy objectives of SD regulation
discussed above. Specifically, as seen in
Table 1 in section II.A.2.i, almost all
swap transactions involved at least one
registered SD as a counterparty,
approximately 99 percent or greater for
IRS, CDS, FX swaps, and equity swaps.
For NFC swaps, approximately 86
percent of transactions involved at least
one registered SD as a counterparty.
Overall, approximately 98 percent of all
swap transactions involved at least one
registered SD. As seen in Table 2,
almost all AGNA of swaps activity
included at least one registered SD,
approximately 99 percent or greater for
IRS, CDS, FX swaps, and equity swaps.
Further, the Commission notes that
the 6,440 entities that did not enter into
any transactions with a registered SD
185 See
186 See
id.
id. at 30628–30, 30703, 30707.
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had limited activity overall. As
discussed in section II.A.2.i, the 6,440
entities entered into 77,333 transactions,
representing approximately 1.7 percent
of the overall number of transactions
during the review period. Additionally,
collectively, the 6,440 entities had $68
billion in AGNA of swaps activity,
representing approximately 0.03 percent
of the overall AGNA of swaps activity
during the review period. The
Commission believes that this limited
activity indicates that to the extent these
entities are engaging in swap dealing
activities, such activity is likely
ancillary and in connection with other
client services, potentially indicating
that the policy rationales behind a de
minimis exception are being advanced
at the current $8 billion threshold.
Additionally, with respect to NFC
swaps, Table 13 in section II.A.2.iv
indicates that registered SDs still
entered into the significant majority (86
percent) of the overall market’s total
transactions and faced 83 percent of
counterparties in at least one
transaction, indicating that the existing
$8 billion de minimis threshold has
helped extend the benefits of SD
registration to much of the NFC swap
market. The trading activity of the 42
unregistered entities with 10 or more
NFC swap counterparties represents
approximately 13 percent of the overall
NFC swap market by transaction count.
However, as compared to the existing 44
registered SDs with at least 10
counterparties, these 42 In-Scope
Entities have significantly lower mean
transaction and counterparty counts,
indicating that they may only be
providing ancillary dealing services to
accommodate commercial end-user
clients, also potentially indicating that
the policy rationales behind a de
minimis exception are being advanced
at the current $8 billion threshold.
(b) $3 Billion De Minimis Threshold
The Commission is of the view that
the systemic risk mitigation,
counterparty protection, and market
efficiency benefits of SD regulation
would be enhanced in only a very
limited manner if the de minimis
threshold decreased from $8 billion to
$3 billion, as would be the case if the
current regulation and the existing
Commission order establishing an end
to the phase-in period on December 31,
2019 were left unchanged. As seen in
Table 4 in section II.A.2.ii, the
Estimated AGNA Coverage would
increase from approximately $221,020
billion (99.95 percent) to $221,039
billion (99.96 percent), an increase of
$19 billion (a 0.01 percentage point
increase). As seen in Table 5, the
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Estimated Transaction Coverage would
increase from 3,795,330 trades (99.77
percent) to 3,797,734 trades (99.83
percent), an increase of 2,404 trades (a
0.06 percentage point increase). As seen
in Table 6, the Estimated Counterparty
Coverage would increase from 30,879
counterparties (88.80 percent) to 31,559
counterparties (90.75 percent), an
increase of 680 counterparties (a 1.96
percentage point increase). The effect of
these limited increases is further
mitigated by the fact that at the current
$8 billion phase-in threshold, the
substantial majority of transactions are
already covered by SD regulation—and
related counterparty protection
requirements—because they include at
least one registered SD as a
counterparty.
For NFC swaps, as discussed in
section II.A.2.iv, without notionalequivalent data, it is unclear how many
of the 42 In-Scope Entities with 10 or
more counterparties that are not
registered SDs would actually be subject
to SD registration at a $3 billion de
minimis threshold. It is possible that a
portion of the swaps activity for some or
all of these entities qualifies for the
physical hedging exclusion in paragraph
(6)(iii) of the SD Definition, and
therefore would not be considered swap
dealing activity, regardless of the de
minimis threshold level.187
As discussed in section II.A.2.ii with
respect to IRS, CDS, FX swaps, and
equity swaps, and section II.A.2.iv with
respect to NFC swaps, the Commission
also notes that it is possible that a lower
de minimis threshold could lead to
certain entities reducing or ceasing
swaps activity to avoid registration and
its related costs. Although the
magnitude of this effect is unclear,
reduced swap dealing activity could
lead to increased concentration in the
swap dealing market, reduced
availability of potential swap
counterparties, reduced liquidity,
increased volatility, higher fees, wider
bid/ask spreads, or reduced competitive
pricing. The end-user counterparties of
these smaller swap dealing entities may
be adversely impacted by the above
consequences and could face a reduced
ability to use swaps to manage their
business risks.
(c) Higher De Minimis Threshold
Conversely, a higher de minimis
threshold would potentially decrease
the number of registered SDs, which
could have a negative impact on
187 Hypothetically, if all 42 entities registered, the
percentage of all NFC swaps facing at least one
registered SD would rise from approximately 86
percent to 98 percent.
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achieving the SD regulation policy
objectives. For example, a higher de
minimis threshold would allow a
greater amount of swap dealing to be
undertaken without certain
counterparty protections. This might
impact the integrity of swap market to
some extent. However, the Commission
is unable to quantify how the integrity
of swap market might be harmed. On
the other hand, the higher the de
minimis threshold, the greater the
number of entities that are able to
engage in dealing activity without being
required to register, which could
increase competition and liquidity in
the swap market. A higher threshold
could also allow the Commission to
expend its resources on entities with
larger swap dealing activities warranting
more oversight.
As seen in Table 9 in section II.A.2.iii,
in comparison to an $8 billion
threshold, a $100 billion threshold
would reduce the Estimated AGNA
Coverage from approximately $221,020
billion (99.95 percent) to $220,877
billion (99.88 percent), a decrease of
$143 billion (a 0.06 percentage point
decrease). As seen in Table 10, in
comparison to an $8 billion threshold,
a $100 billion threshold would reduce
the Estimated Transaction Coverage
from 3,795,330 trades (99.77 percent) to
3,773,440 trades (99.20 percent), a
decrease of 21,890 trades (a 0.58
percentage point decrease). The
decreases would be more limited at
higher thresholds of $20 billion or $50
billion. The data also indicates that at
higher thresholds, there is a more
pronounced decrease in Estimated
Counterparty Coverage. As seen in Table
11, the Estimated Counterparty
Coverage would decrease from 30,879
counterparties (88.80 percent) to 28,234
counterparties (81.19 percent), a
decrease of 2,645 counterparties (a 7.61
percentage point decrease). The
decrease would be lower at thresholds
of $20 billion and $50 billion, at 2.80
percentage points and 5.71 percentage
points, respectively.
Although it has not conducted an
analysis of AGNA activity in NFC
swaps, the Commission is of the
preliminary view that increasing the de
minimis threshold could potentially
lead to fewer registered SDs
participating in in the NFC swap
market, similar to its observations with
respect to IRS, CDS, FX swaps, and
equity swaps discussed above in section
II.A.2.iii. This could reduce the number
of entities transacting with registered
SDs.
The cost of reduced protections for
counterparties would be realized to the
extent a higher threshold would result
in fewer swaps involving at least one
registered SD. Additionally, depending
on how the swap market adapts to a
higher threshold, it is also possible that
the reduction in Estimated Regulatory
Coverage would be greater than the data
indicates to the extent that a higher de
minimis threshold leads to an increased
amount of swap dealing activity
between entities that are not registered
SDs. In such a scenario, Estimated
Regulatory Coverage could potentially
decrease more than the data indicates,
negatively impacting the policy goals of
SD regulation.
(d) Preliminary Entity-Netted Notional
Amounts Analysis
As previously discussed, analysis
indicates that the Estimated AGNA
Coverage is not very sensitive to
changes in de minimis threshold level.
Staff also conducted a preliminary
analysis of the sensitivity of entitynetted notional amounts (‘‘ENNs’’) 188 of
Likely SDs in the IRS market to changes
in the de minimis threshold level. The
ENNs analysis normalizes notional
amounts to five-year risk equivalents
and nets long and short positions within
counterparty pairs in the same
currency.189
The preliminary analysis indicates
that IRS ENNs are generally not overly
sensitive to the de minimis threshold
levels between $3 billion and $50
billion, providing additional support for
staff’s preliminary consideration of the
policy-related costs and benefits
discussed above. Table 15 shows the
results of an analysis of the de minimis
threshold in terms of ENNs for the IRS
market.
TABLE 15—ENNS FOR IRS LIKELY SDS
[Minimum 10 counterparties]
Notional threshold
($Bn)
IRS ENNs totals
($Bn)
Number of
likely SDs
Long
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3 ...................................
8 ...................................
20 .................................
50 .................................
100 ...............................
121
108
93
81
72
9,812
9,750
9,707
9,617
9,464
Short
Change in ENNs totals vs. $8 Bn
(%)
Net
8,307
8,219
8,191
8,105
8,026
Long
1,505
1,532
1,516
1,512
1,439
Short
Net
0.6
........................
(0.4)
(1.4)
(2.9)
1.1
........................
(0.3)
(1.4)
(2.3)
(1.8)
........................
(1.0)
(1.3)
(6.1)
The 108 Likely SDs at $8 billion
identified by the AGNA analysis in
section II.A.2.ii above represented
approximately $9.8 trillion of long
ENNs and $8.2 trillion of short ENNs on
December 15, 2017. A reduction in the
de minimis threshold from $8 billion to
$3 billion would have only a modest
effect on the coverage of risk transfer as
measured by IRS ENNs, adding only 0.6
percent of additional long ENNs and 1.1
percent of additional short ENNs.
Similarly, an increase in the de minimis
threshold from $8 billion to $50 billion
would modestly decrease long ENNs by
1.4 percent and short ENNs by 1.4
percent. The decrease would be more
limited at a threshold of $20 billion.190
(ii) Direct Cost and Benefits of Setting
an $8 Billion Threshold
188 See Introducing ENNs: A Measure of the Size
of Interest Rate Swap Markets, supra note 65.
189 Each entity is net long or net short ENNs
against each of its counterparties, and each entity’s
total long and short ENNs are the sums of its long
and short ENNs, respectively, across all of its
counterparties. See id.
190 IRS ENNs totals for a hypothetical de minimis
threshold of $100 billion, however, begin to show
increased sensitivities compared to other de
minimis thresholds examined.
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It is likely that for any de minimis
threshold, some firms will have AGNA
of swap dealing activity sufficiently
close to the threshold so as to require
analysis to determine whether their
AGNA qualifies as de minimis. Hence,
with a $3 billion threshold, some set of
entities will likely have to incur the
direct costs of analyzing whether they
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would exceed the de minimis threshold,
and with an $8 billion threshold, a
(mostly) different set of entities would
have to continue to incur costs of
analyzing their activity.
Based on the available data, the
Commission estimates that if the de
minimis threshold were set at $3 billion,
approximately 22 currently unregistered
entities would need to conduct an
initial analysis of whether they would
be above the threshold.191 The
Commission estimates that the potential
total direct cost of conducting the initial
analysis for the 22 entities would
average approximately $79,000 per
entity, or approximately $1.7 million in
the aggregate.192 Certain of those entities
with ongoing swap dealing activity that
is near a $3 billion threshold may also
need to conduct periodic de minimis
calculation analyses to assess whether
they qualify for the exception. The
Commission estimates that
approximately 11 entities may need to
conduct such analyses.193 Further, the
Commission estimates that the potential
annual direct cost of conducting these
ongoing analyses for those 11 entities
would be approximately $40,000 per
entity, or $440,000 in the aggregate.194
191 Commission staff analyzed the swaps activity
of market participants over a one-year period to
develop this estimate. The estimate includes 22 InScope Entities that had 10 or more counterparties
and between $1 billion and $5 billion in AGNA of
swaps activity in IRS, CDS, FX swaps, and equity
swaps. Entities that were already registered SDs
were excluded. The estimate does not account for
entities that primarily are entering into NFC swaps
because notional amount information was not
available for that asset class.
192 This estimate is based on the following staff
requirements for this determination: 25 hours for an
OTC principal trader at $695/hour, 40 hours for a
compliance attorney at $335/hour, 35 hours for a
chief compliance officer at $556/hour, 80 hours for
an operations manager at $290/hour, and 20 hours
for a business analyst at $273/hour. These
individuals would be responsible for identifying,
analyzing, and aggregating the swap dealing activity
of a firm and its affiliates. The estimates of the
number of personnel hours required have been
updated from the SD Definition Adopting Release
in light of the Commission’s experience in
implementing the SD Definition.
The estimates of the hourly costs for these
personnel are from SIFMA’s Management &
Professional Earnings in the Securities Industry
2013 survey, modified to account for an 1,800-hour
work-year and multiplied by 5.35 to account for
firm size, employee benefits, and overhead, which
is the same multiplier that was used when the SD
Definition was adopted. See 77 FR at 30712 n.1347.
The Commission recognizes that particular
entities may, based on their circumstances, incur
costs substantially greater or less than the estimated
averages.
193 The estimate of 11 entities is approximately 50
percent of the 22 entities that would need to
undertake an initial analysis. This estimate assumes
that many entities would, following the initial
analysis, determine that they would either need to
register or choose not to engage in enough dealing
activity to require ongoing monitoring.
194 The Commission estimates that the ongoing
analysis would be streamlined as a result of the
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Conversely, the Commission assumes
that a higher threshold would permit
certain entities to no longer incur
ongoing costs of assessing whether they
are above the threshold. The
Commission estimated the savings that
would result from a higher de minimis
threshold of $20 billion. Based on the
available data, the Commission
estimates that if the de minimis
threshold were set at $20 billion,
approximately 29 entities would no
longer need to conduct an ongoing
analysis of whether they would be
above the new threshold, while 4
entities may begin conducting such an
analysis.195 The Commission estimates
that the ongoing cost savings for the net
25 entities that would no longer be
conducting periodic de minimis
threshold analyses would average
approximately $40,000 per entity, or $1
million in the aggregate per year.196
(iii) Section 15(a)
Section 15(a) of the CEA requires the
Commission to consider the effects of its
actions in light of the following five
factors:
(a) Protection of Market Participants and
the Public
Providing regulatory protections for
swap counterparties who may be less
experienced or knowledgeable about the
swap products offered by SDs
(particularly end-users who use swaps
for hedging or investment purposes) is
a fundamental policy goal advanced by
the regulation of SDs.
The Commission is proposing to
maintain the current de minimis phasein threshold of $8 billion in AGNA of
swap dealing activity. As discussed
above, the Commission recognizes that
a $3 billion de minimis threshold may
result in more entities being required to
register as SDs compared to the
proposed (and currently in-effect) $8
initial analysis, and therefore would be less costly.
For purposes of this calculation, the Commission
preliminarily estimates that the cost of the ongoing
analysis would be approximately 50 percent of the
cost of the initial analysis.
195 Commission staff analyzed the swaps activity
of market participants over a one-year period to
develop this estimate. The estimate includes 29 InScope Entities that had between $3 billion and $15
billion, and 4 In-Scope Entities that had between
$15 billion and $25 billion, in AGNA of swaps
activity in IRS, CDS, FX swaps, and equity swaps,
and at least 10 counterparties. The estimate does
not account for entities that primarily are entering
into NFC swaps because notional amount
information was not available for that asset class.
196 The Commission estimates that the ongoing
analysis would be streamlined as a result of the
initial analysis, and therefore would be less costly.
For purposes of this calculation, the Commission
preliminarily estimates that the cost of the ongoing
analysis would be approximately 50 percent of the
cost of the initial analysis.
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billion threshold, thereby extending
counterparty protections to a greater
number of market participants.
However, this benefit is relatively small
because, at the current $8 billion phasein threshold, the substantial majority of
transactions are already covered by SD
regulation—and related counterparty
protection requirements—since they
include at least one registered SD as a
counterparty.197
On the other hand, as noted above, a
threshold above $8 billion may result in
fewer entities being required to register
as SDs, thus extending counterparty
protections to a fewer number of market
participants. Although the Estimated
Transaction Coverage and Estimated
AGNA Coverage would not decrease
much at higher thresholds of up to $100
billion, the decrease in Estimated
Counterparty Coverage is more
pronounced at higher de minimis
thresholds, potentially indicating that
the benefit of SD counterparty
protections requirements could be
reduced at higher thresholds.
SD regulation is also intended to
reduce systemic risk in the swap
market. Pursuant to the Dodd-Frank Act,
the Commission has proposed or
adopted regulations for SDs, including
margin and risk management
requirements, designed to mitigate the
potential systemic risk inherent in the
swap market. Therefore, the
Commission recognizes that a lower de
minimis threshold may result in more
entities being required to register as
SDs, thereby potentially further
reducing systemic risk. Conversely, a
higher de minimis threshold may result
in fewer entities being required to
register an SD and, thus, possibly
increase systematic risk.
However, the Commission’s data
appears to indicate that the additional
entities that would need to register at
the $3 billion de minimis threshold are
engaged in a comparatively smaller
amount of swap dealing activity. Many
of these entities might be expected to
have fewer counterparties and smaller
overall risk exposures as compared to
the SDs that engage in swap dealing in
excess of the $8 billion level.
Accordingly, the Commission believes
that that the incremental reduction in
systemic risk that may be achieved by
registering dealers that engage in
dealing between the $3 billion and $8
billion thresholds is limited.
The data also indicates that at higher
thresholds of $20 billion, $50 billion, or
$100 billion, fewer entities would be
197 As discussed in section II.A.2.i, the 2017
Transaction Coverage was approximately 98
percent.
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required to register as SDs, though the
change in regulatory coverage as
measured by Estimated AGNA Coverage
and Estimated Transaction Coverage
would be small. Thus, the Commission
preliminarily believes that the increase
in systemic risk that may occur due to
a higher threshold would not be
significant. However, depending on how
the market adapts to a higher threshold,
the level of regulatory coverage could
potentially decrease more than the data
indicates.
Additionally, as discussed above, the
ENNs analysis suggests that the change
in the extent to which market risk is
held by persons identified as Likely SDs
is not very sensitive to the changes in
the thresholds considered here.
The Commission preliminarily
believes that setting the de minimis
threshold at $8 billion will not
substantially diminish the protection of
market participants and the public as
compared to a $3 billion threshold.
Further, as discussed, the Commission
does not expect that an increase in the
threshold would increase the protection
of market participants and the public.
(b) Efficiency, Competitiveness, and
Financial Integrity of Markets
Another goal of SD regulation is swap
market efficiency, orderliness, and
transparency. These market benefits are
achieved through regulations requiring,
for example, SDs to keep detailed daily
trading records, report trade
information, provide counterparty
disclosures about swap risks and
pricing, and engage in portfolio
reconciliation and compression
exercises.
As compared to a $3 billion de
minimis threshold, an $8 billion
threshold may have a negative effect on
the efficiency and integrity of the
markets as fewer entities are required to
register as SDs and fewer transactions
become subject to SD-related
regulations. However, the Commission
also recognizes that the efficiency and
competitiveness of the swap market may
be negatively impacted if the de
minimis threshold is set too low, by
potentially increasing barriers to entry
that may stifle competition and reduce
swap market efficiency. For example, if
entities choose to reduce or cease their
swap dealing activities in response to
the $3 billion de minimis threshold, the
number or availability of market makers
for swaps may be reduced, which could
lead to increased costs for potential
counterparties and end-users.
Conversely, a higher threshold may
increase market liquidity, efficiency,
and competition as more entities engage
in swap dealing without SD registration
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as a barrier to entry. However, a higher
threshold may also result in fewer
swaps being subject to SD-related
regulations requiring, for example,
disclosures, portfolio reconciliation,
portfolio, compression, potentially
reducing the financial integrity of
markets.
Considering these countervailing
factors, the Commission believes that
setting the de minimis threshold at $8
billion will not significantly diminish
the efficiency, competitiveness, and
financial integrity of markets as
compared to a $3 billion threshold.
Further, as discussed, an increase in the
threshold would potentially have both
positive and negative effects to the
efficiency, competitiveness, and
financial integrity of the markets.
(c) Price Discovery
All else being equal, the Commission
preliminarily believes that price
discovery will not be harmed and might
be improved if there are more entities
engaging in ancillary dealing due to
increased competitiveness among swap
counterparties. The Commission is
preliminarily of the view that, as
compared to a $3 billion threshold, an
$8 billion de minimis threshold would
encourage participation of new SDs and
promote ancillary dealing because those
entities engaged in swap dealing
activities below the threshold would not
need to incur the direct costs of
registration until they exceeded a higher
threshold.
Similarly, raising the threshold above
$8 billion could lead to even more
entities engaging in ancillary dealing.
(d) Sound Risk Management
The Commission notes that a higher
de minimis threshold could lead to
impaired risk management practices
because a lower number of entities
would be required by regulation to: (1)
Develop and implement detailed risk
management programs; (2) adhere to
business conduct standards that reduce
operational and other risks; and (3)
satisfy margin requirements for
uncleared swaps. For the same reason,
a lower threshold could positively
impact risk management since more
entities would be required to comply
with the above mentioned risk-related
SD regulations.
(e) Other Public Interest Considerations
The Commission has not identified
any other public interest considerations
with respect to setting the de minimis
threshold at $8 billion in AGNA of swap
dealing activity.
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27475
2. Swaps Entered Into by Insured
Depository Institutions in Connection
With Loans to Customers
The proposed IDI De Minimis
Provision would require that the loans
and related swaps generally meet
requirements that, as compared to the
requirements of the IDI Swap Dealing
Exclusion in paragraph (5) of the SD
Definition, reflect: (1) A revised timing
requirement for when the swap must be
entered into; (2) an expansion of the
types of swaps that are eligible; (3) a
reduced syndication percentage
requirement; (4) an elimination of the
notional amount cap; and (5) a refined
explanation of the types of loans that
would qualify. Any swap that meets the
requirements of the IDI Swap Dealing
Exclusion in paragraph (5) of the SD
Definition would also meet the
requirements of this new IDI De
Minimis Provision.
(i) Policy-Related Costs and Benefits
Similar to the IDI Swap Dealing
Exclusion in paragraph (5) of the SD
Definition, the IDI De Minimis Provision
allows IDIs to tailor the risks of a loan
to the loan customer’s and the lender’s
needs and promotes the risk-mitigating
effects of swaps. The IDI De Minimis
Provision, however, allows more
flexibility, which should expand the
universe of swaps that do not have to be
counted towards the de minimis
threshold, as well as decrease
concentration in the markets for swaps
and loans. For example, the different
requirements for both timing and the
relationship of the swap to the loan will
increase the ability of IDIs to enter into
certain swaps and not be concerned that
they would have to be counted towards
the de minimis threshold. This should
enhance market liquidity, which is
helpful for customers of IDIs that may
not have access to larger SDs.
Conversely, expanding the universe of
swaps not required to be counted
towards the de minimis threshold also
expands the number of swaps
potentially not subject to SD regulation
and consequently, could decrease
customer protections. As mentioned in
section II.B.1, however, the proposed
IDI De Minimis Provision will likely
benefit mostly small and mid-sized IDIs,
which mitigates the concern that
systemic risk will increase as a result of
the proposed change.
As indicated by Table 14 in section
II.B.1, the level of activity between
unregistered IDIs and other unregistered
persons is between only approximately
0.003 percent and 0.007 percent of the
total AGNA of swaps activity,
depending on the range of AGNA of
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swaps activity being examined (at
AGNAs of between $1 billion and $50
billion). Given those low percentages,
the Commission is of the view that the
policy benefits of SD regulation likely
would not be significantly diminished if
the proposed IDI De Minimis Provision
is adopted and some unregistered IDIs
marginally expand the number and
AGNA of swaps they enter into with
customers in connection with loans to
those customers. Further, though these
entities are active in the swap market,
the Commission is of the view that their
activity poses less systemic risk as
compared to larger IDIs because of their
limited AGNA of swaps activity as
compared to the overall size of the
market.
The Commission believes that the
benefits of added market liquidity may
be more significant than the costs of
potentially reduced customer
protections. The cost of reduced
customer protections is mitigated
because such swaps would still be
required to be reported to the CFTC and
IDIs would still be subject to prudential
regulatory requirements, thereby
providing oversight with respect to such
swaps.
(ii) Section 15(a)
Section 15(a) of the CEA requires the
Commission to consider the effects of its
actions in light of the following five
factors:
(a) Protection of Market Participants and
the Public
The IDI De Minimis Provision
proposed amendment may expand the
universe of swaps that fall outside the
scope of SD regulations, potentially
increasing systemic risk and reducing
counterparty protections. However, the
IDIs would still be subject to prudential
regulatory requirements, potentially
mitigating this concern.
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(b) Efficiency, Competitiveness, and
Financial Integrity of Markets
The efficiency, competitiveness, and
financial integrity of the markets may
also be affected by the addition of the
IDI De Minimis Provision since it
provides IDIs more flexibility to enter
into swaps in connection with loans
without registering as SDs. With the
added flexibility, the number of IDIs
offering swaps in connection with loans
may increase, which might have a
positive impact on the efficiency and
competiveness of the market for swaps
and loans. However, the added
flexibility may also result in fewer
swaps being subject to SD-related
regulations.
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(c) Price Discovery
The IDI De Minimis Provision could
lead to better price discovery as small
and mid-sized banks increase their level
of ancillary dealing activity, which
might increase the frequency of swap
transaction pricing.
(d) Sound Risk Management
The proposed IDI De Minimis
Provision should increase the usage of
swaps for risk mitigation, which might
reduce the risk resulting from the
defaulting of loan customers.
Additionally, having more IDIs offering
swaps in connection with loans might
decrease concentration in the market for
loan-related swaps and thereby decrease
risk as well.
(e) Other Public Interest Considerations
The Commission has not identified
any other public interest considerations
with respect to the proposed IDI De
Minimis Provision.
3. Swaps Entered Into To Hedge
Financial or Physical Positions
The Commission is proposing new
paragraph (4)(D), which provides a
general exception from the SD de
minimis threshold calculation for
certain hedging swaps. To meet the
requirements of the Hedging De
Minimis Provision, a swap must be
entered into by a person for the primary
purpose of reducing or otherwise
mitigating one or more of its specific
risks, including, but not limited to,
market risk, commodity price risk, rate
risk, basis risk, credit risk, volatility
risk, correlation risk, foreign exchange
risk, or similar risks arising in
connection with existing or anticipated
identifiable assets, liabilities, positions,
contracts, or other holdings of the
person or any affiliate. Additionally, the
entity entering into the hedging swap
must not: (1) Be the price maker of the
hedging swap; (2) receive or collect a
bid/ask spread, fee, or commission for
entering into the hedging swap; and (3)
receive other compensation separate
from the contractual terms of the
hedging swap in exchange for entering
into the hedging swap.
(i) Policy-Related Costs and Benefits
Generally, the proposed Hedging De
Minimis Provision is not expected to
impact how such swaps are treated for
purposes of the de minimis threshold
calculation, but rather provides
additional clarity to market participants,
which allows them to determine more
easily whether swaps entered into for
purposes of hedging financial or
physical positions are counted towards
the de minimis threshold. The
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Commission believes that the clarity
will benefit certain entities by
encouraging economically-appropriate
risk mitigation, potentially reducing
systemic risk broadly. The proposed
exception should reduce costs that
persons engaging in such swaps would
incur in determining if they are SDs.
Such added clarity may also improve
market liquidity as entities feel more
comfortable entering into a swap for the
purpose of hedging, knowing that the
swap would not necessarily constitute
swap dealing. In addition to increased
market liquidity, the additional clarity
should encourage economically
appropriate risk mitigation.
Conversely, it is possible that
improper application of the Hedging De
Minimis Provision could lead to certain
swap dealing activity being treated as
hedging activity that does not need to be
counted towards the de minimis
threshold. This may reduce the level of
the Commission’s regulatory coverage of
the swap market. However, the
Commission believes that the
requirements of the proposed Hedging
De Minimis Provision limit the
likelihood that dealing activity would
be treated as hedging activity by market
participants.
(ii) Section 15(a)
Section 15(a) of the CEA requires the
Commission to consider the effects of its
actions in light of the following five
factors:
(a) Protection of Market Participants and
the Public
The Commission notes that certain
swaps that are now currently counted
towards the de minimis threshold could
now be hedging swaps that would not
be counted, which could potentially
mean less regulatory coverage and
protection for market participants.
However, as discussed, the Commission
believes that the proposed exception for
swaps entered into to hedge financial or
physical positions has a number of
requirements that greatly reduce the
likelihood that swap dealing activity
would improperly not be counted
towards an entity’s de minimis
threshold calculation, reducing the
potential impact to systemic risk and
counterparty protections.
(b) Efficiency, Competitiveness, and
Financial Integrity of Markets
With respect to the Hedging De
Minimis Provision, market liquidity
may improve as entities would be able
to execute hedging swaps knowing that
the swaps would not necessarily
constitute swap dealing that counts
towards the de minimis threshold.
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(c) Price Discovery
The Hedging De Minimis Provision
could lead to better price discovery as
more entities gain certainty that hedging
swaps are not considered dealing
activity, and therefore increase their
hedging-related activity because they
are less likely to have to register as an
SD.
(d) Sound Risk Management
The added clarity that certain hedging
swaps need not be counted towards an
entity’s de minimis calculation could
lead to improved risk management as
certain entities increase their hedging
activities.
(e) Other Public Interest Considerations
The Commission has not identified
any other public interest considerations
with respect to the proposed Hedging
De Minimis Provision.
4. Swaps Resulting From Multilateral
Portfolio Compression Exercises
(i) Policy-Related Costs and Benefits
The Commission believes that swaps
which result from multilateral portfolio
compression exercises and which meet
the requirements of the existing Staff
Letter No. 12–62 would also meet the
requirements of the proposed rule
amendment, and are already not
considered swaps that have to count
towards a person’s de minimis
threshold. The Commission is of the
preliminary belief that the existing noaction relief is being fully relied upon
by market participants, and therefore,
this proposed change could lead to
increased certainty for market
participants, without any significant
policy-related costs for the swap market.
(ii) Section 15(a)
Section 15(a) of the CEA requires the
Commission to consider the effects of its
actions in light of the following five
factors:
pmangrum on DSK30RV082PROD with PROPOSALS2
(a) Protection of Market Participants and
the Public
Multilateral portfolio compression
exercises help to better align initial
margin between appropriate
counterparties when, for example, a
swap with a compression exercise
participant has been backed-to-backed
between two SD affiliates in the same
holding company. In such cases, the
original outward facing swap with the
first affiliate and the back-to-back
affiliate swap may be replaced with an
outward facing swap with the second
affiliate. Thus, having SDs engage in
compression exercises may increase the
protections that posting initial margin
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provides market participants and the
public, namely, a counterparty has a
senior claim to posted initial margin
and may not have to become a general
creditor in a bankruptcy. To the extent
that a provision explicitly excepting
multilateral portfolio compression
exercise swaps from the de minimis
calculation encourages more
participation in compression exercises,
market participants and the public may
be better protected.
(b) Efficiency, Competitiveness, and
Financial Integrity of Markets
The increased certainty that swaps
resulting from multilateral portfolio
compression exercises do not need to be
counted towards a person’s de minimis
threshold could encourage persons to
enter into multilateral portfolio
compression exercises on a more regular
basis, potentially increasing the
financial integrity of the markets.
(c) Price Discovery
Prices from swap compression
exercises are not publicly reported
because they are not price-forming
trades. As such, the Commission has not
identified any price discovery
considerations with respect to the MPCE
De Minimis Provision.
(d) Sound Risk Management
The increased certainty that swaps
resulting from multilateral portfolio
compression exercises do not need to be
counted towards a person’s de minimis
threshold could encourage persons to
enter into multilateral portfolio
compression exercises on a more regular
basis, potentially reducing risk.
(e) Other Public Interest Considerations
The Commission has not identified
any other public interest considerations
with respect to the MPCE De Minimis
Provision.
5. Methodology for Calculating Notional
Amounts
(i) Policy-Related Costs and Benefits
To allow for more timely clarity to
market participants, the Commission is
proposing new paragraph (4)(vii) of the
SD Definition, which provides that the
Commission may determine the
methodology to be used to calculate the
notional amount for any group,
category, type, or class of swaps, and
delegates to the Director of DSIO the
authority to determine methodologies
for calculating notional amounts.
Additionally, any such methodology
shall be economically reasonable and
analytically supported, and be made
publicly available on the CFTC website.
The Commission believes that this
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27477
proposed amendment would facilitate
timely clarity regarding notional amount
calculation methodologies for purposes
of the de minimis threshold, and help
ensure that persons are fully aware of
whether their activities could lead to (or
presently entail) SD registration
requirements in the event of market or
regulatory changes. As is the case with
existing delegations to staff, the
Commission would continue to reserve
the right to exercise the delegated
authority itself at any time.
(ii) Section 15(a)
(a) Protection of Market Participants and
the Public
The Commission has not identified
any protection of market participants
and the public considerations with
respect to the proposed rule for
determining the methodology for
calculating notional amounts and the
delegation of authority.
(b) Efficiency, Competitiveness, and
Financial Integrity of Markets
The Commission has not identified
any efficiency, competitiveness, and
financial integrity of the markets
considerations with respect to the
proposed rule for determining the
methodology for calculating notional
amounts and the delegation of authority.
(c) Price Discovery
The Commission has not identified
any price discovery considerations with
respect to the proposed rule for
determining the methodology for
calculating notional amounts and the
delegation of authority.
(d) Sound Risk Management
The Commission believes that most
market participants understand the risks
of the swaps they engage in. To the
extent that the proposed amendment
compels SDs to assess the deltas of
embedded options in swaps, however,
the proposed amendment could lead to
an audit trail for SDs that might
ultimately improve risk management (if
estimated deltas did not exist already).
(e) Other Public Interest Considerations
The Commission believes that the
proposed rule for determining the
methodology for calculating notional
amounts and the delegation of authority
will ensure that persons are fully aware
of whether their activities could lead to
(or presently entail) SD registration
requirements in the event of market or
regulatory changes.
6. Request for Comment
The Commission invites comments
from the public on all aspects of its
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preliminary consideration of costs and
benefits associated with this Proposal.
The questions below relate to areas that
the Commission preliminarily believes
may be relevant. In addressing these or
any other aspect of the Commission’s
preliminary assessment, commenters are
encouraged to submit any data or other
information that they may have
quantifying or qualifying the costs and
benefits of the proposed alternatives.
(1) What are the costs and benefits to
market participants associated with
each proposed change? Please explain
and, to the extent possible, quantify
these costs and benefits.
(2) What are the direct costs
associated with SD registration and
compliance? What is the smallest
notional amount of dealing swaps that
an entity must enter into in order for the
profitability of its swap dealing activity
to exceed SD registration and
compliance costs?
(3) Are there indirect benefits to
registering as an SD? For example, does
being a registered SD make an entity a
more desirable counterparty? Are many
of the benefits of transacting with an SD
not relevant because many requirements
are part of standard ISDA agreements?
(4) Besides the direct costs of
registration and compliance, are there
any indirect costs to becoming a
registered SD? What are these costs?
(5) Would the entities with dealing
activity between $3 billion and $8
billion incur similar registration and
compliance costs as compared to
entities with dealing activity above $8
billion? Would those dealers be
impacted differently by those costs?
(6) What are the costs and benefits to
the public associated with each
proposed change? Please explain and, to
the extent possible, quantify these costs
and benefits.
(7) How does each proposed change
affect the efficiency, competitiveness,
and financial integrity of markets?
(8) How does each proposed change
affect price discovery for the swap
market?
(9) How does each proposed change
affect sound risk management for swap
market participants?
(10) How does each proposed change
affect other public interests that the
Commission may elect to consider?
(11) Has the Commission identified
all of the relevant categories of costs and
benefits in its preliminary consideration
of the costs and benefits? Please
describe any additional categories of
costs or benefits that the Commission
should consider.
(12) The Commission preliminarily
believes that cross-border aspects of this
rulemaking are similar to domestic
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applications. Do the costs and benefits
of the proposed changes, as applied in
cross-border contexts, differ from those
costs and benefits resulting from their
domestic application, and, if so, in what
ways and to what extent?
D. Antitrust Considerations
Section 15(b) of the CEA requires the
Commission to take into consideration
the public interest to be protected by the
antitrust laws and endeavor to take the
least anticompetitive means of
achieving the purposes of the CEA, in
issuing any order or adopting any
Commission rule or regulation
(including any exemption under section
4(c) or 4c(b)), or in requiring or
approving any bylaw, rule, or regulation
of a contract market or registered futures
association established pursuant to
section 17 of the CEA.198
The Commission believes that the
public interest to be protected by the
antitrust laws is generally to protect
competition. The Commission requests
comment on whether this Proposal
implicates any other specific public
interest to be protected by the antitrust
laws.
The Commission has considered this
Proposal to determine whether it is
anticompetitive and has preliminarily
identified no anticompetitive effects.
The Commission requests comment on
whether this Proposal is anticompetitive
and, if it is, what the anticompetitive
effects are.
Because the Commission has
preliminarily determined that this
Proposal is not anticompetitive and has
no anticompetitive effects, the
Commission has not identified any less
anticompetitive means of achieving the
purposes of the CEA. The Commission
requests comment on whether there are
less anticompetitive means of achieving
the relevant purposes of the CEA that
would otherwise be served by adopting
this Proposal.
List of Subjects in 17 CFR Part 1
Commodity futures, Definitions, De
minimis exception, Insured depository
institutions, Swaps, Swap dealers.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission proposes to amend
17 CFR part 1 as follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to read as follows:
■
198 7
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U.S.C. 19(b).
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Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p,
6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12,
12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and
24 (2012).
2. In § 1.3, amend the definition of the
term ‘‘Swap dealer’’ as follows:
■ a. Revise paragraph (4)(i)(A);
■ b. Add paragraphs (4)(i)(C), (D), and
(E);
■ c. Remove and reserve paragraph
(4)(ii); and
■ d. Add paragraph (4)(vii).
The revisions and additions read as
follows:
■
§ 1.3
Definitions.
*
*
*
*
*
Swap Dealer. * * *
(4) De minimis exception—(i)(A) In
general. Except as provided in
paragraph (4)(vi) of this definition, a
person that is not currently registered as
a swap dealer shall be deemed not to be
a swap dealer as a result of its swap
dealing activity involving
counterparties, so long as the swaps
connected with those dealing activities
into which the person—or any other
entity controlling, controlled by or
under common control with the
person—enters over the course of the
immediately preceding 12 months have
an aggregate gross notional amount of
no more than $8 billion, and an
aggregate gross notional amount of no
more than $25 million with regard to
swaps in which the counterparty is a
‘‘special entity’’ (as that term is defined
in section 4s(h)(2)(C) of the Act, 7 U.S.C.
6s(h)(2)(C), and § 23.401(c) of this
chapter), except as provided in
paragraph (4)(i)(B) of this definition. For
purposes of this definition, if the stated
notional amount of a swap is leveraged
or enhanced by the structure of the
swap, the calculation shall be based on
the effective notional amount of the
swap rather than on the stated notional
amount.
*
*
*
*
*
(C) Insured depository institution
swaps in connection with originating
loans to customers. Solely for purposes
of determining whether an insured
depository institution has exceeded the
aggregate gross notional amount
threshold set forth in paragraph (4)(i)(A)
of this definition, an insured depository
institution may exclude swaps entered
into by the insured depository
institution with a customer in
connection with originating a loan to
that customer, subject to the
requirements of paragraphs (4)(i)(C)(1)
through (4)(i)(C)(6) of this definition.
(1) Timing of execution of swap. The
insured depository institution enters
into the swap with the customer no
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earlier than 90 days before execution of
the applicable loan agreement, or no
earlier than 90 days before transfer of
principal to the customer by the insured
depository institution pursuant to the
loan, unless an executed commitment or
forward agreement for the applicable
loan exists, in which event the 90 day
restriction does not apply;
(2) Relationship of swap to loan. (i)
The rate, asset, liability or other term
underlying such swap is, or is related to,
a financial term of such loan, which
includes, without limitation, the loan’s
duration, rate of interest, the currency or
currencies in which it is made and its
principal amount; or
(ii) Such swap is required as a
condition of the loan, either under the
insured depository institution’s loan
underwriting criteria or as is
commercially appropriate, in order to
hedge risks incidental to the borrower’s
business (other than for risks associated
with an excluded commodity) that may
affect the borrower’s ability to repay the
loan;
(3) Duration of swap. The duration of
the swap does not extend beyond
termination of the loan;
(4) Level of funding of loan. (i) The
insured depository institution is
committed to be, under the terms of the
agreements related to the loan, the
source of at least 5 percent of the
maximum principal amount under the
loan; or
(ii) If the insured depository
institution is committed to be, under the
terms of the agreements related to the
loan, the source of less than 5 percent
of the maximum principal amount
under the loan, then the aggregate
notional amount of all swaps entered by
the insured depository institution with
the customer in connection with the
financial terms of the loan cannot
exceed the principal amount of the
insured depository institution’s loan;
(5) The swap is considered to have
been entered into in connection with
originating a loan with a customer if the
insured depository institution:
(i) Directly transfers the loan amount
to the customer;
(ii) Is a part of a syndicate of lenders
that is the source of the loan amount
that is transferred to the customer;
(iii) Purchases or receives a
participation in the loan; or
(iv) Under the terms of the agreements
related to the loan, is, or is intended to
be, the source of funds for the loan;
(6) The loan to which the swap relates
shall not include:
(i) Any transaction that is a sham,
whether or not intended to qualify for
the exception from the de minimis
threshold in this definition; or
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(ii) Any synthetic loan.
(D) Swaps entered into for the
purpose of hedging. Solely for purposes
of determining whether a person has
exceeded the aggregate gross notional
amount threshold set forth in paragraph
(4)(i)(A) of this definition, the person
may exclude swaps that are entered into
for the purpose of hedging, subject to
the requirements of paragraphs
(4)(i)(D)(1) through (4)(i)(D)(6) of this
definition.
(1) The person is entering into the
swap for the primary purpose of
reducing or otherwise mitigating one or
more specific risks for the person,
which includes, without limitation,
market risk, price risk, rate risk, basis
risk, credit risk, volatility risk, foreign
exchange risk, liquidity risk, or similar
risks arising in connection with existing
or anticipated identifiable assets,
liabilities, positions, contracts, or other
holdings of the person or any affiliate of
the person;
(2) For that swap, the person is not
the price maker and does not receive or
earn a bid/ask spread, fee, commission,
or other compensation for entering into
the swap;
(3) The swap is economically
appropriate to the reduction of risks that
may arise in the conduct and
management of an enterprise engaged in
the type of business in which the person
is engaged;
(4) The swap is entered into in
accordance with sound business
practices; and
(5) The person does not enter into the
swap in connection with activity
structured to evade designation as a
swap dealer.
(E) Swaps resulting from multilateral
portfolio compression exercises. Solely
for purposes of determining whether a
person has exceeded the aggregate gross
notional amount threshold set forth in
paragraph (4)(i)(A) of this definition, the
person may exclude swaps that result
from multilateral portfolio compression
exercises, as defined in § 23.500 of this
chapter, to the extent the person does
not enter into the multilateral portfolio
compression exercise in connection
with activity structured to evade
designation as a swap dealer.
(ii) [Reserved]
*
*
*
*
*
(vii) Methodology for calculation of
notional amounts. (A) For purposes of
paragraph (4) of this definition, the
Commission may on its own, or upon
written request by a person, determine
the methodology to be used to calculate
the notional amount for any group,
category, type, or class of swaps. Such
methodology shall be economically
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27479
reasonable and analytically supported.
Each such determination shall be made
publicly available and posted on the
Commission website.
(B) Delegation. (i) The Commission
hereby delegates to the Director of the
Division of Swap Dealer and
Intermediary Oversight, or such other
employee or employees as the Director
may designate from time to time, the
authority in paragraph (4)(vii)(A) of this
definition to determine the methodology
to be used to calculate the notional
amount for any group, category, type, or
class of swaps.
(ii) The Director of the Division of
Swap Dealer and Intermediary
Oversight may submit any matter which
has been delegated to him or her under
paragraph (4)(vii)(B)(i) of this definition
to the Commission for its consideration.
(iii) Nothing in this paragraph
(4)(vii)(B) may prohibit the Commission,
at its election, from exercising the
authority delegated to the Director of the
Division of Swap Dealer and
Intermediary Oversight under paragraph
(4)(vii)(A) of this definition.
*
*
*
*
*
Issued in Washington, DC, on June 5, 2018,
by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to De Minimis Exception to
the Swap Dealer Definition—
Commission Voting Summary,
Chairman’s Statement, and
Commissioners’ Statements
Appendix 1—Commission Voting
Summary
On this matter, Chairman Giancarlo and
Commissioner Quintenz voted in the
affirmative. Commissioner Behnam voted in
the negative.
Appendix 2—Statement of Chairman J.
Christopher Giancarlo
Since becoming Chairman, I have
committed to resolving this outstanding issue
and giving market participants the regulatory
certainty they need. Still, as you know, last
year I requested that the Commission
postpone a decision on the de minimis
threshold for a year. That decision was
understandably disappointing to some,
including my fellow Commissioners, who
said they were then ready to vote on it.
Yet, as I told Congress at the time, I did
not just want to address the de minimis
threshold; I wanted to get it right.
Today, I believe the staff has had adequate
time to analyze the most current and
comprehensive trading data and arrive at a
recommendation for the best path forward in
terms of managing risk to the financial
system. The staff has provided
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Commissioners with full access to the data
they have used in their analysis. They have
also conducted additional and specific data
analyses requested by Commissioners.
The data shows quite clearly that a drop in
the de minimis definition from $8 billion to
$3 billion would not have an appreciable
impact on coverage of the marketplace. In
fact, any impact would be less than one
percent—an amount that is truly de minimis.
On the other hand, the drop in the
threshold would pose unnecessary burdens
for non-financial companies that engage in
relatively small levels of swap dealing to
manage business risk for themselves and
their customers. That would likely cause
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, Wall
Street swap dealers.
In my travels around the country over the
past four years on the Commission, I have
met numerous small swaps trading firms that
make markets in local markets or in select
asset classes. These firms are often housed in
small community banks, local energy utilities
or commodity trading houses. They all trade
below the $8 billion threshold. Almost all of
them say that if the de minimis threshold
were to drop to $3 billion, they would reduce
their trading accordingly. They just cannot
afford to be registered as swap dealers.
Who are the winners if these small firms
reduce their market making activities? Big
Wall Street banks. Who are the losers if these
small firms reduce their market making
activities? Small regional lenders, energy
hedgers and Ag producers, who become more
dependent on Wall Street trading liquidity.
Who is the really big loser? The U.S.
economy, which becomes more financially
concentrated and less economically diverse.
That is why I think the proposed rule
rightly balances the mandate to register swap
dealers whose activity is large enough in size
and scope to warrant oversight without
detrimentally affecting community banks and
agricultural co-ops that engage in limited
swap dealing activity and do not pose
systemic risk. Leaving the threshold at the $8
billion level allows firms to avoid incurring
new costs for overhauling their existing
procedures for monitoring and maintaining
compliance with the threshold. It fosters
increased certainty and efficiency in
determining swap dealer registration by
utilizing a simple objective test with a
limited degree of complexity. And it ensures
that smaller market makers and the
counterparties with which they trade can
engage in limited swap dealing without the
high costs of registration and compliance as
intended by Congress when it established the
de minimis dealing exception to begin with.
The changes proposed today will also not
count swaps of Insured Depository
Institutions (IDIs) made in connection with
loans. They would allow, for example, an
insured depository institution swap dealer to
write a swap with a customer 181 days after
entering into a loan without counting it
towards the $8 billion threshold. These types
of changes will allow small and regional
banks to further serve customers’ needs
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without the added burden of unnecessary
regulation and associated compliance costs.
This proposal incorporates feedback and
input from my two fellow Commissioners
and their fine staffs. We now look forward to
feedback from the public and market
participants. We ask numerous questions
about whether any additional exceptions or
calculations should be included in the final
rule. Three years ago, I raised the question of
whether there should be an exclusion from
counting cleared swaps towards the
registration threshold and that question is
asked again. Your response to questions
regarding adding other potential components
will help the Commission assess whether
further adjustments to the de minimis
exception may be appropriate in the final
rule.
As discussed in the adopting release, staff
continues to consult with the SEC and
prudential regulators regarding the changes
in the proposal in particular some of the
questions regarding exclusions. I remain
committed to working with Chair Jay Clayton
and the SEC in areas where harmonization is
necessary and appropriate.
I also remain committed to finalizing this
rule before the end of the year. I recognize
that market participants need certainty.
Today’s proposal is a major step forward in
doing just that. I applaud staff for this
proposal and look forward to feedback.
Appendix 3—Supporting Statement of
Commissioner Brian D. Quintenz
I support this proposed rulemaking
governing swap dealer registration, which is
fundamental to the Commission’s effective
oversight of the swaps market.
Swap dealers are subject to extensive and
costly regulatory requirements: Registration
fees; minimum capital requirements; posting
margin for uncleared swaps; IT costs for trade
processing, reporting, confirmation, and
reconciliation activities; costs to create and
send clients daily valuation reports; costs for
recordkeeping obligations; third party audit
expenses; legal fees to develop and
implement business conduct rules and many,
many more. If that sounds like a big bill, it
is. A prominent economic research firm
estimated the present value of the cost for
swap dealer registration compliance at $390
million per firm.1
Those significant requirements and costs
are imposed to advance equally significant
policy objectives, such as the reduction of
systemic risk, increased counterparty
protections, and enhanced market efficiency
and integrity. Therefore, the registration
threshold, as the trigger mechanism for those
costs and objectives, must be appropriately
and specifically calibrated to ensure that the
correct market group shoulders the burdens
of swap dealer regulations because they are
1 See National Economic Research Associates,
Cost-Benefit Analysis of the CFTC’s Proposed Swap
Dealer Definition 1 (Dec. 20, 2011) (‘‘NERA
Report’’), https://www.nera.com/content/dam/nera/
publications/archive2/PUB_SwapDealer_1211.pdf.
It is difficult to estimate the initial and incremental,
ongoing costs of swap dealer regulation. NERA’s
report regarding the costs of registration for nonfinancial energy firms remains one of the only
comprehensive analyses produced.
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best situated to realize the corresponding
policy goals of that registration.
I have stated previously, in great detail and
with considerable evidence, the importance
of appropriately calibrating the de minimis
threshold so that entities posing no systemic
risk and with a relatively small market
footprint are not regulated under a regime
that is more appropriate for the world’s
largest, most complex financial institutions.2
If we fail to calibrate this threshold
appropriately, firms at the margin will likely
reduce their activity to avoid registration as
opposed to serving their clients’ interests and
accepting the burdens of registration. A
public policy choice which drives away
market participants and reduces market
activity is undeniably flawed.
From my first confirmation hearing in 2016
to the present day,3 including meetings with
elected representatives, my second
confirmation hearing,4 interviews with the
press,5 discussions with market participants,
and in public remarks at event forums, 6 I
have been adamant that notional value is a
poor measure of activity and a meaningless
measure of risk, and therefore, by itself, is a
deficient metric by which to impose large
costs and achieve substantial policy
objectives.7 Therefore, I have some
reservations about this proposal’s continued
reliance on a one-size-fits-all notional value
test for swap dealer registration.
I still, and will continue to, believe that the
criteria for determining swap dealer
registration should be more closely correlated
to risk. However, if any final rule is going to
2 Keynote Address of Commissioner Brian
Quintenz before the Smart Financial Regulation
Roundtable (Nov. 2017), https://www.cftc.gov/
PressRoom/SpeechesTestimony/opaquintenz3.
3 Transcript, ‘‘Hearing to Consider Pending CFTC
Nominations,’’ Senate Agriculture, Nutrition, and
Forestry Committee, September 15, 2016, 2016 WL
4938280 p.12.
4 Transcript, ‘‘Hearing to Consider Pending CFTC
Nominations,’’ Senate Agriculture, Nutrition, and
Forestry Committee, July 27, 2017, 2017 WL
3215667 p.14 (‘‘With regard to the de minimis
threshold level, I think when this threshold was set
originally it was really done without the benefit of
a lot of data. I think if there is a scenario where this
shortfall reduces from $8 billion to $3 billion [that]
instead of increasing registration, it would drive
participants out of the market or force them to
reduce their activity because of the cost that would
be imposed upon them.’’).
5 Bain, Benjamin, ‘‘CFTC Swaps Dealer Threshold
Criticized by Its Newest Republican,’’ Bloomberg
(Oct. 9, 2017); and DeFrancesco, Dan, ‘‘CFTC’s
Quintenz: Dealer Threshold Could Exclude Cleared
Swaps—Commissioner Suggests Risks should be
Better Considered in De Minimis Reappraisal,’’
Risk.Net (Oct. 24, 2017).
6 ‘‘Fireside Chat: CFTC Commissioners,’’ FIA
Expo Chicago (Oct 19, 2017) available at: https://
expo2017.fia.org/articles/fireside-chat-cftccommissioners, at 9’30’’ through 10’25’’.
7 For further discussion, see comment letter to
CFTC from Financial Services Roundtable dated
January 19, 2016 (‘‘We do not see a benefit to
requiring an entity that enters into a small number
of swaps with a large notional amount but little
exposure to choose between exiting the market or
registering as a swap dealer, nor should entities that
are taking on very large exposures without crossing
a notional threshold, or a trade or counterparty
count metric, be unregulated because they have
concentrated risk in a small number of trades.’’).
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settle for an activity-based threshold, a
notional value metric should at least be
combined with additional measures (such as
dealing counterparty count and dealing
transaction count) to determine what
constitutes a de minimis quantity of swap
dealing activity. Including additional
measures should mitigate instances of ‘‘false
positives’’ that could result from the use and
deficiencies of any one activity-based
metric.8
While it would have been my preference
that this concept appear in this proposal’s
rule text as the operative standard, I am very
grateful to the Chairman and the Division of
Swap Dealer and Intermediary Oversight
(DSIO) for including a robust discussion in
the preamble on the merits of replacing the
current notional value de minimis threshold
with a three-prong test. Specifically, the
preamble suggests an entity could qualify for
the de minimis exception if its dealing
activity is below any of the following three
criteria: (i) A notional threshold, (ii) a
proposed dealing counterparty count
threshold, or (iii) a proposed dealing
transaction count threshold. In other words,
an entity would have to surpass all three
hurdles collectively in order to lose the de
minimis exception’s safe harbor.
I have included several questions in the
proposal that ask for feedback on this
approach, particularly with respect to the
dealing counterparty and transaction count
thresholds which I believe would provide
market participants with additional
flexibility to serve their clients’ needs
without triggering a very costly and
burdensome registration process. I thank the
staff of DSIO for including my questions in
the proposal and welcome market
participant’s feedback on this potential
approach.
I also welcome comments on the Proposed
Rule’s preamble discussion on accounting for
exchange-traded or cleared swaps in an
entity’s de minimis calculation. Many of the
policy goals of swap dealer regulation are
accomplished when a swap is exchangetraded and cleared. For example, systemic
risk concerns are diminished with respect to
cleared swaps: The swaps are standardized,
the executing counterparties do not incur
counterparty credit risk because they face the
clearinghouse and not each other, and each
side is required to post margin that helps
guarantee performance and prevent
unfunded losses from accumulating.
Removing such swaps from the de minimis
calculation would better align the registration
threshold with risk and would also, I believe,
encourage additional liquidity on SEFs. I am
hopeful that with the benefit of additional
industry comment and further Commission
analysis, the Commission will either adopt
an exclusion for exchange-traded and cleared
swaps or adjust their notional weighting in
an entity’s de minimis calculation.
We must remember, the Commission is not
establishing the de minimis exception in a
vacuum. Subsequent to the adoption of the
swap dealer definition, other regulatory
requirements have gone into effect which
8 For further discussion, see letter from Institute
of International Bankers dated January 19, 2016.
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also advance the goals of swap dealer
registration, such as mandatory clearing, SEF
trading, reporting swap data to repositories,
and margin requirements for uncleared
swaps. For example, regardless of whether an
entity is registered as a swap dealer, its swap
activity is transparent to the Commission
because of the swap data and real-time
reporting requirements that apply to all
market participants.
When the Commission first established the
$8 billion de minimis threshold in 2012, it
did so without the benefit of swap data.9
Now almost six years later, staff has
conducted a comprehensive analysis of the
available swap data collected by
Commission-registered SDRs and presented
estimates about the impact that lower or
higher notional amount thresholds would
have on swap dealer registration. Although
much work remains to be done to further
refine the data, particularly with respect to
the non-financial commodity asset class, I
commend staff for their hard work, progress,
and thoughtful analysis. I believe the data in
the Proposed Rule clearly supports
maintaining the de minimis threshold at $8
billion or potentially increasing it. For
example, at a $20 billion notional threshold,
the estimated amount of notional swap
activity that would no longer be covered by
swap dealer regulation is approximately only
1/100th of 1 percent of the $221 trillion
market analyzed. I am interested to hear from
commenters about the policy and market
implications of maintaining or raising the de
minimis threshold.
Finally, I would like to commend the
Chairman and DSIO for including many
important improvements to the de minimis
exception in this proposal which I fully
support. For instance, I support an
appropriate Insured Depository Institution
exception that will allow for banks to serve
their clients’ needs. By removing
unnecessary timing restrictions and
expanding the types of credit extensions that
qualify for the exception, the proposal should
improve the ability of IDIs to help their
customers hedge loan-related risks as the
statute intended. I also support the proposed
rule’s clarification that swaps that hedge
financial risks may be excluded from an
entity’s de minimis count. Market
participants should be able to use swaps to
manage their financial and physical risks
without concern that such activity may
trigger swap dealer registration.
I will vote in favor of issuing this proposal
to the public for feedback and look forward
to hearing from market participants about
how these proposed amendments may be
further refined or calibrated to increase the
efficacy of the de minimis threshold to meet
the goals of swap dealer registration.
9 See Hearing to Review the 2016 Agenda of the
Commodity Futures Trading Commission Before the
H. Comm. on Agric., 114th Cong. 17 (2016)
(response of Timothy Massad, former CFTC
Chairman, to question posed by Congressman David
Scott (D–GA)), https://agriculture.house.gov/
uploadedfiles/114-40_-_98680.pdf.
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Appendix 4—Dissenting Statement of
Commissioner Rostin Behnam
Introduction
I respectfully dissent from the Commodity
Futures Trading Commission’s (the
‘‘Commission’’ or ‘‘CFTC’’) notice of
proposed rulemaking addressing the de
minimis exception to the swap dealer
definition (the ‘‘Proposal’’). I have a number
of concerns with specific criteria of the
various exceptions proposed and
contemplated in the Proposal. However, my
gravest concern is that the Commission is
moving far beyond the task before it—setting
the aggregate gross notional amount
threshold for the de minimis exception—to
redefine swap dealing activity absent
meaningful collaboration with the Securities
and Exchange Commission (‘‘SEC’’), as
required by the Dodd-Frank Act,1 and to the
detriment of market participants eager for
regulatory certainty. Equally concerning, the
Proposal’s various ancillary components not
only detract from its core purpose, but may
signify the Commission’s willingness to
exploit the de minimis exception to
undermine the swap dealer definition and
circumvent Congressional intent.
As discussed in the preamble to the
Proposal, the regulatory history sets forth a
clear path towards—and a deadline to
complete—today’s determination to propose
an amendment that would set the aggregate
gross notional amount (‘‘AGNA’’) threshold
for the de minimis exception at $8 billion in
swap dealing activity entered into by a
person over the preceding 12 months prior to
the termination of the phase-in period on
December 31, 2019.2 Since the Commission’s
1 The Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203,
section 712(d), 124 Stat. 1376, 1644 (2010) (the
‘‘Dodd-Frank Act’’). Additionally, with respect to
rulemakings and orders regarding swap dealers,
among other things, section 712(a) requires the
CFTC to consult and coordinate to the extent
possible with the SEC and the prudential regulators
to ensure consistency and comparability, to the
extent possible. Such consultation must occur
before the CFTC commences such rulemaking or
order issuance. The Proposal indicates only that the
Commission ‘‘is consulting with the SEC and
prudential regulators regarding the changes to the
SD Definition discussed in this Proposal,’’
indicating that the Commission may not have
adhered to the letter or spirit of section 712(a) or
(d) of the Dodd-Frank Act with respect to the
Proposal.
2 Since the initial establishment of the AGNA at
$3 billion in May 2012, and initial five year phasein period during which the AGNA threshold was
set at $8 billion, the Commission issued two
successive orders extending the phase-in, and
issued preliminary and final staff reports
concerning the de minimis threshold, as required
by paragraph 4(ii)(B) of the swap dealer definition.
Additionally, the Commission has more than five
years of swap dealer oversight experience; given
that the first swap dealers submitted applications
for preliminarily registration in December 2017. See
Further Definition of ‘‘Swap Dealer,’’ ‘‘SecurityBased Swap Dealer,’’ ‘‘Major Swap Participant,’’
‘‘Major Security-Based Swap Participant’’ and
‘‘Eligible Contract Participant,’’ 77 FR 30596 (May
23, 2012) (‘‘SD Definition Adopting Release’’);
Order Establishing De Minimis Threshold Phase-In
Termination Date, 81 FR 71605 (Oct. 18, 2016)
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first Order Establishing a New De Minimis
Threshold Phase-in Termination Date in
2016,3 market participants have endured
undue and prolonged uncertainty because
the Commission has not acted decisively on
the de minimis threshold. When the
Commission punted again in October 2017, I
urged the Commission to take further action
now or let the current rule take effect.4
It is now June 2018. Given the twelve
month lookback for calculating the AGNA,
absent Commission action, market
participants will need to start tracking their
swap dealing activity on January 1, 2019 to
determine whether their dealing activity
would require registration when the phase-in
period ends on December 31, 2019. The
Commission has less than six months to
either finalize the Proposal or kick it down
the road again by issuing a third order
establishing yet another phase-in termination
date sometime in the future.
Six months is an ambitious time frame for
even a simple rule. While CFTC-specific data
is not available, at least one study concluded
that the average amount of time for federal
regulatory agencies to finalize rules is
generally between 14 and 20 months.5 The
Part 49 amendments that we also voted on
today, for example, took over 16 months
between the Commission proposal and a final
rule, and that rule only addressed a single
industry comment letter that was nine pages
long. However, given our extensive history
with the AGNA for the de minimis exception,
I believe that had the Commission observed
the course it was on, and focused on the task
at hand, it could have crafted the Proposal to
address the issues most critical to market
participants (the de minimis threshold, the
exclusion for insured depository institution
swaps in connection with originating loans to
customers or ‘‘IDI Swap Dealing Exclusion,’’
and the hedging swap exclusion), consistent
with requirements of the Commodity
Exchange Act (the ‘‘CEA’’ or ‘‘Act’’) and
Congressional intent and within the six
month window we are now in.
Instead, the Commission, having waited
too long to address these critical issues
jointly with the SEC, veered off course, and
relies too heavily on an alternative means to
reach its destination: The de minimis
(‘‘Initial Phase-In Termination Date Order’’); Order
Establishing a New De Minimis Threshold PhaseIn Termination Date, 82 FR 50309 (Oct. 31, 2017)
(‘‘Second Phase-In Termination Date Order’’); Swap
Dealer De Minimis Exception Preliminary Report
(Nov. 18, 2015), available at https://www.cftc.gov/
idc/groups/public/@swaps/documents/file/
dfreport_sddeminis_1115.pdf; Swap Dealer De
Minimis Exception Final Staff Report (Aug. 15,
2016), available at https://www.cftc.gov/idc/groups/
public/@swaps/documents/file/dfreport_
sddeminis081516.pdf.
3 Initial Phase-In Termination Date Order, supra
note 2.
4 Second Phase-In Termination Date Order, supra
note 2; Rostin Behnam, Statement on De Minimis
Threshold (Oct. 11, 2017), https://www.cftc.gov/
PressRoom/SpeechesTestimony/
behnamstatement101117a.
5 Jason Webb Yackee and Susan Webb Yackee,
Delay in Notice and Comment Rulemaking:
Evidence of Systemic Regulatory Breakdown?, in
Regulatory Breakdown: The Crisis of Confidence in
U.S. Regulation 169 (Cary Coglianese ed., 2012).
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exception.6 Though this alternative path is
within the Commission’s authority, I believe
that in utilizing the de minimis exception to
address longstanding concerns with the IDI
and physical hedging exclusions, the
Commission stopped respecting the
difference between what is permissible and
what is proper. As a consequence, the
Proposal morphed into a loophole for the
Commission to explore the extent to which
it may unilaterally alter the swap dealer
definition. Such overreach not only may call
into question the integrity of this agency, but
it could prolong the uncertainty currently
plaguing market participants as they (and the
general public) sort through the matters
ancillary to the de minimis AGNA threshold,
which alone raise over 50 individual
questions in requests for comments.
Commission Authority Under Regulation
1.3, Swap Dealer, Paragraph (4)(v)
Under paragraph 4(v) of the swap dealer
definition, the Commission may change the
requirements of the de minimis exception by
rule or regulation, and may do so
independent of the SEC (‘‘De Minimis
Exception Authority’’).7 While this authority
permits the Commission to revisit the de
minimis threshold, in the SD Definition
Adopting Release, the Commission stated
that in determining whether to revisit the
threshold, it intended to focus on whether
the de minimis exception (1) results in a
swap dealer definition that encompasses too
many entities whose activities are not
significant enough to warrant full Title VII
regulation; (2) results in an undue amount of
dealing activity to fall outside of the
regulatory framework; or (3) leads to
inappropriate reductions in counterparty
protections.8
While the Commission’s authority with
respect to the de minimis exception is broad,
the Commission cannot lose sight of its
purpose, as set forth in the CEA,9 and the
underlying Congressional intent.10 As well,
this authority is not intended to provide a de
facto means to alter the swap dealer
definition, by for example, excepting from
consideration swaps that are exchange-traded
and/or cleared when calculating the AGNA
for purposes of the de minimis threshold, or
excepting from such consideration entire
categories of swaps.
6 See 17 CFR 1.3, Swap dealer, paragraph (4)(v),
providing that the Commission may by rule or
regulation change the requirements of the de
minimis exception described in paragraphs (4)(i)
through (iv).
7 Id.; see also SD Definition Adopting Release, 77
FR at 30634, n. 464.
8 SD Definition Adopting Release, 77 FR at
30634–5.
9 See CEA section 1a(49)(D), 7 U.S.C. 1a(49)(D).
10 See SD Definition Adopting Release, 77 FR at
30629, n. 413 (‘‘Congress incorporated a de minimis
exception to the swap dealer definition to ensure
that smaller institutions that are responsibly
managing their commercial risk are not
inadvertently pulled into addition regulations.’’)
(quoting 156 Cong. Rec. S6192 (daily ed. July 22,
2010) (letter from Senators Dodd and Lincoln to
Representatives Frank and Paterson).
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Exclusions vs. Exceptions
IDI De Minimis Provision
Turning to the Proposal, and the critical
issues, I am concerned with the
Commission’s use of its De Minimis
Exception Authority to address longstanding
concerns that the IDI Swap Dealing
Exclusion, which was jointly adopted with
the SEC as paragraph (5) to the swap dealer
definition (‘‘SD Definition), is unnecessarily
restrictive, lacks clarity, and limits the ability
of IDIs to serve customers in connection with
their lending activity—which is inconsistent
with the CEA.11 As explained in the
Proposal, ‘‘rather than proposing to revise the
scope of activity that constitutes swap
dealing,’’ which would require a joint
rulemaking with the SEC, the Commission is
proposing to amend paragraph (4) of the SD
Definition, which addresses only the de
minimis exception. Accordingly, the
Proposal is to include both the IDI Swap
Dealing Exclusion and a separate, slightly
broader IDI De Minimis Provision in the SD
Definition.
Conducting a side-by-side comparison of
the current text of paragraph (5) and
proposed paragraph (4)(i)(C) of the SD
Definition, it is difficult to understand what
hurdles may have prevented the CFTC and
SEC from engaging in a joint rulemaking to
address these relatively modest differences,
which are generally well supported by the
record. It’s especially noteworthy given the
close working relationship between the two
agencies and ongoing harmonization
efforts.12 The end result is that, if finalized,
instead of simply disregarding or
‘‘excluding’’ all swap activity that meets a
single set of criteria, IDIs will have to
develop an additional analysis to address
swap activity that cannot be excluded from
their determinations for purposes of the SD
Definition, but might nevertheless be
excepted from their AGNAs when calculating
dealing activity for the purpose of the de
minimis threshold. It is difficult to
understand why the Commission would want
to create additional regulatory burdens in the
context of this Proposal, and the document
provides no explanation other than that the
Commission has discretion under its De
Minimis Exception Authority.
Hedging De Minimis Provision
I am similarly concerned that the
Commission’s use of its De Minimis
Exception Authority to provide greater
regulatory certainty with respect to swaps
entered to hedge physical or financial
exposures (the ‘‘Hedging De Minimis
Provision’’) will—out of an abundance of
caution—be utilized by market participants
11 See CEA 1a(49)(A), 7 U.S.C. 1a(49)(A)
(providing that ‘‘in no event shall an insured
depository institution be considered to be a swap
dealer to the extent it offers to enter into a swap
with a customer in connection with originating a
loan with that customer’’).
12 See, e.g. CFTC (@CFTC), @CFTC & @SEC_News
teams are hard at work on Title VII harmonization,
Twitter (Feb. 27, 2018, 4:53 p.m.), https://
twitter.com/CFTC/status/968605066889515009;
Chris Giancarlo (@giancarloCFTC), Twitter (Feb. 27,
2018, 9:18 p.m.) https://twitter.com/giancarloCFTC/
Status/968671749737992192.
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as a limitation on the universe of hedging
swaps they consider to be outside their swap
dealing activity. In this instance, instead of
amending the Physical Hedging Exclusion,13
which is in the nature of a safe harbor and
provides that, subject to certain
requirements, swaps entered into by a person
for hedging physical positions are not
considered for purposes of determining
whether that person is a swap dealer, the
Commission is proposing an exception with
respect to a person’s AGNA for the de
minimis threshold for swaps entered to
hedge financial or physical positions. While
this exception will, if finalized, exist in the
Commission regulations alongside the
Physical Hedging Exclusion, it is not truly a
safe-harbor and could end up limiting the
discretion inherent in the SD Definition.
An exception, as proposed for the Hedging
De Minimis Provision, ostensibly creates a
precise rule, leaving compliance staff or even
regulatory enforcement agencies with limited
discretion when evaluating difficult
scenarios. As the Commission has stated, ‘‘In
general, entering into a swap for the purpose
of hedging is inconsistent with swap
dealing.’’ 14 The Commission also has
emphasized that all relevant facts and
circumstances about a swap ought to be
considered when determining whether a
person is a swap dealer.15 It seems that an
exception limited solely to determining
whether a person has exceeded the AGNA de
minimis threshold may prove unduly
limiting and inconsistent with the SD
Definition.16
Premature Delegation
The Proposal purports to create
Commission authority to determine the
methodology to be used to calculate the
notional amount for any group, category,
type, or class of swaps for purposes of the
AGNA de minimis threshold calculation and
immediately delegates that authority to the
Director of the Division of Swap Dealer and
Intermediary Oversight (‘‘DSIO’’). The
Commission has, to my knowledge, not
released public guidance on this issue since
2012.17 The Proposal cites two letters, one
responding to the Chairman’s recent Project
KISS initiative, and the other responding to
the request for comments on the Swap Dealer
De Minimis Exception Preliminary Report,18
in support of the inherent need to empower
13 17
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14 SD
CFR 1.3, Swap dealer, paragraph (6)(iii).
Definition Adopting Release, 77 FR at
30611.
15 See, e.g., CFTC Fact Sheet: Final Rules
Regarding Further Defining ‘‘Swap Dealer,’’ ‘‘Major
Swap Participant and ‘‘Eligible Contract
Participant’’ (Apr. 18, 2012), available at https://
www.cftc.gov/sites/default/files/idc/groups/public/
@newsroom/documents/file/msp_ecp_factsheet_
final.pdf.
16 See Frequently Asked Questions (FAQ)—
[DSIO] Responds to FAQs About Swap Entities
(Oct. 12, 2012), available at https://www.cftc.gov/
sites/default/files/idc/groups/public/@newsroom/
documents/file/swapentities_faq_final.pdf.
17 Id.
18 See n.152 of the Proposal, Letter from CEWG;
Letter from Natural Gas Supply Association (Jan.
15, 2016), available at https://comments.cftc.gov/
PublicComments/
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the Director of DSIO to independently—and
without limitation—provide clarity about the
appropriate notional amount calculation
methodologies for purposes of the de
minimis threshold in a timely manner. As
well, both the public guidance and requests
cited in the Proposal address or respond to
the need for clarity regarding commodity
swaps, further calling into question the
breadth of the proposed delegation.
For most swaps, calculation of notional
amount is a matter of standard industry
practice. There is not any controversy as to
how notional amount is calculated. Giving
the Director of DSIO broad authority to
determine how this calculation is made for
all categories of swaps is a remedy that is not
commensurate to the limited issue of how to
determine the notional value of commodity
swaps. It also provides an opportunity for
mischief. This provision could subsume the
entire de minimis threshold by giving the
Director of DSIO broad authority to
determine what swaps count toward the
threshold—and perhaps more importantly,
what swaps do not.
I’m concerned that the Commission is
proposing to both establish its authority and
immediately delegate such authority without
any internal discussion, without any public
deliberation, and within this Proposal. The
Commission has simply not articulated a
sound rationale for moving abruptly forward
on this rule proposal without fulsome
consideration of its legal authority, potential
risks, and possible alternatives. Indeed, upon
review of the Proposal, it came to my
attention that the Commission’s proposed
delineation of authority to determine the
methodology for calculating notion amounts
in proposed paragraph (D)(vii)(A) of the SD
Definition may contradict its De Minimis
Exception Authority.
The De Minimis Exception Authority
provides that the Commission may by rule or
regulation change the requirements of the de
minimis exception. Given that the
methodology for calculating notional
amounts for purposes of the AGNA for the de
minimis threshold would be a ‘‘requirement’’
of that exception, one could assume that the
authority to alter it resides with the
Commission, and that the Commission would
need to engage in rulemaking to establish a
methodology. Of course, the De Minimis
Exception Authority includes a ‘‘may’’ versus
a ‘‘shall,’’ and therefore the Commission has
discretion to engage in rulemaking, but I
believe the ‘‘may’’ applies more generally to
suggest that the Commission may change the
requirements of the de minimis exception,
and if it chooses to do so, rulemaking is the
vehicle. My point is that the Commission’s
precise authority and attendant parameters
are unclear, and it would therefore be more
prudent to first, define the parameters of the
notional amount calculation issue, conduct
additional research and explore our options
to address it, and then propose a more cogent
solution in a separate rulemaking so as not
to further detract from the more salient and
critical issues before the Commission as part
of this Proposal.
Ancillary Matters
Having become comfortable with using its
De Minimis Exception Authority, the
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27483
Commission appears to have determined to
use this Proposal to seek comment on ‘‘other
potential considerations for the de minimis
threshold.’’ These considerations run the
gamut from re-considering the merits of using
AGNA by itself by seeking comment on
adding alternative criteria in the form of a
dealing counterparty or dealing transaction
count threshold to excepting from
consideration when calculating the AGNA
for purposes of the de minimis threshold (1)
swaps that are exchange-traded and/or
cleared and (2) swaps that are categorized as
non-deliverable forward transactions. These
‘‘considerations’’ result in the combined
inclusion of more than 50 individual requests
for comment, detracting from any reasonable
market participant’s (or the public’s) ability
to provide comments on the more critical
issues raised by this Proposal. Moreover,
each ‘‘potential consideration’’ raises
individual concerns as to whether the
Commission is attempting to undermine the
swap dealer definition and circumvent
Congressional intent.
Dealing Counterparty Count and Dealing
Transaction Count Thresholds
The Commission is seeking comment on
whether an entity should be able to qualify
for the de minimis exception if its level of
swap dealing activity is below any one of
three criteria: (1) An AGNA threshold; (2) a
proposed dealing counterparty count
threshold; or (3) a proposed dealing
transaction count threshold. In support of its
request for comment, already limited
Commission staff resources were utilized to
construct an alternative to the proposal
aimed at suggesting that, despite its analysis
in the Proposal in support of setting the
AGNA threshold for the de minimis
exception at $8 billion, a $20 billion AGNA
‘‘backstop’’ threshold was appropriate. This
analysis and attendant request for comment
suddenly appeared in the Proposal after
hours on May 31, 2018, providing my office
less than 17 hours to respond before DSIO
intended to submit a final voting copy to the
Commission’s Office of the Secretariat.
Not only is the inclusion of this request for
comment in this Proposal overwhelmingly
misplaced, but its inclusion at such a late
hour in the process undermines the inherent
fairness of the rulemaking process. Foremost,
the Commission already rejected the use of
counterparty and transaction count
thresholds as determinative criteria for the de
minimis threshold.19 Moreover, the
Commission is required to take the Swap
Dealer De Minimis Exception Final Staff
Report (‘‘Final Staff Report’’) and comments
into account when weighing further action
on the de minimis exception at the end of the
phase-in.20 According to the Final Staff
Report, ‘‘many of the commenters stated that
the Commission should not use the
alternative factors of Counterparty and/or
Transaction Count as part of a de minimis
exception because they are misleading or
19 SD Definition Adopting Release, 77 FR at
30630.
20 Id. at 30634.
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Federal Register / Vol. 83, No. 113 / Tuesday, June 12, 2018 / Proposed Rules
arbitrary indicators of dealing activity.’’ 21
The footnote cites 11 comment letters
representing at least 12 entities including
major industry and trade organizations.22 In
comparison, only two commenters supported
the use of the alternative factors.23
While I believe it may be appropriate for
the Commission to explore other factors or
criteria in defining the scope of the de
minimis threshold, inclusion of even a
request for comments on dealing
counterparty count and dealing transaction
count thresholds should be out of scope—
even as a request for comment—for this
Proposal, which speaks directly to the end of
the phase-in, and is proceeding on a
constrained time schedule such that even
providing Commissioners the courtesy of
ample opportunity to evaluate the merits of
including this line of questioning was
dispensed with.
Exchange-Traded and/or Cleared Swaps
Similar to the dealing counterparty and
transaction count threshold, the Commission
has already rejected arguments that swaps
executed on an exchange should not be
considered in determining if a person is a
swap dealer.24 However, beyond that, the
breadth of the request for comment suggests
that a discussion regarding how the
Dealer De Minimis Exception Final Staff
Report, supra note 2 at 15.
22 Id. at note 45.
23 Id. at note 49.
24 See SD Definition Adopting Release, 77 FR at
30610.
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utilization of exchange trading and/or
clearing in the swap market may address the
underlying policy goals of swap dealer
registration is significant and raises issues
that should be considered in the context of
a joint discussion with the SEC and
prudential regulators regarding the SD
Definition. Even further, it may require
Congressional action to amend the statutory
swap dealer definition, which does not
distinguish exchange traded and/or cleared
swaps from over-the-counter swaps, and in
fact, may suggest that there is no distinction
given the focus on market making, which
significantly occurs on exchanges.25 In
responding to this request for comment, I
hope that commenters address whether an
exception for exchange-traded and/or cleared
swaps—even if limited to consideration
when calculating the AGNA for purposes of
the de minimis threshold—would be
consistent with the statutory definition of
‘‘swap dealer’’ in CEA section 1a(49) and
Congressional intent.
Non-Deliverable Forwards
Similarly, I believe that the issue of
whether the Commission should consider an
exception for NDFs from consideration when
calculating the AGNA of swap dealing
activity for purposes of the de minimis
threshold is inappropriate. Such an
exception ignores that the SD Definition is
activities-based.26 The real issue that should
be addressed is whether NDFs are swaps and,
25 See,
e.g., Id. at 30608.
26 Id.
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Fmt 4701
Sfmt 9990
if so, whether they ought to be excluded from
consideration in the SD Definition.27 Instead
of attempting to begin a conversation through
use of its De Minimis Exception Authority,
the Commission should use its relationships
with the Secretary of the Treasury, the SEC
and prudential regulators and engage in a
meaningful dialog regarding the appropriate
categorization and consideration of NDFs
outside of this Proposal.
Conclusion
I am disappointed with today’s Proposal
and would have liked to been able to support
the portions that were well supported by the
data and analysis and could lead to a clear
and legally sound resolution of the de
minimis threshold, providing much needed
regulatory certainty for a critical cohort of
market participants. I am hopeful that market
participants have sufficient time to evaluate
and respond to the most critical aspects of
this Proposal and do not get overwhelmed or
overly optimistic with regard to lines of
questioning that take us further afield from
Congressional intent and therefore are less
likely to come to fruition. I understand that
messaging creates expectations; sometimes,
we must focus on what’s right and not what
seems easy.
[FR Doc. 2018–12362 Filed 6–11–18; 8:45 am]
BILLING CODE 6351–01–P
27 As noted in the Proposal, the Secretary of the
Treasury, pursuant to authority in section 1a(47)(E)
of the CEA, 7 U.S.C. 1a(47)(E), declined to exempt
NDFs from the CEA’s definition of ‘‘swap.’’
E:\FR\FM\12JNP2.SGM
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]]>Agencies
[Federal Register Volume 83, Number 113 (Tuesday, June 12, 2018)]
[Proposed Rules]
[Pages 27444-27484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12362]
[[Page 27443]]
Vol. 83
Tuesday,
No. 113
June 12, 2018
Part IV
Commodity Futures Trading Commission
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17 CFR Part 1
De Minimis Exception to the Swap Dealer Definition; Proposed Rule
Federal Register / Vol. 83 , No. 113 / Tuesday, June 12, 2018 /
Proposed Rules
[[Page 27444]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AE68
De Minimis Exception to the Swap Dealer Definition
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing to amend the de minimis exception within the
``swap dealer'' definition in the Commission's regulations by: Setting
the aggregate gross notional amount threshold for the de minimis
exception at $8 billion in swap dealing activity entered into by a
person over the preceding 12 months; excepting from consideration when
calculating the aggregate gross notional amount of a person's swap
dealing activity for purposes of the de minimis threshold: Swaps
entered into with a customer by an insured depository institution in
connection with originating a loan to that customer; swaps entered into
to hedge financial or physical positions; and swaps resulting from
multilateral portfolio compression exercises; and providing that the
Commission may determine the methodology to be used to calculate the
notional amount for any group, category, type, or class of swaps, and
delegating to the Director of the Division of Swap Dealer and
Intermediary Oversight (``DSIO'') the authority to make such
determinations (collectively, the ``Proposal''). In addition, the
Commission is seeking comment on the following additional potential
changes to the de minimis exception: Adding a minimum dealing
counterparty count threshold and a minimum dealing transaction count
threshold; excepting from consideration when calculating the aggregate
gross notional amount for purposes of the de minimis threshold swaps
that are exchange-traded and/or cleared; and excepting from
consideration when calculating the aggregate gross notional amount for
purposes of the de minimis threshold swaps that are categorized as non-
deliverable forward transactions.
DATES: Comments must be received on or before August 13, 2018.
ADDRESSES: You may submit comments, identified by RIN 3038-AE68, by any
of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish for the Commission to
consider information that is exempt from disclosure under the Freedom
of Information Act (``FOIA''),\1\ a petition for confidential treatment
of the exempt information may be submitted according to the procedures
set forth in Sec. 145.9 of the Commission's regulations.\2\
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\1\ 5 U.S.C. 552.
\2\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse, or remove any or all of
your submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
FOIA.
FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, [email protected], Erik Remmler, Deputy Director, 202-418-7630,
[email protected], Rajal Patel, Associate Director, 202-418-5261,
[email protected], or Jeffrey Hasterok, Data and Risk Analyst, 646-746-
9736, [email protected], Division of Swap Dealer and Intermediary
Oversight; Bruce Tuckman, Chief Economist, 202-418-5624,
[email protected] or Scott Mixon, Associate Director, 202-418-5771,
[email protected], Office of the Chief Economist; Mark Fajfar, Assistant
General Counsel, 202-418-6636, [email protected], Office of General
Counsel, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Statutory Authority
B. Regulatory History
C. Policy Considerations
1. Swap Dealer Registration Policy Considerations
2. De Minimis Exception Policy Considerations
D. De Minimis Calculation
II. The Proposal
A. $8 Billion De Minimis Threshold
1. Methodology
2. Data and Analysis
3. Request for Comments
B. Swaps Entered Into by Insured Depository Institutions in
Connection With Loans to Customers
1. Background
2. Proposal
3. Request for Comments
C. Swaps Entered Into To Hedge Financial or Physical Positions
1. Background and Proposal
2. Request for Comments
D. Swaps Resulting From Multilateral Portfolio Compression
Exercises
1. Background and Proposal
2. Request for Comments
E. Methodology for Calculating Notional Amounts
1. Background and Proposal
2. Request for Comments
III. Other Considerations
A. Dealing Counterparty Count and Dealing Transaction Count
Thresholds
1. Background
2. Potential Thresholds
B. Exchange-Traded and/or Cleared Swaps
C. Non-Deliverable Forwards
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. $8 Billion De Minimis Threshold
2. Swaps Entered Into by Insured Depository Institutions in
Connection With Loans to Customers
3. Swaps Entered Into To Hedge Financial or Physical Positions
4. Swaps Resulting From Multilateral Portfolio Compression
Exercises
5. Methodology for Calculating Notional Amounts
6. Request for Comment
D. Antitrust Considerations
I. Background
A. Statutory Authority
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') was signed into law on July 21, 2010.\3\ Title VII
of the Dodd-Frank Act established a statutory framework to reduce risk,
increase transparency, and promote market integrity within the
[[Page 27445]]
financial system by regulating the swap market. Among other things, the
Dodd-Frank Act amended the Commodity Exchange Act (``CEA'') \4\ to
provide for the registration and regulation of swap dealers
(``SDs'').\5\ The Dodd-Frank Act directed the CFTC and the U.S.
Securities and Exchange Commission (``SEC'' and together with the CFTC,
``Commissions'') to jointly further define, among other terms, the term
``swap dealer,'' \6\ and to exempt from designation as an SD a person
that engages in a de minimis quantity of swap dealing.\7\
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\3\ Public Law 111-203, 124 Stat. 1376 (2010), available at
https://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
\4\ The CEA is found at 7 U.S.C. 1, et seq.
\5\ See 7 U.S.C. 6s(a)(1).
\6\ Dodd-Frank Act section 712(d)(1). See the definitions of
``swap dealer'' in CEA section 1a(49) and Sec. 1.3 of Commission
regulations. 7 U.S.C. 1a(49); 17 CFR 1.3.
\7\ See Dodd-Frank Act section 721.
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CEA section 1a(49) defines the term ``swap dealer'' to include any
person who: (1) Holds itself out as a dealer in swaps; (2) makes a
market in swaps; (3) regularly enters into swaps with counterparties as
an ordinary course of business for its own account; or (4) engages in
any activity causing the person to be commonly known in the trade as a
dealer or market maker in swaps (collectively referred to as ``swap
dealing,'' ``swap dealing activity,'' or ``dealing activity'').\8\ The
statute also requires the Commission to promulgate regulations to
establish factors with respect to the making of a determination to
exempt from designation as an SD an entity engaged in a de minimis
quantity of swap dealing.\9\ CEA section 1a(49) further provides that
in no event shall an insured depository institution be considered to be
an SD to the extent it offers to enter into a swap with a customer in
connection with originating a loan with that customer.\10\
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\8\ 7 U.S.C. 1a(49)(A). In general, a person that satisfies any
one of these prongs is deemed to be engaged in swap dealing
activity.
\9\ 7 U.S.C. 1a(49)(D).
\10\ 7 U.S.C. 1a(49)(A).
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B. Regulatory History
Pursuant to the statutory requirements, in December 2010, the
Commissions issued a proposing release further defining, among other
things, the term ``swap dealer'' (``SD Definition Proposing
Release'').\11\ Subsequently, in May 2012, the Commissions issued an
adopting release (``SD Definition Adopting Release'') \12\ further
defining, among other things, the term ``swap dealer'' in Sec. 1.3 of
the CFTC's regulations (the ``SD Definition'') and providing for a de
minimis exception in paragraph (4) therein.\13\ The de minimis
exception states that a person shall not be deemed to be an SD unless
its swaps connected with swap dealing activities exceed an aggregate
gross notional amount (``AGNA'') threshold of $3 billion (measured over
the prior 12-month period), subject to a phase-in period during which
the AGNA threshold is set at $8 billion.\14\ The phase-in period was
originally scheduled to terminate on December 31, 2017, and the de
minimis threshold was scheduled to decrease to $3 billion at that time.
However, as discussed below, pursuant to paragraph (4)(i)(D) of the SD
Definition, the Commission issued two successive orders to set new
termination dates, and the phase-in period is currently scheduled to
terminate on December 31, 2019.\15\
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\11\ Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant,'' 75 FR
80174 (proposed Dec. 21, 2010).
\12\ Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant,'' 77 FR
30596 (May 23, 2012).
\13\ See 17 CFR 1.3, Swap dealer. As discussed in more detail in
section II, the Commission notes that a joint rulemaking with the
SEC is not required to amend the de minimis exception, pursuant to
paragraph (4)(v) of the SD Definition. See 17 CFR 1.3, Swap dealer,
paragraph (4)(v); 77 FR at 30634 n.464.
\14\ 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A). Paragraph
(4)(i)(A) also provides for a de minimis threshold of $25 million
with regard to swaps in which the counterparty is a ``special
entity'' (excluding ``utility special entities'' as provided in
paragraph (4)(i)(B) of the SD Definition) as defined in CEA section
4s(h)(2)(C), 7 U.S.C. 6s(h)(2)(C). This proposal would not change
the de minimis threshold for swaps with special entities.
\15\ See Order Establishing De Minimis Threshold Phase-In
Termination Date, 81 FR 71605 (Oct. 18, 2016); Order Establishing a
New De Minimis Threshold Phase-In Termination Date, 82 FR 50309
(Oct. 31, 2017).
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When the $3 billion de minimis exception threshold was established,
the Commissions explained that the information then available regarding
certain portions of the swap market was limited, and that they expected
more information to be available in the future (following the
implementation of swap data reporting), which would enable the
Commissions to make a more informed assessment of the proper level for
the de minimis exception and to revise it as appropriate.\16\ In
establishing the AGNA threshold of $3 billion, the Commissions stated
that ``there may be some uncertainty regarding the exact level of swap
dealing activity, measured in terms of a gross notional amount of swaps
that should be regarded as de minimis.'' \17\ In light of this
uncertainty, the Commissions provided for the phase-in period during
which the de minimis threshold was set at $8 billion, explaining that
this would: (1) Permit market participants and the Commissions to
become familiar with the application of the SD Definition and
regulatory requirements; (2) afford the Commissions time to study the
swap market as it evolved and to consider new information about the
swap market that became available (e.g., through swap data reporting);
(3) provide potential SDs that engage in smaller amounts of activity
additional time to adjust their business practices, while at the same
time preserving a focus on the regulation of the largest and most
significant SDs; and (4) address comments suggesting that the de
minimis threshold be set higher initially to provide for efficient use
of regulatory resources and that implementation of SD requirements in
general be phased.\18\
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\16\ See 77 FR at 30632-34. In making their determination, the
Commissions considered the limited and incomplete swap market data
that was available at that time and concluded that the $3 billion
level appropriately considers the relevant regulatory goals. Id. at
30632. The Commissions found merit in determining the threshold by
multiplying the estimated size of the domestic swap market by a
0.001 percent ratio suggested by several commenters. Id. at 30633.
\17\ Id. at 30633.
\18\ See id. at 30633-34.
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In recognition of these limitations and in anticipation of
additional swap market data becoming available to the CFTC through the
reporting of transactions to swap data repositories (``SDRs''),
paragraph (4)(ii)(B) of the SD Definition was adopted, which directed
CFTC staff to complete and publish for public comment a report on
topics relating to the definition of the term ``swap dealer'' and the
de minimis threshold as appropriate, based on the availability of data
and information.\19\ Paragraph (4)(ii)(C) of the SD Definition provided
that after giving due consideration to the staff report and any
associated public comment, the CFTC may either set a termination date
for the phase-in period or issue a notice of proposed rulemaking to
modify the de minimis exception.\20\
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\19\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(B).
\20\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(C).
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In the interest of providing ample opportunity for public input on
the relevant policy considerations, as well as on staff's preliminary
analysis of the SDR data, and to ensure that the Commission had as much
information and data as practicable for purposes of its determinations
with respect to the de minimis exception, in November 2015 staff issued
a preliminary report concerning the de minimis exception (``Preliminary
Staff Report'').\21\ The
[[Page 27446]]
Preliminary Staff Report sought to analyze the available swap data, in
conjunction with relevant policy considerations, to assess the $8
billion AGNA de minimis threshold and potential alternatives to the
AGNA de minimis exception.\22\ Commission staff received 24 comment
letters responsive to the Preliminary Staff Report.\23\
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\21\ See Swap Dealer De Minimis Exception Preliminary Report
(Nov. 18, 2015), available at https://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis_1115.pdf.
\22\ For the Preliminary Staff Report, staff analyzed data from
April 1, 2014 through March 31, 2015.
\23\ The comment letters are available on the Commission website
at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1634.
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After consideration of the public comments received in response to
the Preliminary Staff Report, and further data analysis, in August 2016
staff issued a final staff report \24\ concerning the de minimis
exception (``Final Staff Report,'' and together with the Preliminary
Staff Report, ``Staff Reports''). The Final Staff Report refreshed much
of the analysis conducted in the Preliminary Staff Report for a
subsequent review period,\25\ and similar to the Preliminary Staff
Report, discussed observations with respect to the $8 billion de
minimis threshold, as well as the de minimis exception alternatives
considered in the Preliminary Staff Report, in light of refreshed data
and comments received.
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\24\ See Swap Dealer De Minimis Exception Final Staff Report
(Aug. 15, 2016), available at https://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis081516.pdf.
\25\ For the Final Staff Report, staff analyzed data from April
1, 2015 through March 31, 2016.
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The data analysis in the Staff Reports provided some insights into
the effectiveness of the de minimis exception as currently implemented.
For example, staff analyzed the number of swap transactions involving
at least one registered SD,\26\ which is indicative of the extent to
which swaps are subject to SD regulation at the current $8 billion
threshold. Data reviewed for the Final Staff Report indicated that
approximately 96 percent of all reported swap transactions involved at
least one registered SD.\27\
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\26\ Given that all of the CEA section 4s requirements have not
yet been implemented by regulation, the term ``registered SD''
refers to an entity that is a provisionally registered SD. See 17
CFR 3.2(c)(3)(iii).
\27\ See section II.A below for additional discussion regarding
the Staff Reports.
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To provide additional time for more information to become available
to reassess the de minimis exception, in October 2016 the Commission
issued an order, pursuant to paragraph (4)(ii)(C)(1) of the SD
Definition, establishing December 31, 2018, as the new termination date
for the $8 billion phase-in period.\28\ As noted above, absent any
action, the phase-in period would have terminated, and the de minimis
threshold would have decreased to $3 billion, on December 31, 2017. To
enable staff to conduct additional analysis, in October 2017 the
Commission further extended the phase-in period to December 31,
2019.\29\ Generally, the extensions provided additional time for
Commission staff to conduct more complete data analysis regarding the
de minimis exception, and gave market participants additional time to
begin preparing for a change, if any, to the de minimis exception
threshold.
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\28\ 81 FR 71605.
\29\ 82 FR 50309.
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C. Policy Considerations
1. Swap Dealer Registration Policy Considerations
In adopting the SD Definition, the Commissions identified the
policy goals underlying SD registration and regulation generally to
include reducing systemic risk, increasing counterparty protections,
and increasing market efficiency, orderliness, and transparency.
Reducing systemic risk: The Dodd-Frank Act was enacted in the wake
of the financial crisis of 2008, in significant part, to reduce
systemic risk, including the risk to the broader U.S. financial system
created by interconnections in the swap market.\30\ Pursuant to the
Dodd-Frank Act, the Commission has adopted regulations designed to
mitigate the potential systemic risk inherent in the previously
unregulated swap market.\31\
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\30\ Dodd-Frank Act, Preamble (indicating that the purpose of
the Dodd-Frank Act was to promote the financial stability of the
United States by improving accountability and transparency in the
financial system, to end ``too big to fail,'' to protect the
American taxpayer by ending bailouts, to protect consumers from
abusive financial services practices, and for other purposes).
\31\ For example, registered SDs have specific requirements for
risk management programs and margin. See, e.g., 17 CFR 23.600; 17
CFR 23.150-23.161.
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Increasing counterparty protections: Providing regulatory
protections for swap counterparties who may be less experienced or
knowledgeable about the swap products offered by SDs (particularly end-
users who use swaps for hedging or investment purposes) is a
fundamental policy goal advanced by the regulation of SDs.\32\ The
Commissions recognized that a narrower or smaller de minimis exception
would increase the number of counterparties that could potentially
benefit from those regulatory protections.\33\
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\32\ For example, registered SDs are subject to rigorous
external business conduct standard regulations designed to provide
counterparty protections. See, e.g., 17 CFR 23.400-23.451.
\33\ 77 FR at 30628 (``On the one hand, a de minimis exception,
by its nature, will eliminate key counterparty protections provided
by Title VII for particular users of swaps and security-based
swaps.'').
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Increasing market efficiency, orderliness, and transparency:
Increasing swap market efficiency, orderliness, and transparency is
another goal of SD regulation.\34\ Regulations requiring SDs, for
example, to keep detailed daily trading records, report trade
information, and engage in portfolio reconciliation and compression
exercises help achieve these market benefits.\35\
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\34\ Id. at 30629 (``The statutory requirements that apply to
[SDs] . . . include requirements . . . aimed at helping to promote
effective operation and transparency of the swap . . . markets.'').
See also id. at 30703 (``Those who engage in swaps with entities
that elude [SD] or major swap participant status and the attendant
regulations could be exposed to increased counterparty risk;
customer protection and market orderliness benefits that the
regulations are intended to provide could be muted or sacrificed,
resulting in increased costs through reduced market integrity and
efficiency. . . .'').
\35\ See, e.g., 17 CFR 23.200-23.205; 17 CFR part 45; 17 CFR
23.502-23.503.
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2. De Minimis Exception Policy Considerations
The Commissions also recognized that, consistent with Congressional
intent, ``an appropriately calibrated de minimis exception has the
potential to advance other interests.'' \36\ The Commissions explained
that these interests include increasing efficiency, allowing limited
swap dealing in connection with other client services, encouraging new
participants to enter the market, and focusing regulatory
resources.\37\ The policy objectives underlying the de minimis
exception are designed to encourage participation and competition by
allowing persons to engage in a de minimis amount of dealing without
incurring the costs of registration and regulation.\38\
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\36\ See 77 FR at 30628.
\37\ See 77 FR at 30628-30, 30707-08.
\38\ In considering the appropriate de minimis threshold, the
Commissions stated that ``exclud[ing] entities whose dealing
activity is sufficiently modest in light of the total size,
concentration and other attributes of the applicable markets can be
useful in avoiding the imposition of regulatory burdens on those
entities for which dealer regulation would not be expected to
contribute significantly to advancing the customer protection,
market efficiency and transparency objectives of dealer
regulation.'' Id. at 30629-30.
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Increasing efficiency: A de minimis exception based on an objective
test with a limited degree of complexity enables entities to engage in
a lower level of swap dealing with limited concerns about whether their
activities
[[Page 27447]]
would require registration.\39\ The de minimis exception thereby
fosters efficient application of the SD Definition. Additionally, the
Commission is of the view that the potential for regular or periodic
changes to the de minimis threshold may reduce its efficacy by making
it challenging for persons to calibrate their swap dealing activity as
appropriate for their business models. Further, the existing de minimis
exception reduces regulatory uncertainty and increases efficiency by
establishing a simple threshold test for all of a person's swaps
connected with swap dealing activity. Conversely, the more variables
included in the de minimis calculation, the more complex the
determination of whether a person must register, potentially resulting
in less efficiency.\40\
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\39\ Id. at 30628-29 (``[T]he de minimis exception may further
the interest of regulatory efficiency when the amount of a person's
dealing activity is, in the context of the relevant market, limited
to an amount that does not warrant registration . . . . In addition,
the exception can provide an objective test . . . .'').
\40\ Id. at 30707-08 (``On the other hand, requiring market
participants to consider more variables in evaluating application of
the de minimis exception would likely increase their costs to make
this determination.'').
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Allowing limited ancillary dealing: A de minimis exception allows
persons to accommodate existing clients that have a need for swaps (on
a limited basis) along with other services.\41\ This interest enables
end-users to continue transacting within existing business
relationships, for example to hedge interest rate or currency risk.
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\41\ Id. at 30629, 30708.
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Encouraging new participants: A de minimis exception also promotes
competition by allowing a person to engage in some swap dealing
activities without immediately incurring the regulatory costs
associated with SD registration and regulation.\42\ Without a de
minimis exception, SD regulation could become a barrier to entry that
may stifle competition. An appropriately calibrated de minimis
exception could lower the barrier to entry of becoming an SD by
allowing smaller participants to gradually expand their business until
the scope and scale of their activity warrants regulation (and the
costs involved with compliance).
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\42\ Id. at 30629.
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Focusing regulatory resources: Finally, the de minimis exception
also increases regulatory efficiency by enabling the Commission to
focus its limited resources on entities whose swap dealing activity is
sufficient in size and scope to warrant oversight.\43\
---------------------------------------------------------------------------
\43\ Id. at 30628-29.
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The Commissions explained that ``implementing the de minimis
exception requires a careful balancing that considers the regulatory
interests that could be undermined by an unduly broad exception as well
as those regulatory interests that may be promoted by an appropriately
limited exception.'' \44\ A narrower de minimis exception would likely
mean that a greater number of entities would be required to register as
SDs and become subject to the regulatory framework applicable to
registered SDs. However, a de minimis exception that is too limited
could, for example, discourage persons from engaging in swap dealing
activity in order to avoid the burdens associated with SD regulation.
---------------------------------------------------------------------------
\44\ Id. at 30628. See also SD Definition Proposing Release, 75
FR at 80179 (The de minimis exception ``should apply only when an
entity's dealing activity is so minimal that applying dealer
regulations to the entity would not be warranted.'').
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D. De Minimis Calculation
Whether a person's activities constitute swap dealing is based on a
facts and circumstances analysis. Generally, a person must count
towards its AGNA de minimis threshold all swaps it enters into for
dealing purposes over any rolling 12-month period. In addition, each
person whose own swaps do not exceed the de minimis threshold must also
include in its de minimis calculation the AGNA of swaps of any other
unregistered affiliate controlling, controlled by, or under common
control with that person (referred to as ``aggregation'').\45\
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\45\ 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A); Interpretive
Guidance and Policy Statement Regarding Compliance With Certain Swap
Regulations, 78 FR 45292, 45323 (July 26, 2013).
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Pursuant to various CFTC regulations, certain swaps, subject to
specific conditions, need not be considered in determining whether a
person is an SD, including: (1) Swaps entered into by an insured
depository institution (``IDI'') with a customer in connection with
originating a loan to that customer; \46\ (2) swaps between affiliates;
\47\ (3) swaps entered into by a cooperative with its members; \48\ (4)
swaps hedging physical positions; \49\ (5) swaps entered into by floor
traders; \50\ (6) certain foreign exchange (``FX'') swaps and FX
forwards; \51\ and (7) commodity trade options.\52\ In addition,
certain cross-border swaps \53\ and swaps resulting from multilateral
portfolio compression exercises \54\ need not be counted towards the
person's de minimis threshold, subject to certain conditions, pursuant
to CFTC interpretive guidance and staff letters. Further, certain
inter-governmental or quasi-governmental international financial
institutions are not included within the term ``swap dealer.'' \55\
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\46\ See 17 CFR 1.3, Swap dealer, paragraph (5); 77 FR at 30620-
24.
\47\ See 17 CFR 1.3, Swap dealer, paragraph (6)(i); 77 FR at
30624-25.
\48\ See 17 CFR 1.3, Swap dealer, paragraph (6)(ii); 77 FR at
30625-26.
\49\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); 77 FR at
30611-14.
\50\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iv); 77 FR at
30614. The floor trader exclusion was also addressed in no-action
relief. See CFTC Staff Letter No. 13-80, No-Action Relief from
Certain Conditions of the Swap Dealer Exclusion for Registered Floor
Traders (Dec. 23, 2013), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-80.pdf.
\51\ See Determination of Foreign Exchange Swaps and Foreign
Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694,
69704-05 (Nov. 20, 2012); Further Definition of ``Swap,''
``Security-Based Swap,'' and ``Security-Based Swap Agreement'';
Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR
48208, 48253 (Aug. 13, 2012).
\52\ 17 CFR 32.3; Commodity Options, 77 FR 25320, 25326 n.39
(Apr. 27, 2012).
\53\ See 78 FR 45292; CFTC Staff Letter No. 12-61, No-Action
Relief: U.S. Bank Wholly Owned by Foreign Entity May Calculate De
Minimis Threshold Without Including Activity From Its Foreign
Affiliates (Dec. 20, 2012), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/12-61.pdf; CFTC Staff Letter No. 12-71, No-Action Relief: U.S. Bank
Wholly Owned by Foreign Entity May Calculate De Minimis Threshold
Without Including Activity From Its Foreign Affiliates (Dec. 31,
2012), available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/12-71.pdf; and CFTC Letter No.
18-13, No-Action Position: Relief for Certain Non-U.S. Persons from
Including Swaps with International Financial Institutions in
Determining [SD] and Major Swap Participant Status (May 16, 2018),
available at https://www.cftc.gov/sites/default/files/idc/groups/public/%40lrlettergeneral/documents/letter/2018-05/18-13.pdf.
\54\ CFTC Staff Letter No. 12-62, No-Action Relief: Request that
Certain Swaps Not Be Considered in Calculating Aggregate Gross
Notional Amount for Purposes of the Swap Dealer De Minimis Exception
for Persons Engaging in Multilateral Portfolio Compression
Activities (Dec. 21, 2012), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/12-62.pdf.
\55\ See 77 FR at 30693.
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II. The Proposal
Given the more complete information now available regarding certain
portions of the swap market, the data analytical capabilities developed
since the SD regulations were adopted, and five years of implementation
experience, the Commission believes that modifications to the de
minimis exception are necessary to increase efficiency, flexibility,
and clarity in the application of the SD Definition.
Additionally, in March 2017, Chairman Giancarlo initiated an
agency-wide internal review of CFTC regulations and practices to
identify those areas that could be simplified to make them less
burdensome and costly
[[Page 27448]]
(``Project KISS'').\56\ The Commission subsequently published in the
Federal Register a Request for Information soliciting suggestions from
the public regarding how the Commission's existing rules, regulations,
or practices could be applied in a simpler, less burdensome, and less
costly manner.\57\ As discussed below, a number of responses submitted
pursuant to the Project KISS Request for Information also support
modifications to the de minimis exception.\58\
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\56\ See Remarks of then-Acting Chairman J. Christopher
Giancarlo before the 42nd Annual International Futures Industry
Conference in Boca Raton, FL (Mar. 15, 2017), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20.
\57\ Project KISS, 82 FR 21494 (May 9, 2017), amended by 82 FR
23765 (May 24, 2017). The Federal Register Request for Information,
and the suggestion letters filed by the public are available at
https://comments.cftc.gov/KISS/KissInitiative.aspx.
\58\ See Letters from BP Energy Company and BP Products North
America Inc. (collectively, ``BP'') (Sep. 29, 2017); Chatham
Financial Corp. (``Chatham'') (Sep. 29, 2017); Coalition for
Derivatives End-Users (``CDE'') (Sep. 29, 2017); The Commercial
Energy Working Group (``CEWG'') (Sep. 30, 2017); Commodity Markets
Council (``CMC'') (Sep. 29, 2017); EDF Trading North America, LLC
(``EDF'') (Sep. 29, 2017); Edison Electric Institute and the
Electric Power Supply Association (collectively, ``EEI/EPSA'') (Sep.
29, 2017); Financial Services Roundtable (``FSR'') (Sep. 30, 2017);
Futures Industry Association (``FIA'') (Sep. 28, 2017); Institute of
International Bankers (``IIB'') (Sep. 29, 2017); International
Energy Credit Association (``IECA'') (Sep. 30, 2017); International
Swaps and Derivatives Association, Inc. (``ISDA'') (Sep. 29, 2017);
Natural Gas Supply Association (``NGSA'') (Sep. 29, 2017); Northern
Trust Company (``Northern Trust'') (Sep. 21, 2017); Securities
Industry and Financial Markets Association (``SIFMA'') (Sep. 29,
2017); Custom House USA, LLC and Western Union Business Solutions
(USA), LLC (collectively, ``Western Union'') (Sep. 25, 2017); and
Custom House USA, LLC, Western Union Business, GPS Capital Markets,
Inc., and Associated Foreign Exchange, Inc. (collectively, ``WU/GPS/
AFEX'') (Sep. 29, 2017).
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The amendments proposed herein support a clearer and more
streamlined application of the SD Definition. They also provide greater
clarity regarding which swaps need to be counted towards the de minimis
threshold and consider the practical application of swaps in different
circumstances. This Proposal includes amendments regarding: (1) The
appropriate de minimis threshold level; and (2) the swap transactions
that are not required to be counted towards that threshold.
With respect to the appropriate threshold level, the Commission is
proposing to amend the de minimis exception in paragraph (4) of the SD
Definition by setting the AGNA threshold at $8 billion in swap dealing
activity. Additionally, to complement the Commission's definitions of
the types of activities that do not constitute swap dealing, the
Commission is proposing to add specific exceptions from the de minimis
threshold calculation for certain swaps entered into: (1) By IDIs in
connection with loans to customers; and (2) to hedge financial or
physical positions.\59\ Additionally, the Commission is proposing to
except from a person's de minimis threshold calculation swaps that
result from multilateral portfolio compression exercises, in a manner
consistent with relief granted in a 2012 DSIO staff no-action
letter.\60\ Lastly, the Commission is proposing to provide that, for
purposes of paragraph (4) of the SD Definition, the Commission may
determine the methodology to be used to calculate the notional amount
for any group, category, type, or class of swaps. The Commission is
also proposing to delegate authority to the Director of DSIO to make
such determinations.
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\59\ These proposed exceptions would be in addition to the
existing exclusions in paragraphs (5) and (6)(iii) of the SD
Definition for swaps entered into by IDIs and swaps entered into for
the purpose of hedging physical positions, respectively.
\60\ See CFTC Staff Letter No. 12-62, supra note 54.
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The proposed rule changes would amend the de minimis exception
provision in paragraph (4) of the SD Definition, pursuant to the
Commission's authority under CEA section 1a(49), which requires the
Commission to promulgate regulations to establish factors with respect
to the making of this determination to exempt a de minimis quantity of
swap dealing.\61\ The Commissions issued the SD Definition Adopting
Release pursuant to section 712(d)(1) of the Dodd-Frank Act, which
requires the CFTC and SEC to jointly adopt rules regarding the
definition of, among other things, the term ``swap dealer.'' The CFTC
continues to coordinate with the SEC on SD and security-based swap
dealer regulations. However, as discussed in the SD Definition Adopting
Release, a joint rulemaking is not required with respect to the de
minimis exception-related factors.\62\ The Commission notes that it is
consulting with the SEC and prudential regulators regarding the changes
to the SD Definition discussed in this Proposal.\63\
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\61\ 7 U.S.C. 1a(49)(D). See also 17 CFR 1.3, Swap dealer,
paragraph (4)(v).
\62\ 77 FR at 30634 n.464 (``We do not interpret the joint
rulemaking provisions of section 712(d) of the Dodd-Frank Act to
require joint rulemaking here, because such an interpretation would
read the term ``Commission'' out of CEA section 1a(49)(D) (and
Exchange Act section 3(a)(71)(D)), which themselves were added by
the Dodd-Frank Act.'').
\63\ As required by Sec. 712(a)(1) of the Dodd-Frank Act.
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Although this Proposal includes several potential rule amendments
in a single notice, the CFTC may in the future issue separate adopting
releases for any aspect of this Proposal that is finalized.\64\
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\64\ See ICI v. CFTC, 720 F.3d 370, 379 (D.C. Cir. 2013) (``[A]s
the Supreme Court has emphasized, `[n]othing prohibits federal
agencies from moving in an incremental manner.' '') (quoting FCC v.
Fox Television Stations, Inc., 556 U.S. 502, 522 (2009)).
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A. $8 Billion De Minimis Threshold
As discussed above, the de minimis threshold for the AGNA of a
person's swap dealing activity is scheduled to decrease to $3 billion
on December 31, 2019, requiring persons to begin calculating towards
the lower threshold on January 1, 2019. Based on the data and analysis
described below, the Commission is proposing to amend paragraph
(4)(i)(A) of the SD Definition by setting the de minimis threshold at
$8 billion. For added clarity, the Commission is also proposing to
change the term ``swap positions'' to ``swaps'' in paragraph (4)(i)(A).
Additionally, the Commission is proposing to delete a parenthetical
clause in paragraph (4)(i)(A) referring to the period after adoption of
the rule further defining the term ``swap,'' and to remove and reserve
paragraph (4)(ii) of the SD Definition, which addresses the phase-in
procedure and staff report requirements of the de minimis exception
(discussed above in section I.B), since both of those provisions would
no longer be applicable.
The Commission recognizes the benefits and drawbacks of an SD
Definition that relies upon AGNA for SD registration purposes. The
Commission is aware of potential viable alternative metrics and remains
open to the possibility of relying on a different approach in the
future, such as a threshold based on entity-netted notional amounts
\65\ or other risk metrics, including, but not limited to, initial
margin, open positions, material swaps exposure, net current credit
exposure, gross negative or positive fair value, potential future
exposure, value-at-risk, or expected shortfall. However, at this time,
the Commission continues to believe that the de minimis exception
should include an AGNA threshold component. As noted in the SD
Definition Adopting Release, a notional value test is useful to measure
the relative amount of an entity's swap dealing activity, and it avoids
potential
[[Page 27449]]
distorting effects from measures that reflect netting or collateral
offsets.\66\
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\65\ See Introducing ENNs: A Measure of the Size of Interest
Rate Swap Markets (Jan. 2018), available at https://www.cftc.gov/idc/groups/public/@economicanalysis/documents/file/oce_enns0118.pdf;
Remarks of Chairman J. Christopher Giancarlo before Derivcon 2018,
New York City, NY (Feb. 1, 2018), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo35.
\66\ 77 FR at 30630.
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1. Methodology
(i) Filters and Assumptions
For this Proposal, CFTC staff conducted an analysis of SDR data
from January 1, 2017, through December 31, 2017 (the ``review
period'').\67\ Generally, employing methodologies similar to those used
for purposes of the Staff Reports, staff attempted to calculate
persons' swaps activity in terms of AGNA to assess how the swap market
might be impacted by potential changes to the current de minimis
exception.
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\67\ The data used in this Proposal was sourced from data
reported to the four registered SDRs: BSDR LLC, Chicago Mercantile
Exchange Inc., DTCC Data Repository, and ICE Trade Vault.
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Given improvements in the quality of data being reported to SDRs
since the Staff Reports were issued, Commission staff was able to
analyze the AGNA of swaps activity for interest rate swaps (``IRS''),
credit default swaps (``CDS''), FX swaps,\68\ and equity swaps (while
by comparison, in the Staff Reports, AGNA analysis was limited to IRS
and CDS).\69\ However, given certain limitations discussed below, AGNA
data was not available for non-financial commodity (``NFC'') swaps. In
addition to now-available AGNA information for FX swaps and equity
swaps, there were also continued improvements in the consistency of
legal entity identifier (``LEI'') and unique swap identifier reporting.
However, as explained in the Staff Reports, the SDR data lacks: (1) A
reporting field to indicate whether a swap was entered into for dealing
purposes (as opposed to hedging, investing, or proprietary trading);
and (2) a reporting field to indicate whether a specific swap need not
be considered in determining whether a person is an SD or need not be
counted towards the person's de minimis threshold, pursuant to one of
the exclusions or exceptions identified above in section I.D.\70\ These
constraints limited the usefulness of the SDR data to identify which
swaps should be counted towards a person's de minimis threshold, and
the ability to precisely assess the current de minimis threshold or the
impact of potential changes to the current exclusions.
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\68\ The term ``FX swaps'' is used in this Proposal to only
describe those FX transactions that are counted towards a person's
de minimis calculation. The term ``FX swaps'' does not refer to
swaps and forwards that are not counted towards the de minimis
threshold pursuant to the exemption granted by the Secretary of the
Treasury. See 77 FR at 69704-05; 77 FR at 48253. Section III.C below
discusses the Secretary of the Treasury's exemption in more detail
in the context of non-deliverable forward transactions.
\69\ See Preliminary Staff Report, supra note 21, at 21-22;
Final Staff Report, supra note 24, at 19.
\70\ See Preliminary Staff Report, supra note 21, at 15; Final
Staff Report, supra note 24, at 19.
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As noted above, for purposes of this Proposal, staff utilized
assumptions and methodologies similar to those detailed in the Staff
Reports to approximate potential swap dealing activity.\71\ To attempt
to account for the various exclusions relevant to the SD Definition,
filters were applied to the data to exclude certain transactions and
entities from the analysis. The reason an entity enters into a swap
(e.g., dealing, hedging, investing, proprietary trading) is not
collected under the reporting requirements in part 45 of the
Commission's regulations.\72\ Accordingly, staff used filters to
identify and exclude certain categories of entities--such as funds,
insurance companies, cooperatives, government-sponsored entities, most
commercial end-users, and international financial institutions--as
potential SDs because these entities generally use swaps for investing,
hedging, or proprietary trading and do not seem to be engaged in swap
dealing activity, or otherwise enter into swaps that would not be
included in determining whether the entity is an SD.\73\ Further,
additional filters allowed for the exclusion of inter-affiliate \74\
and non-U.S. swap transactions.\75\
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\71\ See Preliminary Staff Report, supra note 21, at 13-21;
Final Staff Report, supra note 24, at 4-6, 19-20.
\72\ See 17 CFR part 45 app.1.
\73\ See section I.D (discussing the de minimis threshold
calculation). The Commission notes that entity-based exclusions are
not a determinative means of assessing whether any particular entity
is engaged in swap dealing. See Preliminary Staff Report, supra note
21, at 12; Final Staff Report, supra note 24, at 6.
\74\ See 17 CFR 1.3, Swap dealer, paragraph (6)(i).
\75\ See generally 78 FR 45292.
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With the benefits of improved data quality and analytical tools,
staff was able to conduct a more granular analysis, as compared to the
Staff Reports, in order to more accurately identify those entities
that, based on their observable business activities, are potentially
engaged in swap dealing activity (``In-Scope Entities'') \76\ versus
those likely engaged in other kinds of transactions (e.g., entering
into swaps for investment purposes). Further, for the purposes of this
Proposal, a minimum unique counterparty count of 10 counterparties was
utilized to better identify the entities that are likely to be engaged
in transactions that have to be considered for the SD Definition. Each
distinct, unaffiliated counterparty of a person was regarded as one
unique counterparty (hereinafter referred to as ``counterparty'').\77\
A threshold of 10 counterparties was utilized because, after excluding
inter-affiliate and non-U.S. swap transactions, 83 percent of
registered SDs had 10 or more reported counterparties, while
approximately 97 percent of unregistered entities had fewer than 10
counterparties. Therefore, this appeared to be a reasonable threshold
to better identify entities likely engaged in swap dealing. Adding this
filter to the analysis reduced the likelihood of false positives--i.e.,
reduced the potential that entities likely engaged in hedging or other
non-dealing activity would be identified as potential SDs.
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\76\ The majority of In-Scope Entities are banks, broker-
dealers, non-bank financial entities, and affiliates thereof.
\77\ For example, if Bank A entered into swaps with each of
three entities that are all affiliated with Bank B (i.e., Bank A
entered into swaps with each of Bank B-1, Bank B-2, and Bank B-3),
and also entered into a swap with Bank C, Bank A was considered to
have four counterparties (Bank B-1, Bank B-2, Bank B-3, and Bank C).
Additionally, each invalid identifier (i.e., an invalid LEI or a
non-LEI identifier) was considered its own counterparty. However, it
is possible that each invalid identifier does not actually represent
a distinct counterparty because one counterparty may be associated
with multiple invalid identifiers.
---------------------------------------------------------------------------
The updated analysis largely confirmed the analysis conducted for
the Staff Reports; \78\ however, there is greater confidence in the
results given the improved data and refined methodology. Nonetheless,
given the lack of a swap dealing indicator for individual swaps, and
the lack of an indicator to identify whether a specific swap need not
be considered in determining whether a person is an SD or counted
towards the person's de minimis threshold, staff's analysis is based on
a person's AGNA of swaps activity, as opposed to AGNA of swap dealing
activity.
---------------------------------------------------------------------------
\78\ See generally Final Staff Report, supra note 24;
Preliminary Staff Report, supra note 21.
---------------------------------------------------------------------------
With respect to NFC swaps, Commission staff encountered a number of
challenges in calculating notional amounts. These included: (1) The
vast array of underlying commodities with differing characteristics;
(2) the multiple types of swaps (e.g., fixed-float, basis, options,
multi-leg, exotic); (3) the variety of data points required to
calculate notional amounts (e.g., price, quantity, quantity units,
location, grades, exchange rate); (4) locality-specific terms; and (5)
lack of industry standards for notional amount-equivalent
calculations.\79\ However,
[[Page 27450]]
given the limitations in the AGNA data, counterparty counts and
transaction counts were used to analyze likely swap dealing activity
for participants in the NFC swap market.
---------------------------------------------------------------------------
\79\ Compare Letter from American Petroleum Institute, Commodity
Markets Council, Edison Electric Institute, Electric Power Supply
Association, Independent Petroleum Association of America, and
Natural Gas Supply Association (Sep. 20, 2012) (stating that ``The
notional amount for options should be based on the absolute value of
the product of the notional quantity of the option (without
adjustment for the option delta) multiplied by the transaction value
for the option (i.e., the premium).''), attached to a 2016 comment
letter available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60595&SearchText, with Letter from Futures
Industry Association Principal Traders Group (Dec. 20, 2012)
(proposing a methodology that does not utilize premium value or the
strike price, but does include option delta in the calculation),
available at https://ptg.fia.org/file/487/download?token=HSUPcHmL.
See also Ernst & Young, Notional value under Dodd-Frank: survey of
energy commodities participants (2013) (``While the term notional
value is commonly used in industry, in practice there isn't a single
accepted definition.''), available at https://www.ey.com/Publication/
vwLUAssets/Notional_value_-_under_Dodd-Frank/$FILE/
Notional_value_under_Dodd_Frank.pdf.
---------------------------------------------------------------------------
(ii) Regulatory Coverage Analysis
To assess the relative impact on the swap market of potential
changes to the de minimis exception, CFTC staff analyzed the extent to
which the swap market was subject to SD regulation during the review
period because at least one counterparty to a swap was a registered SD
(``2017 Regulatory Coverage''). For purposes of this analysis, any
person listed as a provisionally registered SD on December 31, 2017,
was considered to be a registered SD. Specifically, with regard to 2017
Regulatory Coverage, staff identified the extent to which: (1) Swaps
activity, measured in terms of AGNA, was subject to SD regulation
during the review period because at least one counterparty to a swap
was a registered SD (``2017 AGNA Coverage''); (2) swaps activity,
measured in terms of number of transactions, was subject to SD
regulation during the review period because at least one counterparty
to a swap was a registered SD (``2017 Transaction Coverage''); and (3)
swaps activity was subject to SD regulation during the review period,
measured in terms of number of counterparties who transacted with at
least one registered SD (``2017 Counterparty Coverage'').
Additionally, staff estimated regulatory coverage by assessing the
extent to which the swap market would have been subject to SD
regulation at different de minimis thresholds because at least one
counterparty to a swap was identified as a ``Likely SD'' (``Estimated
Regulatory Coverage''). For purposes of this analysis, the term
``Likely SD'' refers to an In-Scope Entity that exceeds a specified
AGNA threshold level, and trades with at least 10 counterparties. With
regard to Estimated Regulatory Coverage, staff identified the extent to
which: (1) Swaps activity, measured in terms of AGNA, would have been
subject to SD regulation during the review period, at a specified de
minimis threshold, because at least one counterparty to a swap was
identified as a Likely SD at that de minimis threshold (``Estimated
AGNA Coverage''); (2) swaps activity, measured in terms of number of
transactions, would have been subject to SD regulation during the
review period, at a specified de minimis threshold, because at least
one counterparty to a swap was identified as a Likely SD at that de
minimis threshold (``Estimated Transaction Coverage''); and (3)
counterparties in the swap market would have transacted with at least
one Likely SD during the review period, at a specified de minimis
threshold (``Estimated Counterparty Coverage'').
2. Data and Analysis
For this Proposal, the Commission considered reducing the AGNA de
minimis threshold to $3 billion, maintaining the threshold at $8
billion, or increasing the threshold. Based on the data and related
policy considerations discussed below, the Commission is of the view
that maintaining the current $8 billion AGNA de minimis threshold is
appropriate. The policy objectives underlying SD regulation--reducing
systemic risk, increasing counterparty protections, and increasing
market efficiency, orderliness, and transparency--would not be
significantly advanced if the threshold were to decrease to $3 billion
or to increase from the current $8 billion level.\80\ Nor does the
Commission believe that the policy objectives furthered by a de minimis
exception--increasing efficiency, allowing limited ancillary dealing,
encouraging new participants, and focusing regulatory resources--would
be significantly advanced if the threshold were to be changed.\81\
---------------------------------------------------------------------------
\80\ As discussed below, the analysis explored the hypothetical
effects on the swap market of changing the AGNA threshold to various
amounts between $3 billion and $100 billion.
\81\ The Commission also notes that setting the threshold at $8
billion would be consistent with a non-binding Congressional
Directive stating that the Commission should establish a de minimis
threshold of $8 billion or greater within 60 days of enactment of
the Consolidated Appropriations Act of 2016. See Accompanying
Statement to the Consolidated Appropriations Act of 2016,
Explanatory Statement Division A at 32 (Dec. 2015), available at
https://docs.house.gov/meetings/RU/RU00/20151216/104298/HMTG-114-RU00-20151216-SD002.pdf; H.Rpt. 114-205 at 76 (July 14, 2015),
available at https://www.congress.gov/114/crpt/hrpt205/CRPT-114hrpt205.pdf.
---------------------------------------------------------------------------
Analysis of the data indicates that: (1) The current $8 billion
threshold subjects almost all swap transactions (as measured by AGNA or
transaction count) to SD regulations; \82\ (2) at a lower threshold of
$3 billion, there would only be a small amount of additional AGNA and
swap transactions subject to SD regulation, and potentially reduced
liquidity in the swap market, as compared to the $8 billion threshold;
(3) counterparty protections may be reduced at higher thresholds; and
(4) a lower threshold could lead to reduced liquidity for NFC swaps,
negatively impacting end-users and commercial entities who utilize NFC
swaps for hedging purposes. Additionally, the Commission expects that
maintaining an $8 billion threshold would foster the efficient
application of the SD Definition by providing continuity and addressing
the uncertainty associated with the end of the phase-in period.
---------------------------------------------------------------------------
\82\ SD regulations include, among other things, registration,
internal and external business conduct standards, reporting,
recordkeeping, risk management, margin, and chief compliance officer
requirements. However, the requirement to report a swap to an SDR
applies regardless of whether an SD is a counterparty to the swap.
---------------------------------------------------------------------------
The analysis below is based on a January 1, 2017, through December
31, 2017, review period, and includes swap transactions reported to
SDRs, excluding inter-affiliate and non-U.S. transactions.\83\ The
total size of the swap market that was analyzed, after excluding inter-
affiliate and non-U.S. transactions, was approximately $221.1 trillion
in AGNA of swaps activity (excluding NFC swaps), approximately 4.4
million transactions, and 39,107 counterparties.
---------------------------------------------------------------------------
\83\ See section II.A.1 above for additional discussion
regarding the methodology utilized to conduct the analysis.
---------------------------------------------------------------------------
(i) Regulatory Coverage at $8 Billion Threshold
As shown below, the data indicates that, at the $8 billion
threshold, there was nearly complete 2017 Regulatory Coverage as
measured by 2017 AGNA Coverage and 2017 Transaction Coverage.
[[Page 27451]]
Table 1--Swaps Subject to SD Regulation
2017 Transaction Coverage
----------------------------------------------------------------------------------------------------------------
Number of
transactions 2017
Asset class Total number of including at transaction
transactions least one coverage (%)
registered SD
----------------------------------------------------------------------------------------------------------------
IRS.......................................................... 945,593 937,975 99.19
CDS.......................................................... 133,570 132,899 99.50
FX swaps..................................................... 2,443,659 2,435,537 99.67
Equity swaps................................................. 281,219 281,211 >99.99
NFC swaps.................................................... 633,943 546,823 86.26
--------------------------------------------------
Total.................................................... 4,437,984 4,334,445 97.67
----------------------------------------------------------------------------------------------------------------
As seen in Table 1, at the $8 billion threshold, almost all swap
transactions involved at least one registered SD as a counterparty,
greater than 99 percent for IRS, CDS, FX swaps, and equity swaps. For
NFC swaps, approximately 86 percent of transactions involved at least
one registered SD as a counterparty. As discussed in more detail in
section II.A.2.iv, although that percentage is lower than the
approximately 99 percent for the other asset classes, the Commission is
of the view that with respect to NFC swaps, lower SD regulatory
coverage is acceptable given the unique characteristics of the NFC swap
market. Overall, approximately 98 percent of transactions involved at
least one registered SD.
Table 2--Swaps Subject to SD Regulation
2017 AGNA Coverage
----------------------------------------------------------------------------------------------------------------
AGNA including
Total AGNA at least one 2017 AGNA
Asset class ($Bn) registered SD coverage (%)
($Bn)
----------------------------------------------------------------------------------------------------------------
IRS.......................................................... 182,961 182,847 99.94
CDS.......................................................... 7,527 7,490 99.51
FX swaps..................................................... 28,794 28,775 99.93
Equity swaps \84\............................................ 1,850 1,850 99.99
--------------------------------------------------
Total.................................................... 221,132 220,963 99.92
----------------------------------------------------------------------------------------------------------------
As seen in Table 2, at the $8 billion threshold, almost all AGNA of
swaps activity included at least one registered SD, greater than 99
percent for IRS, CDS, FX swaps, and equity swaps.
---------------------------------------------------------------------------
\84\ Coverage is approximately 99.99 percent due to rounding.
---------------------------------------------------------------------------
The 2017 Transaction Coverage and 2017 AGNA Coverage ratios
indicate that SD regulations covered nearly all swaps in these asset
classes, signifying that nearly all swaps already benefited from the
policy considerations discussed above (e.g., reducing systemic risk,
increasing counterparty protections, and increasing market efficiency,
orderliness, and transparency) at the existing $8 billion threshold.
The Commission notes the 2017 Counterparty Coverage was
approximately 83.5 percent--i.e., approximately 16.5 percent of the
counterparties in the swap market did not transact with at least one
registered SD on at least one swap (6,440 counterparties out of a total
of 39,107), and therefore potentially did not benefit from the
counterparty protection aspects of SD regulations.\85\ However, given
the 2017 AGNA Coverage and 2017 Transaction Coverage statistics, these
6,440 entities overall had limited swaps activity. Collectively, the
6,440 entities entered into 77,333 transactions, an average of
approximately 12 transactions per entity, and represented only
approximately 1.7 percent of the overall number of transactions during
the review period. Additionally, collectively, the 6,440 entities had
an AGNA of approximately $68 billion in swaps activity, an average of
approximately $10.6 million per entity, and they represented only
approximately 0.03 percent of the overall AGNA of swaps activity during
the review period in IRS, CDS, FX swaps, and equity swaps.
---------------------------------------------------------------------------
\85\ The actual number of entities without a single transaction
with a registered SD is likely lower than 6,440. Of the 6,440
entities, 1,780 have invalid identifiers that staff was unable to
manually replace with a valid LEI. It is possible that these 1,780
invalid identifiers actually represent fewer than 1,780 distinct
counterparties because one counterparty may be associated with
multiple invalid identifiers.
---------------------------------------------------------------------------
The Commission also believes that this limited activity indicates
that, to the extent these 6,440 entities are engaging in swap dealing
activities, such activity is likely ancillary and in connection with
other client services, potentially advancing the policy rationales
behind a de minimis exception. For example, of the 6,440 entities,
5,302 are active in IRS, indicating that these entities may be entering
into loan-related swaps with banks. These banks may be entering into an
outright amount of swap dealing activity at a level below the de
minimis threshold, or do not have to register because of the exclusion
for swaps entered into by IDIs in connection with originating
loans.\86\
---------------------------------------------------------------------------
\86\ See 17 CFR 1.3, Swap dealer, paragraph (5).
---------------------------------------------------------------------------
Generally, the Commission is of the view that the policy
considerations underlying SD regulation--reducing systemic risk,
increasing counterparty protections, and increasing market efficiency,
orderliness, and
[[Page 27452]]
transparency--are being appropriately advanced at the current $8
billion threshold given the regulatory coverage statistics discussed
above. Only a low percentage of swaps activity is not currently covered
by SD regulation-related requirements,\87\ indicating that the current
threshold is appropriate. Additionally, as discussed below in sections
II.A.2.ii and II.A.2.iv, a reduction in the de minimis threshold could
negatively affect the policy considerations underlying the de minimis
exception, as compared to the current $8 billion threshold.
---------------------------------------------------------------------------
\87\ Transactions that do not include at least one registered SD
as a counterparty would generally not be subject to SD-specific
regulations (e.g., margin, business conduct standard, and risk
management requirements). However, such transactions would still be
subject to swap reporting requirements (e.g., 17 CFR part 45), among
other regulations.
---------------------------------------------------------------------------
(ii) Regulatory Coverage at Lower Threshold
Given the high percentage of swaps that were subject to SD
regulation at the existing $8 billion threshold during the review
period, a lower threshold of $3 billion would result in only a small
amount of additional activity being directly subjected to SD
regulation. To estimate the effect of a lower de minimis threshold
during the review period, staff compared the number of Likely SDs and
the Estimated AGNA Coverage, Estimated Transaction Coverage, and
Estimated Counterparty Coverage at $8 billion and $3 billion
thresholds.
Table 3 estimates the percentage of IRS, CDS, FX swaps, and equity
swaps that would involve at least one Likely SD at de minimis
thresholds of $3 billion and $8 billion. To make these calculations,
staff used the methodology described in section II.A.1 to determine
Likely SDs at the indicated thresholds.\88\ Because SDR data does not
include information indicating the underlying purposes of a swap,\89\
the analysis likely includes swaps that were not required to be counted
under the SD Definition (e.g., swaps entered into for hedging,
investing, or proprietary trading purposes). Therefore, the estimates
of the number of Likely SDs at various AGNA thresholds may differ from
the actual number of entities that would be required to register at
those thresholds. For example, Table 3 shows that an estimated 108
entities could be required to register as SDs at the $8 billion
threshold, whereas the figures in Table 1 are based on the 100 actual
registered SDs.\90\ Nevertheless, the Commission believes that Table 3
presents a reasonably accurate estimate of how the number of SDs that
are required to register will fluctuate with changes in the threshold.
---------------------------------------------------------------------------
\88\ The term ``Likely SD'' refers to an In-Scope Entity that
exceeds a notional threshold test, and trades with at least 10
counterparties.
\89\ See 17 CFR part 45 app. 1.
\90\ Some registered SDs were not captured in the Estimated
Regulatory Coverage analysis since they primarily are involved in
the NFC swap market, which is excluded from this AGNA-based
analysis. In addition, some of the existing registered SDs reported
AGNA of swaps activity below $8 billion in 2017 but remained
registered SDs.
Table 3--Number of Likely SDs and Estimated Regulatory Coverage
IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
Likely SD
Number of count change Estimated AGNA Estimated Estimated
AGNA threshold ($Bn) likely SDs vs. $8 Bn coverage (%) transaction counterparty
threshold coverage (%) coverage (%)
----------------------------------------------------------------------------------------------------------------
1 2 3 4 5 6
----------------------------------------------------------------------------------------------------------------
3............................... 121 13 99.96 99.83 90.75
8............................... 108 .............. 99.95 99.77 88.80
----------------------------------------------------------------------------------------------------------------
Column 1 of Table 3 lists the AGNA thresholds for which information
is being presented. Column 2 is the number of Likely SDs at each given
threshold as determined using the methodology described above,
including a 10 counterparty minimum. Column 3 is the change in the
number of Likely SDs, as compared to the current $8 billion threshold.
Columns 4, 5, and 6 illustrate the Estimated Regulatory Coverage, in
percentage terms, for the $3 billion and $8 billion de minimis
thresholds during the review period. The percentages are based on a
total market size in IRS, CDS, FX swaps, and equity swaps of
approximately $221.1 trillion in AGNA of swaps activity, 3.8 million
transactions, and 34,774 counterparties, after excluding inter-
affiliate and non-U.S. transactions.\91\
---------------------------------------------------------------------------
\91\ Note that the market totals of 3.8 million transactions and
34,774 counterparties exclude NFC swaps, whereas the market totals,
in section II.A.2.i above, of 4.4 million transactions and 39,107
counterparties include NFC swaps.
---------------------------------------------------------------------------
As columns 2 and 3 indicate, the number of Likely SDs increases
from 108 at an $8 billion AGNA threshold to 121 at a $3 billion AGNA
threshold--an increase of 13 entities. However, as columns 4 through 6
indicate, and as explained in more detail below in Tables 4 through 6,
if these 13 entities were all registered as SDs, the increase in
Estimated Regulatory Coverage would be small.
Table 4--Estimated AGNA Coverage ($3 Bn and $8 Bn)
IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
Change in
Estimated AGNA estimated AGNA Estimated AGNA Change in
AGNA threshold ($Bn) coverage (%) coverage (pct. coverage ($Bn) estimated AGNA
point) coverage ($Bn)
----------------------------------------------------------------------------------------------------------------
3............................................... 99.96 0.01 221,039 19
8............................................... 99.95 .............. 221,020 ..............
----------------------------------------------------------------------------------------------------------------
[[Page 27453]]
As seen in Table 4, at a $3 billion threshold, the Estimated AGNA
Coverage would have increased from approximately $221,020 billion
(99.95 percent) to $221,039 billion (99.96 percent)--an increase of $19
billion (a 0.01 percentage point increase).
Table 5--Estimated Transaction Coverage ($3 Bn and $8 Bn)
IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties)
----------------------------------------------------------------------------------------------------------------
Change in
Change in Estimated estimated
Estimated estimated transaction transaction
AGNA threshold ($Bn) transaction transaction coverage coverage
coverage (%) coverage (pct. (number of (number of
point) trades) trades)
----------------------------------------------------------------------------------------------------------------
3............................................... 99.83 0.06 3,797,734 2,404
8............................................... 99.77 .............. 3,795,330 ..............
----------------------------------------------------------------------------------------------------------------
As seen in Table 5, at a $3 billion threshold, the Estimated
Transaction Coverage would have increased from 3,795,330 trades (99.77
percent) to 3,797,734 trades (99.83 percent)--an increase of 2,404
trades (a 0.06 percentage point increase).
Table 6--Estimated Counterparty Coverage ($3 Bn and $8 Bn)
IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
Change in
Change in Estimated estimated
Estimated estimated counterparty counterparty
AGNA threshold ($Bn) counterparty counterparty coverage coverage
coverage (%) coverage (pct. (number of (number of
point) counterparties) counterparties)
----------------------------------------------------------------------------------------------------------------
3............................................. 90.75 1.96 31,559 680
8............................................. 88.80 .............. 30,879 ...............
----------------------------------------------------------------------------------------------------------------
As seen in Table 6, at a $3 billion threshold, the Estimated
Counterparty Coverage would have increased from 30,879 counterparties
(88.80 percent) to 31,559 counterparties (90.75 percent)--an increase
of 680 counterparties (a 1.96 percentage point increase).
The Commission is of the view that these small increases in
Estimated AGNA Coverage, Estimated Transaction Coverage, and Estimated
Counterparty Coverage indicate that the systemic risk mitigation,
counterparty protection, and market efficiency benefits of SD
regulation would be enhanced in only a very limited manner if the de
minimis threshold decreased from $8 billion to $3 billion.
Additionally, the limited regulatory and market benefits of a $3
billion threshold should be considered in conjunction with the costs
associated with a lower threshold. In particular, the persons required
to register would incur the likely significant costs of implementing,
among other things, policies and procedures, technology systems, and
training programs to address requirements imposed by SD
regulations.\92\
---------------------------------------------------------------------------
\92\ Registered SDs are subject to a broad range of regulatory
requirements. See, e.g., supra note 82.
---------------------------------------------------------------------------
Further, if the de minimis threshold decreases to $3 billion, it is
possible that the number of Likely SDs would be smaller than estimated
because the analysis includes swaps that would not be required to be
counted under the SD Definition (e.g., swaps entered into for hedging,
investing, or proprietary trading purposes). Further, persons engaged
in swap dealing in amounts between $3 billion and $8 billion may also
reduce their swap dealing activity to remain under a lower threshold,
thus further reducing the actual incremental change.
To more fully understand the potential market impact of a lower
threshold, the Commission also analyzed the 13 entities that were
identified as Likely SDs at a $3 billion threshold but not at an $8
billion threshold.
---------------------------------------------------------------------------
\93\ ``Other'' refers to commercial entities, such as consumers,
merchants, producers, or traders of physical commodities, who appear
to be engaging in some swap dealing activity.
Table 7--Categories of Likely SDs ($3 Bn and $8 Bn)
IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
Category $3 Bn $8 Bn Difference
----------------------------------------------------------------------------------------------------------------
Bank/Bank subsidiary/Bank affiliate............................. 105 95 10
Non-bank financial.............................................. 14 11 3
Other \93\...................................................... 2 2 0
-----------------------------------------------
Total....................................................... 121 108 13
----------------------------------------------------------------------------------------------------------------
[[Page 27454]]
As seen in Table 7, for IRS, CDS, FX swaps, and equity swaps,
entities that would potentially have to register at a lower threshold
primarily include banks or bank affiliates, 10 of the 13 entities in
total. In the aggregate, these 13 entities have only approximately $19
billion in AGNA of swaps activity (approximately 0.01 percent of the
overall market) and 2,406 transactions (approximately 0.06 percent of
the overall market) with currently unregistered market participants,
further indicating that decreasing the threshold to $3 billion would
yield only a small increase in Estimated Regulatory Coverage. After
reviewing the list of the 10 banking entities' counterparties, it is
also likely that some of the activity for the 10 banking entities
consists of swaps that would be excluded from the de minimis
calculation pursuant to the exclusion for swaps entered into by IDIs in
connection with loans to customers (as provided for in paragraph (5) of
the SD Definition), potentially reducing the likelihood that all or
some of these entities would be required to register at a lower
threshold.
In addition to a negligible increase in the AGNA or number of
transactions that would be subject to SD regulation at a $3 billion
threshold, policy considerations may indicate that lowering the
threshold would not be beneficial to the market. A number of Project
KISS suggestions addressed these policy-related concerns.\94\
---------------------------------------------------------------------------
\94\ See Letters from BP, Chatham, CDE, CMC, EDF, EEI/EPSA, FSR,
IIB, IECA, ISDA, NGSA, SIFMA, Western Union, and WU/GPS/AFEX, supra
note 58.
---------------------------------------------------------------------------
The Commission believes that a $3 billion AGNA de minimis threshold
could lead certain entities to reduce or cease swap dealing activity to
avoid registration and its related costs. Generally, the costs
associated with registering as an SD may exceed the revenue from
dealing swaps for many small or mid-sized banks and non-financial
entities. Additionally, some persons engaged in swap dealing activities
below the current $8 billion threshold have indicated that swap dealing
is not a major source of revenue and is only complementary to other
client-facing businesses, suggesting that these smaller dealing
entities could reduce or eliminate their swap dealing activities if the
threshold is lowered. Although the magnitude of this effect is not
certain, reduced swap dealing activity could lead to increased
concentration in the swap dealing market, reduced availability of
potential swap counterparties, reduced liquidity, increased volatility,
higher fees, wider bid/ask spreads, or reduced competitive pricing. The
end-user counterparties of these smaller swap dealing entities may be
adversely impacted by the above consequences and could face a reduced
ability to use swaps to manage their business risks.\95\
---------------------------------------------------------------------------
\95\ See generally Letters from BP, Chatham, CDE, CMC, EDF, EEI/
EPSA, FSR, IIB, IECA, ISDA, NGSA, SIFMA, Western Union, and WU/GPS/
AFEX, supra note 58; Final Staff Report, supra note 24, at 11-12
(citing comment letters submitted in response to Preliminary Staff
Report, supra note 21).
---------------------------------------------------------------------------
Based on the likely small increase in regulatory coverage, and the
potential negative market effects of a $3 billion de minimis threshold,
the Commission is of the view that, on balance, the overall policy
goals of SD registration and the de minimis exception would not be
advanced by lowering the threshold from $8 billion.
(iii) Regulatory Coverage at Higher Thresholds
To assess the effect of a higher de minimis threshold, staff
compared the number of Likely SDs and the Estimated AGNA Coverage,
Estimated Transaction Coverage, and Estimated Counterparty Coverage at
$8 billion, $20 billion, $50 billion, and $100 billion thresholds. As
with the analysis above regarding $3 billion and $8 billion thresholds,
to make these calculations, staff used the methodology described in
section II.A.1 to determine Likely SDs at the indicated thresholds.\96\
As discussed, if a swap transaction includes at least one Likely SD,
that transaction would theoretically be subject to SD-related
regulations.
---------------------------------------------------------------------------
\96\ Additionally, as discussed in section II.A.2.ii, the
percentages are based on a total market size in IRS, CDS, FX swaps,
and equity swaps of approximately $221.1 trillion in AGNA of swaps
entered into, 3.8 million transactions, and 34,774 counterparties,
after excluding inter-affiliate and non-U.S. transactions.
Table 8--Number of Likely SDs and Regulatory Coverage
IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
Likely SD
Number of count change Estimated AGNA Estimated Estimated
AGNA threshold ($Bn) likely SDs vs. $8 Bn coverage (%) transaction counterparty
threshold coverage (%) coverage (%)
----------------------------------------------------------------------------------------------------------------
1 2 3 4 5 6
----------------------------------------------------------------------------------------------------------------
8............................... 108 .............. 99.95 99.77 88.80
20.............................. 93 (15) 99.94 99.72 86.00
50.............................. 81 (27) 99.91 99.35 83.09
100............................. 72 (36) 99.88 99.20 81.19
----------------------------------------------------------------------------------------------------------------
As seen in Table 8, the number of Likely SDs decreases from 108 at
an $8 billion AGNA threshold to 93, 81, and 72 Likely SDs, at the $20
billion, $50 billion, and $100 billion thresholds, respectively. As
columns 4 and 5 indicate, and as explained in more detail below in
Tables 9 and 10, the reduction in the number of Likely SDs would lead
to only a relatively small decrease in Estimated AGNA Coverage and
Estimated Transaction Coverage at higher AGNA thresholds of up to $100
billion. However, as column 6 indicates, and as explained in more
detail below in Table 11, there would potentially be a more pronounced
reduction in Estimated Counterparty Coverage at higher AGNA thresholds.
[[Page 27455]]
Table 9--Estimated AGNA Coverage ($8 Bn, $20 Bn, $50 Bn, and $100 Bn)
IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
Change in
Estimated AGNA estimated AGNA Estimated AGNA Change in
AGNA threshold ($Bn) coverage (%) coverage (pct. coverage ($Bn) estimated AGNA
point) coverage ($Bn)
----------------------------------------------------------------------------------------------------------------
8............................................... 99.95 .............. 221,020 ..............
20.............................................. 99.94 (0.01) 221,005 (15)
50.............................................. 99.91 (0.04) 220,935 (85)
100............................................. 99.88 (0.06) 220,877 (143)
----------------------------------------------------------------------------------------------------------------
As seen in Table 9, at a $100 billion threshold, the Estimated AGNA
Coverage would have decreased from approximately $221,020 billion
(99.95 percent) to $220,877 billion (99.88 percent)--a decrease of $143
billion (a 0.06 percentage point decrease). The decrease would be lower
at thresholds of $20 billion and $50 billion, at 0.01 percentage points
and 0.04 percentage points, respectively.
Table 10--Estimated Transaction Coverage ($8 Bn, $20 Bn, $50 Bn, and $100 Bn)
IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
Change in
Change in Estimated estimated
Estimated estimated transaction transaction
AGNA threshold ($Bn) transaction transaction coverage coverage
coverage (%) coverage (pct. (number of (number of
point) trades) trades)
----------------------------------------------------------------------------------------------------------------
8............................................... 99.77 .............. 3,795,330 ..............
20.............................................. 99.72 (0.05) 3,793,454 (1,876)
50.............................................. 99.35 (0.42) 3,779,466 (15,864)
100............................................. 99.20 (0.58) 3,773,440 (21,890)
----------------------------------------------------------------------------------------------------------------
As seen in Table 10, at a $100 billion threshold, the Estimated
Transaction Coverage would have decreased from 3,795,330 trades (99.77
percent) to 3,773,440 trades (99.20 percent)--a decrease of 21,890
trades (a 0.58 percentage point decrease). The decrease would be lower
at thresholds of $20 billion and $50 billion, at 0.05 percentage points
and 0.42 percentage points, respectively.
Table 11--Estimated Counterparty Coverage ($8 Bn, $20 Bn, $50 Bn, and $100 Bn)
IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
Change in
Change in Estimated estimated
Estimated estimated counterparty counterparty
AGNA threshold ($Bn) counterparty counterparty coverage coverage
coverage (%) coverage (pct. (number of (number of
point) counterparties) counterparties)
----------------------------------------------------------------------------------------------------------------
8............................................. 88.80 .............. 30,879 ...............
20............................................ 86.00 (2.80) 29,907 (972)
50............................................ 83.09 (5.71) 28,893 (1,986)
100........................................... 81.19 (7.61) 28,234 (2,645)
----------------------------------------------------------------------------------------------------------------
As seen in Table 11, at a $100 billion threshold, the Estimated
Counterparty Coverage would have decreased from 30,879 counterparties
(88.80 percent) to 28,234 counterparties (81.19 percent)--a decrease of
2,645 counterparties (a 7.61 percentage point decrease). The decrease
would be lower at thresholds of $20 billion and $50 billion, at 2.80
percentage points and 5.71 percentage points, respectively.
The small decrease in Estimated AGNA Coverage and Estimated
Transaction Coverage at higher thresholds potentially indicates that
increasing the threshold to up to $100 billion may have a limited
effect on the systemic risk and market efficiency policy considerations
of SD regulation. Additionally, a higher threshold could enhance the
benefits associated with a de minimis exception, for example by
allowing entities to increase ancillary dealing activity. However, the
decrease in Estimated Counterparty Coverage indicates that fewer
entities would be transacting with registered SDs, and therefore, the
counterparty protection benefits of SD regulation might be reduced if
the de minimis threshold increased from $8 billion to $20 billion, $50
billion, or $100 billion.
[[Page 27456]]
Also, the Commission is preliminarily of the view that maintaining
the status quo signals long-term stability of the de minimis threshold.
This should provide for the efficient application of the SD Definition
as it allows for long-term planning based on the current AGNA de
minimis threshold.
(iv) Regulatory Coverage of NFC Swap Market
As indicated in Table 1 above, approximately 86 percent of NFC
swaps involved at least one registered SD. Although that percentage is
lower than the approximately 99 percent for other asset classes, as
discussed below, the Commission is of the view that lower SD regulatory
coverage is acceptable given the unique characteristics of the NFC swap
market. Table 12 presents information on the category and SD
registration status of In-Scope Entities with at least 10 NFC swap
counterparties.
Table 12--Categories and Registration Status
In-Scope Entities
[Minimum 10 NFC counterparties]
------------------------------------------------------------------------
Unregistered
Category Registered SDs entities
------------------------------------------------------------------------
Bank/Bank subsidiary/Bank affiliate..... 39 12
Non-bank financial entity (e.g., traders 2 8
without physical assets)...............
Other (e.g., commercial entities, such 3 22
as consumers, merchants, producers, or
traders of physical commodities, who
appear to be engaging in some swap
dealing activity)......................
-------------------------------
Total............................... 44 42
------------------------------------------------------------------------
Analysis of SDR data indicates that were 86 In-Scope Entities with
10 or more NFC swap counterparties during the review period. As seen in
Table 12, of these 86 entities, 44 are registered SDs and 42 are
unregistered entities. Of the 42 unregistered entities, 22 have a
primary business that is non-financial in nature. Specifically, these
are commercial entities, such as consumers, merchants, producers, or
traders of physical commodities, who appear to be engaging in some swap
dealing activity. Moreover, half of the 12 unregistered banks or bank
affiliates active in the NFC swap market are small or mid-sized in
nature. Further, of the 42 unregistered entities, only seven have AGNA
of swaps activity greater than $3 billion in IRS, CDS, FX swaps, and
equity swaps, indicating that the majority of these entities are
primarily or exclusively active in NFC swaps.\97\ In addition to the
fact that entering into NFC swaps is the primary swaps activity for the
majority of these 42 entities, a review of these entities' transaction
data indicates that they appear to provide NFC swaps generally to
smaller end-user counterparties, potentially to permit these
counterparties to hedge risks associated with physical commodities.
---------------------------------------------------------------------------
\97\ Five have greater than $8 billion in AGNA of swaps
activity.
\98\ The transaction and counterparty totals are not mutually
exclusive, as some of the 44 registered SDs transact with the 42
unregistered entities. The 44 registered SDs also transact with some
of the same counterparties as the 42 unregistered entities.
Table 13--NFC Swap Transaction Statistics
In-Scope Entities
[Minimum 10 NFC counterparties] \98\
------------------------------------------------------------------------
Unregistered
Statistic Registered SDs entities (42
(44 total) total)
------------------------------------------------------------------------
Transactions:
Mean................................ 12,638 2,195
Total............................... 546,656 85,025
Total as Percent of all NFC 86% 13%
transactions.......................
Counterparties:
Mean................................ 176 40
Total............................... 4,626 1,207
Total as Percent of all NFC 83% 22%
counterparties.....................
------------------------------------------------------------------------
Table 13 indicates that registered SDs with 10 or more
counterparties entered into 86 percent of the transactions in the NFC
swap market, and faced 83 percent of counterparties in at least one
transaction,\99\ indicating that the existing $8 billion de minimis
threshold has helped extend the benefits of SD registration to much of
the NFC swap market. The trading activity of the 42 unregistered
entities represents approximately 13 percent of the overall NFC swap
market by transaction count. However, as compared to the existing 44
registered SDs with at least 10 counterparties, these 42 unregistered
entities have significantly lower mean transaction and counterparty
counts, indicating that they may only be providing ancillary dealing
services to accommodate commercial end-user clients, and/or be engaged
in non-swap dealing activity, such as hedging activity or proprietary
trading.
---------------------------------------------------------------------------
\99\ Including existing registered SDs with fewer than 10
counterparties would only add 167 trades to the analysis.
---------------------------------------------------------------------------
Lacking notional-equivalent data for NFC swaps, it is unclear how
many of the 42 entities would actually be subject to SD registration at
any given de minimis threshold. It is possible that a portion of the
swaps activity for some or all of these entities qualifies for the
physical hedging exclusion in paragraph (6)(iii) of the SD Definition
or is
[[Page 27457]]
otherwise not swap dealing activity, regardless of the de minimis
threshold level.\100\
---------------------------------------------------------------------------
\100\ Hypothetically, if all 42 entities registered, the
percentage of all NFC swaps facing at least one registered SD would
rise from approximately 86 percent to 98 percent.
---------------------------------------------------------------------------
The Commission believes that the available data, related policy
considerations, and comments from market participants \101\ demonstrate
that maintaining an $8 billion threshold is also appropriate with
respect to the NFC swap asset class.
---------------------------------------------------------------------------
\101\ See Letters from BP, CDE, CMC, EDF, EEI/EPSA, FSR, IIB,
IECA, ISDA, NGSA, and SIFMA, supra note 58.
---------------------------------------------------------------------------
First, a reduced de minimis threshold likely would have negative
impacts on NFC swap liquidity. Specifically, some entities may reduce
dealing to avoid registration and its related costs. Many of the
entities identified in Table 12 that are not registered as SDs are non-
financial in nature and trade in physical commodity markets, or are
small or mid-sized banks. Based on analysis of data and comments from
swap market participants, it is likely that much of the swap dealing by
these entities serves small or mid-sized end-users in their localized
markets. Often, the end-users served by these entities do not have
trading relationships with larger, financial-entity SDs, and the end-
users rely on these small to mid-sized and/or non-financial entities to
access liquidity provided by larger dealers.
For example, the 42 unregistered In-Scope Entities described above
entered into NFC swaps with 1,207 counterparties, 1,174 of which were
not registered SDs. Of these 1,174 entities, 705 had no transactions
with registered SDs. Almost all of the 705 entities are commercial end-
users.\102\ Of the 52,396 NFC swaps that these 705 entities entered
into, 48,813 were entered into with the 42 unregistered In-Scope
Entities discussed above.\103\ Therefore, it is likely that these 705
entities are generally relying on the 42 unregistered In-Scope Entities
for access to the NFC swap market. It is unclear if these 705 entities
would be able to establish trading lines with registered SDs if some of
the 42 entities reduced or eliminated their NFC swap dealing
activities.
---------------------------------------------------------------------------
\102\ The 705 entities comprise 12.6 percent of the 5,578
counterparties who entered into NFC swaps.
\103\ The 48,413 NFC swaps comprise 7.6 percent of the 633,943
NFC swaps entered into during the review period.
---------------------------------------------------------------------------
If the de minimis threshold is decreased, the Commission is of the
view that this would negatively affect swap market access and liquidity
for commercial end-user counterparties of currently unregistered
entities that are active in NFC swaps. Specifically, these entities may
reduce or stop dealing activity if a lower threshold would subject them
to SD registration.\104\ The swap dealing activity of unregistered
entities dealing in NFC swaps is likely a smaller part of those
entities' overall business activities, and may not support the costs
associated with SD registration and compliance.\105\
---------------------------------------------------------------------------
\104\ Comments from market participants have specifically
indicated that some entities would reduce or stop dealing activity
if the de minimis threshold is reduced. See generally Letters from
BP, CMC, EDF, IIB, and NGSA; Final Staff Report, supra note 24, at
11-12, 16-17 (citing comment letters submitted in response to
Preliminary Staff Report, supra note 21).
\105\ See generally Letters from BP, CDE, CMC, EDF, EEI/EPSA,
FSR, IIB, IECA, ISDA, NGSA, and SIFMA, supra note 58; Final Staff
Report, supra note 24, at 11-12, 16-17 (citing comment letters
submitted in response to Preliminary Staff Report, supra note 21).
---------------------------------------------------------------------------
Generally, a reduction in the threshold could negatively affect the
ability of these entities to provide ancillary services involving swap
transactions, a stated benefit for having a de minimis exception.
Further, if the threshold is maintained at $8 billion, it is possible
that unregistered entities that currently limit trading activity to
below $3 billion may increase dealing volumes to levels closer to $8
billion, potentially increasing liquidity in the NFC swap market. As
the Commission has stated:
The futures and swaps markets are essential to our economy and
the way that businesses and investors manage risk. Farmers,
ranchers, producers, commercial companies, municipalities, pension
funds, and others use these markets to lock in a price or a rate.
This helps them focus on what they do best: innovating, producing
goods and services for the economy, and creating jobs. The CFTC
works to ensure these hedgers and other market participants can use
markets with confidence.\106\
---------------------------------------------------------------------------
\106\ CFTC Responsibilities, available at https://www.cftc.gov/About/MissionResponsibilities/index.htm.
Allowing small to mid-sized non-financial entities with a presence
in the physical commodity markets to provide ancillary services
involving swap transactions helps fulfill this goal.
Second, even if the threshold were decreased, it is unclear if or
to what extent the 2017 Counterparty Coverage statistic of 86 percent
would increase for NFC swaps since several of those entities likely
already have less than $3 billion in AGNA of swap dealing activity.
Additionally, as discussed above, many of these entities would likely
reduce activity to remain below the SD de minimis threshold, further
reducing any increase in Estimated Counterparty Coverage from a lower
threshold.
Third, many of the entities engaged in limited swap dealing
activity for NFC swaps appear to have a unique role in the market in
that their primary business is generally non-financial in nature and
the swap dealing activity is ancillary to their primary role in the
market. Further, these firms generally pose less systemic risk than
financial market SDs.\107\ For these reasons, the Commission believes
that there are strong public policy arguments not to require that all
of these entities register with the Commission.
---------------------------------------------------------------------------
\107\ See e.g., Letter from CDE, supra note 58; Final Staff
Report, supra note 24, at 12 (citing comment letters submitted in
response to Preliminary Staff Report, supra note 21).
---------------------------------------------------------------------------
Fourth, although it has not conducted an analysis of AGNA activity
in NFC swaps,\108\ the Commission is of the preliminary view that
increasing the de minimis threshold could potentially lead to fewer
entities being required to register as SDs due to their NFC swap market
activity. This could reduce the number of entities transacting with
registered SDs, and therefore also reduce the benefits of those SD
regulations concerned with counterparty protections.
---------------------------------------------------------------------------
\108\ As discussed above in section II.A.1.i, there were
challenges in calculating notional amounts for NFC swaps.
---------------------------------------------------------------------------
Preliminarily, the Commission does not believe that decreasing or
increasing the de minimis threshold would have much benefit for the NFC
swap market. Rather, there is a concern that a change in the threshold
would cause harm to that market.
(v) Setting an $8 Billion Threshold Avoids Potential Administrative
Burdens
The Commission notes that setting the de minimis threshold at $8
billion would allow persons to continue to use existing calculation
procedures and business processes that are geared towards the $8
billion threshold. Modifying the threshold could require entities to
revise monitoring processes, modify internal systems, and amend
policies and procedures tied to an $8 billion threshold, leading to
increased costs. Further, as discussed, the Commission expects that
maintaining an $8 billion threshold would foster the efficient
application of the SD Definition by providing continuity and addressing
the uncertainty associated with the end of the phase-in period.
Based on the available data and policy considerations discussed
above, the Commission proposes to maintain the de minimis threshold for
AGNA of swap dealing at $8 billion.
[[Page 27458]]
3. Request for Comments
The Commission requests comments on the following questions. To the
extent possible, please quantify the impact of issues discussed in
comments, including costs and benefits, as applicable.
(1) Based on the data and related policy considerations, is an $8
billion de minimis threshold appropriate? Why or why not?
(2) Should the de minimis threshold be reduced to $3 billion? Why
or why not?
(3) Should the de minimis threshold be increased? If so, to what
threshold? Why or why not?
(4) Are the assumptions discussed above regarding a $3 billion de
minimis threshold, an $8 billion de minimis threshold, or a higher de
minimis threshold accurate, including, but not limited to, compliance
costs and market liquidity assumptions?
(5) As an alternative or in addition to maintaining an $8 billion
threshold, should the Commission consider a tiered SD registration
structure that would establish various exemptions from SD compliance
requirements for SDs whose AGNA of swap dealing activity is between the
$3 billion and $8 billion?
(6) What is the impact of the de minimis threshold level on market
liquidity? Are there entities that would increase their swap dealing
activities if the Commission raised the de minimis exception, or
decrease their swap dealing activities if the Commission lowered the
threshold? How might these changes affect the swap market?
(7) Are there additional policy or statutory considerations
underlying SD regulation or the de minimis exception that the
Commission should consider?
(8) Have there been any structural changes to the swap market such
that the policy considerations have evolved since the adoption of the
SD Definition?
(9) Are entities curtailing their swap dealing activity to avoid SD
registration at $8 billion or $3 billion thresholds, and if so, what
impact is that having on the swap market? Are certain asset classes or
product types more affected by such curtailed dealing activity than
others?
(10) Does registration as an SD allow persons to substantially
increase their swap dealing activity, or is increased swap dealing
activity constrained by capital requirements at the firm level and
other considerations?
(11) Should an entity's AGNA of swap dealing activity continue to
be tested against the de minimis threshold for any rolling 12-month
period, only for calendar year periods, or for some other regular 12-
month period such as quarterly or semi-annual testing?
(12) What are the benefits and detriments to using AGNA of swap
dealing activity as the relevant criterion for SD registration, as
compared to other options, including, but not limited to, entity-netted
notional amounts or credit exposures?
B. Swaps Entered Into by Insured Depository Institutions in Connection
With Loans to Customers
1. Background
The CEA provides that in no event shall an IDI be considered to be
an SD to the extent it offers to enter into a swap with a customer in
connection with originating a loan with that customer.\109\ With
respect to the statutory exclusion, the Commissions jointly adopted
paragraph (5) of the SD Definition, which allows an IDI to exclude--
when determining whether it is an SD--certain swaps it enters into with
a customer in connection with originating a loan to that customer (the
``IDI Swap Dealing Exclusion'').\110\
---------------------------------------------------------------------------
\109\ 7 U.S.C. 1a(49)(A).
\110\ 17 CFR 1.3, Swap dealer, paragraph (5).
---------------------------------------------------------------------------
For a swap to be considered to have ``been entered into . . . in
connection with originating a loan,'' the IDI Swap Dealing Exclusion
requires that: (1) The IDI enter into the swap no earlier than 90 days
before and no later than 180 days after execution of the loan agreement
(or transfer of principal); \111\ (2) the rate, asset, liability, or
other notional item underlying the swap be tied to the financial terms
of the loan or be required as a condition of the loan to hedge risks
arising from potential changes in the price of a commodity; \112\ (3)
the duration of the swap not extend beyond termination of the loan;
\113\ (4) the IDI be the source of at least 10 percent of the principal
amount of the loan, or the source of a principal amount greater than
the notional amount of swaps entered into by the IDI with the customer
in connection with the loan; \114\ (5) the AGNA of swaps entered into
in connection with the loan not exceed the principal amount
outstanding; \115\ (6) the swap be reported as required by other CEA
provisions if it is not accepted for clearing; \116\ (7) the
transaction not be a sham, whether or not the transaction is intended
to qualify for the IDI Swap Dealing Exclusion; \117\ and (8) the loan
not be a synthetic loan, including, without limitation, a loan credit
default swap or a loan total return swap.\118\ A swap that meets the
above requirements would not be considered when assessing whether a
person is an SD.
---------------------------------------------------------------------------
\111\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(A).
\112\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(B).
\113\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(C).
\114\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(D).
\115\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(E).
\116\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(F).
\117\ 17 CFR 1.3, Swap dealer, paragraph (5)(iii)(A).
\118\ 17 CFR 1.3, Swap dealer, paragraph (5)(iii)(B).
---------------------------------------------------------------------------
Based on information gained from market participants,\119\ as well
as analysis of data submitted to SDRs, the Commission believes that the
IDI Swap Dealing Exclusion: (1) Has unnecessarily restrictive
conditions; (2) is not clear in certain instances; and (3) limits the
ability of IDIs to provide swaps that would allow their customers to
properly hedge risks associated with bank loans. In general, these
issues make it more difficult for IDIs that are not registered as SDs
to provide swaps to loan customers because of the concern that certain
swaps would not qualify for the IDI Swap Dealing Exclusion. Certain
IDIs are restricting loan-related swaps because of the potential that
such swaps would have to be counted towards an IDI's de minimis
threshold, leading the IDI to register as an SD and incur registration-
related costs. The restrictions on loan-related swaps by IDIs may
result in reduced availability of swaps for the loan customers of these
IDIs, potentially hampering the ability of end-user borrowers to enter
into hedges in connection with their loans.
---------------------------------------------------------------------------
\119\ See, e.g., Letters from Chatham, FSR, and Northern Trust,
supra note 58; Final Staff Report, supra note 24, at 17 (citing
comment letters submitted in response to Preliminary Staff Report,
supra note 21).
---------------------------------------------------------------------------
The Commission is not at this time proposing to amend the IDI Swap
Dealing Exclusion in paragraph (5) of the SD Definition. As discussed
above, pursuant to requirements of section 712(d)(1) of the Dodd-Frank
Act, the CFTC and SEC jointly adopted the IDI Swap Dealing Exclusion in
paragraph (5) as part of the definition of what constitutes swap
dealing activity. Rather than proposing to revise the scope of activity
that constitutes swap dealing, the Commission is proposing to amend
paragraph (4) of the SD Definition, which addresses the de minimis
exception.\120\ In particular, the
[[Page 27459]]
Commission is proposing to add specific factors that an IDI can
consider when assessing whether swaps entered into with customers in
connection with loans to those customers must be counted towards the
IDI's de minimis calculation. The IDI could assess these factors and
exclude qualifying swaps from the de minimis calculation regardless of
whether the swaps would qualify for the IDI Swap Dealing Exclusion.
---------------------------------------------------------------------------
\120\ A joint rulemaking is not required with respect to changes
to the de minimis exception-related factors. 77 FR at 30634 n.464
(``We do not interpret the joint rulemaking provisions of section
712(d) of the Dodd-Frank Act to require joint rulemaking here,
because such an interpretation would read the term ``Commission''
out of CEA section 1a(49)(D) (and Exchange Act section 3(a)(71)(D)),
which themselves were added by the Dodd-Frank Act.''). As noted
above, pursuant to section 712(a)(1) of the Dodd-Frank Act, the
Commission is consulting with the SEC and prudential regulators
regarding the changes to the de minimis exception discussed in this
Proposal.
---------------------------------------------------------------------------
Specifically, the Commission is proposing new paragraph (4)(i)(C)
of the SD Definition, which would except from the calculation of the de
minimis threshold certain loan-related swaps entered into by IDIs (the
``IDI De Minimis Provision''). The IDI De Minimis Provision would have
requirements that are similar to the IDI Swap Dealing Exclusion, but
would encompass a broader scope of loan-related swaps. The proposed IDI
De Minimis Provision includes: (1) A lengthier timing requirement for
when the swap must be entered into; (2) an expansion of the types of
swaps that are eligible; (3) a reduced syndication percentage
requirement; (4) an elimination of the notional amount cap; and (5) a
refined explanation of the types of loans that would qualify.
The Commission notes that any swap that meets the requirements of
the IDI Swap Dealing Exclusion in paragraph (5) of the SD Definition
would also meet the requirements of the proposed IDI De Minimis
Provision. However, proposed paragraph (4)(i)(C) provides additional
flexibility as to what swaps need to be counted towards an IDI's de
minimis calculation. The Commission believes that the broader scope of
the proposed IDI De Minimis Provision, described in further detail
below, may advance the policy objectives of the de minimis exception by
allowing some IDIs to provide swaps to customers in connection with
loans without having to register as an SD. In other words, the proposed
provision would facilitate swap dealing in connection with other client
services and may encourage more IDIs to participate in the swap
market--two policy objectives of the de minimis exception. Greater
availability of loan-related swaps may also improve the ability of
customers to hedge their loan-related exposure. The Commission also
believes that the more flexible provisions of the proposed IDI De
Minimis Provision may allow for more focused, efficient application of
the SD Definition to the activities of IDIs that offer swaps in
connection with loans.
Commission staff reviewed data to assess the potential impact of
the IDI De Minimis Provision. Table 14 below provides information
regarding the AGNA of swaps activity entered into by entities that were
identified as IDIs \121\ with at least 10 counterparties in IRS, CDS,
FX swaps, and equity swaps.\122\ The table summarizes the AGNA of swaps
activity of smaller IDIs within various AGNA ranges from $1 billion to
$50 billion. Note that persons that are affiliated with IDIs were not
included in this analysis (e.g., broker-dealer subsidiaries, other non-
IDI affiliates).
---------------------------------------------------------------------------
\121\ Based on information on the Federal Deposit Insurance
Corporation website, available at https://www5.fdic.gov/idasp/advSearch_warp_download_all.asp.
\122\ As discussed above in section II.A.1.i, there were
challenges in calculating notional amounts for NFC swaps. Therefore,
the analysis in this section focuses on the other asset classes.
Table 14--IDI Activity (Ranges Between $1 Bn and $50 Bn) IRS, CDS, FX Swaps, and Equity Swaps
[Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
Number of IDIs AGNA of swaps activity \123\
-------------------------------------------------------------------------------
Total with no
Range of AGNA of swaps activity Total with at Total with no registered SDs
($Bn) Registered as Not registered least one registered SDs (percent of
SDs as SDs registered SD ($Bn) overall
($Bn) market)
----------------------------------------------------------------------------------------------------------------
1-3............................. 0 13 13.5 8.9 0.004
3-8............................. 0 10 37.5 16.5 0.007
8-20............................ 0 4 42.6 6.5 0.003
20-50........................... 2 3 160.7 14.2 0.006
----------------------------------------------------------------------------------------------------------------
As seen in Table 14, there are a number of IDIs that have 10 or
more counterparties and are active in the swap market at lower
AGNAs.\124\ For example, there are 13 IDIs that are not currently
registered as SDs and have between $1 billion and $3 billion in AGNA of
swaps activity. Based on market participant comments \125\ and review
of the trading data, the Commission believes that many of the
unregistered entities engaged in $1 billion to $50 billion in AGNA of
swaps activity are entering into swaps with customers in connection
with loans to those customers. Additionally, many of these IDIs could
be restricting their swaps activity because the IDI Swap Dealing
Exclusion limits, or is ambiguous regarding, which swaps are considered
to be ``in connection with'' originating a loan (and therefore are
excluded from the SD analysis).
---------------------------------------------------------------------------
\123\ The AGNA totals are not mutually exclusive across rows,
and therefore cannot be added together without double counting. For
example, some IDIs in the $1 billion to $3 billion range transact
with IDIs in the $3 billion to $8 billion range. Transactions that
involve entities from multiple rows are reported in both rows.
\124\ Although staff did not manually identify the category of
every counterparty with less than $1 billion of activity, there are
at least 200 entities generally identified as banks, each with AGNA
of swaps activity below $1 billion and with at least 10
counterparties.
\125\ See generally supra note 119.
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As Table 14 indicates, the AGNA of swaps activity that these
unregistered IDIs enter into with other non-registered entities is low
relative to the total swap market analyzed. For example, there are 10
IDIs that have between $3 billion and $8 billion each in AGNA of swaps
activity--none of which are registered SDs. In aggregate, these IDIs
entered into approximately $54.0 billion in AGNA of swaps activity.
However, only $16.5 billion of that activity was between two entities
not registered as SDs, representing only 0.007 percent of the total
AGNA of swaps activity during the review period. Depending on the range
of AGNA of swaps activity examined, the level of activity occurring
between two entities not registered as SDs (at least one of which is an
IDI) varies between only approximately 0.003 percent and 0.007 percent
of the total AGNA of swaps activity.
Given those low percentages, the Commission is of the view that the
policy benefits of SD regulation likely would not be significantly
diminished if the proposed IDI De Minimis Provision
[[Page 27460]]
is adopted and some of the unregistered IDIs marginally expand the
number and AGNA of swaps they enter into with customers in connection
with loans to those customers. This low percentage of swap activity
between two unregistered entities may also indicate that the limits of
the IDI Swap Dealing Exclusion are restricting certain IDIs from taking
full advantage of the exclusion. Further, though these entities are
active in the swap market, the Commission is of the view that their
activity poses less systemic risk as compared to larger IDIs because of
their limited AGNA of swaps activity as compared to the overall size of
the market. Generally, the reduced potential for risk, combined with
the potential that end-user loan customers may benefit from increased
access to loan-related swaps, provides support for the proposed IDI De
Minimis Provision.
The proposed rule text described below may provide greater ability
for IDIs to not count loan-related swaps towards their de minimis
threshold calculations, potentially increasing the availability of
loan-related swaps for their borrowers and advancing the stated policy
goals of the de minimis exception.
2. Proposal
(i) Timing Requirement
Pursuant to the IDI Swap Dealing Exclusion in paragraph (5) of the
SD Definition, if an IDI enters into a swap in connection with
originating a loan to a customer, that swap must be entered into no
more than 90 days before or 180 days after the date of execution of the
loan agreement (or date of transfer of principal to the customer) for
the IDI Swap Dealing Exclusion to apply.\126\
---------------------------------------------------------------------------
\126\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(A).
---------------------------------------------------------------------------
The Commission is proposing new paragraph (4)(i)(C)(1) of the SD
Definition, which, for purposes of an IDI's de minimis calculation,
does not include the 180-day restriction. Therefore, an IDI would not
have to count towards its de minimis calculation any swap entered into
in connection with a loan after the date of execution of the loan
agreement (or date of transfer of principal). Additionally, the
Commission is proposing to generally maintain the restriction for swaps
entered into more than 90 days before loan funding, except where an
executed commitment or forward agreement for the applicable loan
exists, in which case the 90-day restriction would not apply.
The Commission believes that the timing restrictions in the IDI
Swap Dealing Exclusion limit the ability of IDIs to effectively provide
hedging solutions to end-user borrowers. Depending on market conditions
or business needs, it is not uncommon for a borrower to wait for a
period of time greater than 180 days after a loan is originated to
enter into a hedging transaction. For example, if an IDI provides a
loan with a 10-year term, and the borrower chooses to wait until 181
days after the loan to hedge interest rate risk underlying that loan,
the swap would not qualify for the IDI Swap Dealing Exclusion. However,
under the proposed IDI De Minimis Provision, if the borrower entered
into the hedge 181 days after execution, the swap would not have to be
counted towards an IDI's de minimis calculation. Given that many of the
entities that the Commission expects to utilize the IDI De Minimis
Provision are small and mid-sized banks, not including this timing
restriction could lead to increased swap availability for the borrowing
customers that rely on such IDIs for access to swaps (and thereby
advance a policy objective of the de minimis exception).
For a swap to be considered ``in connection with'' a loan for the
purposes of the IDI De Minimis Provision, the Commission believes there
should be a reasonable expectation that the loan will be entered into
with a customer. Therefore, the proposed 90-day restriction is suitable
because it requires that the swap be entered into within an appropriate
period of time prior to the execution of the loan. However, where an
executed commitment or forward agreement to loan money exists between
the IDI and the borrower prior to the 90-day limit, the Commission
believes a reasonable expectation for the loan is demonstrated.
Accordingly, for purposes of the IDI De Minimis Provision, the
Commission is proposing that an IDI may enter into a swap with a
customer, in connection with a loan to that customer, more than 90 days
prior to the execution of the loan where there is an executed
commitment or forward agreement to loan money.
(ii) Relationship of Swap to Loan
The IDI Swap Dealing Exclusion requires that the rate, asset,
liability, or other notional item underlying such swap is, or is
directly related to, a financial term of such loan or that such swap is
required, as a condition of the loan under the insured depository
institution's loan underwriting criteria, to be in place in order to
hedge price risks incidental to the borrower's business and arising
from potential changes in the price of a commodity (other than an
excluded commodity).\127\ As explained in the SD Definition Adopting
Release, the first category is for ``adjusting the borrower's exposure
to certain risks directly related to the loan itself, such as risks
arising from changes in interest rates or currency exchange rates,''
and the second category is to ``mitigate risks faced by both the
borrower and the lender, by reducing risks that the loan will not be
repaid.'' \128\ Therefore, both categories of swaps are directly
related to repayment of the loan.
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\127\ See 17 CFR 1.3, Swap dealer, paragraph (5)(i)(B); 77 FR at
30622.
\128\ 77 FR at 30622.
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The Commission is proposing new paragraph (4)(i)(C)(2), which
states that for purposes of the IDI De Minimis Provision, a swap is
``in connection with'' a loan if the rate, asset, liability or other
term underlying such swap is, or is related to, a financial term of
such loan, or if such swap is required as a condition of the loan,
either under the insured depository institution's loan underwriting
criteria or as is commercially appropriate, in order to hedge risks
incidental to the borrower's business (other than for risks associated
with an excluded commodity) that may affect the borrower's ability to
repay the loan.
The Commission is of the view that the proposed language would
further the policy objectives of the de minimis exception by providing
flexibility to reflect the actual market practices of end-users who
hedge their risk. The first provision refers to a ``term'' rather than
a ``notional item,'' and does not include the word ``directly,'' for
added flexibility. Because the second provision in the proposed
language allows for swaps that are not explicitly required as a
condition of the IDI's underwriting criteria, it provides flexibility
for IDIs to enter into certain swaps with borrowers to hedge risks
(e.g., commodity price risks) that may not have been evident at the
time the loan was entered into or that are determined based on the
unique characteristics of the borrower rather than the standard bank
underwriting criteria. For example, physical commodity-related hedging
decisions may not be made at the time the loan is entered into, but
rather at a future point when inventory is purchased or produced.
Additionally, in these cases, the underwriting criteria may not
explicitly require that the borrower enter into swaps to hedge
commodity price risk. This additional flexibility allows IDIs to enter
into swaps, as commercially appropriate, with borrowers to hedge
risks--in this case,
[[Page 27461]]
commodity price risk--that may affect the borrower's ability to repay
the loan without the limitation that such swaps must be contemplated in
the original underwriting criteria in order not to be counted towards
an IDI's de minimis calculation. The Commission believes that this
proposal benefits both IDIs and customers and serves the purposes of
the de minimis exception by allowing for greater use of swaps in
effective and dynamic hedging strategies. The Commission also believes
that this aspect of the proposed new provision would facilitate
efficient application of the SD Definition by reducing the concern that
ancillary dealing activity may subject the IDI to SD registration-
related requirements.
(iii) Syndicated Loan Requirement
For a loan-related swap with a notional amount equal to the full
principal amount of the loan to qualify for the IDI Swap Dealing
Exclusion, an IDI must be responsible for at least 10 percent of a
syndicated loan.\129\ In the proposed IDI De Minimis Provision, new
paragraph (4)(i)(C)(4)(i) requires an IDI to be, under the terms of the
agreements related to the loan, the source of at least five percent of
the maximum principal amount under the loan for a related swap not to
be counted towards its de minimis calculation.\130\ In addition to this
different syndication requirement, proposed paragraph (4)(i)(C)(4)(i)
also includes a single provision that consolidates the separate
provisions in paragraphs (5)(i)(D)(1) and (5)(i)(D)(2) of the IDI Swap
Dealing Exclusion.
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\129\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(D).
\130\ Moreover, as discussed below in section II.B.2.iv, if the
IDI is responsible for at least five percent of a syndicated loan,
the Commission is proposing to not include the restriction that the
AGNA of swaps entered into in connection with the loan not exceed
the principal amount outstanding.
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For loans that are widely syndicated, lenders may not have control
over their final share of the syndication. It is not uncommon for
borrowers to enter into negotiations regarding related swaps before the
underlying loan has been executed. The need to have at least a 10
percent share of the syndicate can make it more difficult for IDIs to
determine, in advance, whether a swap they have negotiated with a
borrower will qualify for the IDI Swap Dealing Exclusion. The lower
syndication threshold of five percent in this Proposal provides
additional flexibility for IDIs to enter into a greater range of loan-
related swaps without having those swaps count towards their de minimis
calculations.
The Commission is also proposing to add paragraph (4)(i)(C)(4)(ii),
which states that if an IDI is a source of less than a five percent of
the maximum principal amount of the loan, the notional amount of all
swaps the IDI enters into in connection with the financial terms of the
loan cannot exceed the principal amount of the IDI's loan in order to
qualify for the IDI De Minimis Provision. This provision is similar to
existing paragraph (5)(i)(D)(3) of the IDI Swap Dealing Exclusion,
except that it uses a five percent participation threshold.
(iv) Total Notional Amount of Swaps
The IDI Swap Dealing Exclusion requires that the AGNA of swaps
entered into in connection with the loan not exceed the principal
amount outstanding.\131\ The Commission is proposing to not include
this restriction in the IDI De Minimis Provision in the case of IDIs
responsible for at least five percent of the loan principal.\132\ It is
not uncommon for an IDI-related loan to have related swaps that hedge
multiple categories of exposure. For example, it is possible for a
borrower to hedge some combination of interest rate, foreign exchange,
and/or commodity risk in connection with a loan. The Commission notes
that the AGNA of such swaps entered into in connection with the loan
could exceed the principal amount outstanding; therefore, this
restriction might unduly restrict the ability of certain IDIs to
provide loan-related swaps to their borrowing customers to more
effectively allow the customers to hedge loan-related risks. Not
including this restriction in the IDI De Minimis Provision would
thereby advance the policy objectives of the de minimis exception noted
above.
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\131\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(E).
\132\ As discussed above in section II.B.2.iii in connection
with proposed paragraph (4)(i)(C)(4)(ii), if an IDI is a source of
less than a five percent of the maximum principal amount of the
loan, the notional amount of all swaps the IDI enters into in
connection with the financial terms of the loan cannot exceed the
principal amount of the IDI's loan.
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(v) Types of Loans
The requirements of the IDI Swap Dealing Exclusion do not account
for types of credit financings that are similar to loans (e.g., credit
enhanced bonds, letters of credit, leases, revolving credit
facilities). When the Commission adopted the IDI Swap Dealing
Exclusion, it generally referenced existing common law definitions for
the term ``loan,'' \133\ stating that ``[r]ather than examine at this
time the many particularized examples of financing transactions cited
by some commenters, the term `loan' for purposes of this exclusion
should be interpreted in accordance with this settled legal meaning.''
\134\ Additionally, to prevent evasion, the Commission adopted
restrictions stating that the term ``loan'' shall not include any
synthetic loan, including, without limitation, a loan credit default
swap or loan total return swap, and stating that the term ``loan'' does
not include sham loans, whether or not intended to qualify for the
exclusion from the definition of the term swap dealer in this
rule.\135\
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\133\ 77 FR at 30622 n.326 (``To constitute a loan there must be
(i) a contract, whereby (ii) one party transfers a defined quantity
of money, goods, or services, to another, and (iii) the other party
agrees to pay for the sum or items transferred at a later date.''
(internal citations omitted)).
\134\ Id. at 30622.
\135\ 17 CFR 1.3, Swap dealer, paragraph (5)(iii). See 77 FR at
30622, 30708.
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Similarly, to prevent evasion, the Commission is proposing new
paragraph (4)(i)(C)(6), which states that the IDI De Minimis Provision
shall not apply to any transaction that is a sham and shall not apply
to any synthetic loan. The Commission believes it is appropriate to
continue to require that swaps associated with synthetic loans be
counted towards the de minimis exception. However, for added
simplicity, the Commission has not included the provision specifically
listing ``a loan credit default swap or loan total return swap.'' The
Commission notes that certain loan credit default swaps and loan total
return swaps may be valid loan structures. Nonetheless, to the extent a
credit default swap, loan total return swap, or any other financial
instrument would be considered a synthetic lending arrangement, swaps
entered into in connection with such a synthetic lending arrangement
would not qualify for the IDI De Minimis Provision.
The Commission is of the view that swaps entered into in connection
with non-synthetic lending arrangements that are commonly known in the
market as ``loans'' would generally not need to be counted towards an
IDI's de minimis calculation if the other requirements of the IDI De
Minimis Provision are also met. Although the Commission is not
proposing to assess individual categories of transactions to determine
whether they qualify as loans, it recognizes the common law definition
cited in the SD Definition Adopting Release. Additionally, the
Commission's regulations in part 75 (regarding ``Proprietary Trading
and Certain Interests in and Relationships with Covered Funds'') define
a loan as any loan, lease, extension of credit, or
[[Page 27462]]
secured or unsecured receivable that is not a security or
derivative.\136\ The Commission is of the view that this definition
would also apply for purposes of the IDI De Minimis Provision.
Generally, allowing swaps entered into in connection with other forms
of financing commonly known as loans not to be counted towards the de
minimis threshold calculation better reflects the breadth of lending
products and credit financings that borrowers often utilize and thereby
advances the policy objectives of the de minimis exception noted above.
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\136\ 17 CFR 75.2(s).
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(vi) Additional Requirements
The remaining requirements for the IDI De Minimis Provision are
substantively identical to the IDI Swap Dealing Exclusion provisions in
paragraph (5) of the SD Definition.
Proposed paragraph (4)(i)(C)(3) is identical to paragraph
(5)(i)(C), stating that the termination date of the swap cannot extend
beyond termination of the loan.
Proposed paragraph (4)(i)(C)(5) states that a swap is considered to
have been entered into in connection with originating a loan to a
customer if the IDI: (1) Directly transfers the loan amount; (2) is
part of a syndicate of lenders that is the source of the loan amount;
(3) purchases or receives a participation in the loan; or (4) under the
terms of the agreements related to the loan, is, or is intended to be,
the source of funds for the loan. This provision is similar to
paragraph (5)(ii) of the IDI Swap Dealing Exclusion, except that it
also encompasses a loan-related swap if the IDI ``is intended to be''
the source of the funds. This difference is consistent with the timing
requirement provision, discussed above in section II.B.2.i, which does
not include the 90 days before execution of the loan restriction in
situations where an executed commitment or forward agreement for the
applicable loan exists.
3. Request for Comments
The Commission requests comments on the following questions. To the
extent possible, please quantify the impact of issues discussed in the
comments, including costs and benefits, as applicable.
(1) Based on the data and related policy considerations, is the
proposed IDI De Minimis Provision appropriate? Why or why not?
(2) How will the proposed IDI De Minimis Provision impact IDIs who
enter into swaps with customers in connection with loans? Will IDIs
enter into more swaps with loan customers as result of the proposed IDI
De Minimis Provision?
(3) If the underlying loan is called, put, accelerated, or if it
goes into default before the scheduled termination date, should the
related swap be required to be terminated to remain eligible for the
IDI De Minimis Provision?
(4) Are there circumstances that can be anticipated at the time of
loan origination that would support permitting the termination date of
the swap to extend beyond termination of the loan?
(5) Does the provision in proposed paragraph (4)(i)(C)(1)
referencing ``executed commitment'' or ``forward agreement''
sufficiently reflect market practice regarding how swaps may be entered
into in connection with a loan in advance of the loan being executed?
(6) Is it common for an IDI to have as low as five percent
participation in a syndicated loan and also provide swaps in connection
with the loan?
(7) Is it common for the AGNA of loan-related swaps to exceed the
outstanding principal amount of the loan? In what circumstances?
(8) Should the Commission define ``synthetic loan''? How should
that term be defined?
(9) Are there circumstances in which a loan credit default swap or
loan total return swap would not be considered a synthetic lending
arrangement?
(10) If an IDI would have to register as an SD but for the IDI De
Minimis Provision, should that IDI be required to provide notice to the
Commission, Commission staff, or the National Futures Association?
Alternatively, to utilize the proposed IDI De Minimis Provision, should
IDIs be required to directly reference the related loan in the written
swap confirmation?
C. Swaps Entered Into To Hedge Financial or Physical Positions
1. Background and Proposal
In adopting the SD Definition, the Commission provided that,
subject to certain requirements, swaps entered into by a person for
purposes of hedging physical positions are not considered in
determining whether the person is an SD (the ``Physical Hedging
Exclusion'').\137\ However, the regulatory text does not include a
specific exclusion for swaps entered into for purposes of hedging
financial positions. Rather, the Commission stated that swaps entered
into for hedging purposes that did not fall within the SD Definition,
including those that qualify for an exclusion in the SD Definition,
would not count towards the de minimis threshold.\138\
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\137\ 17 CFR 1.3, Swap dealer, paragraph ] (6)(iii).
\138\ 77 FR at 30631 n.433 (``For purposes of the de minimis
exception to the [SD Definition] . . . the relevant question in
determining whether swaps count as dealing activity against the de
minimis thresholds is whether the swaps fall within the [SD
Definition] . . . . If hedging or proprietary trading activities did
not fall within the definition, including because of the application
of [paragraph (6) of the SD Definition in Sec. 1.3], they would not
count against the de minimis thresholds.'').
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Based on feedback from swap market participants during
implementation of the SD regulations and in connection with Project
KISS,\139\ the Commission believes that although there is a specific
exclusion for swaps entered into in connection with hedging physical
positions, the absence of an explicit exclusion in the regulations for
swaps entered into for purposes of hedging financial positions has
caused uncertainty in the marketplace regarding whether swaps that
hedge, for example, interest rate risk, credit risk, or foreign
exchange risk, would also need to be counted towards a person's de
minimis threshold. This uncertainty could cause inefficient application
of the SD Definition by leading some persons to: (1) Count swaps that
they enter into to hedge financial positions as swap dealing activity
for purposes of assessing whether the persons would need to register as
SDs; or (2) not enter into swaps to hedge financial positions for fear
of exceeding the de minimis threshold.
---------------------------------------------------------------------------
\139\ See Letters from IIB, Western Union, and WU/GPS/AFEX,
supra note 58.
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The Commission is of the view that an explicit statement of the
factors that indicate when a swap entered into to hedge financial or
physical positions (``hedging swap'') is excluded from counting towards
the de minimis threshold would help swap market participants know with
greater certainty what swaps have to be counted towards the de minimis
threshold, and thereby help market participants apply the SD Definition
more efficiently. The Commission is proposing to add a hedging
exception in new paragraph (4)(i)(D) of the SD Definition, permitting
entities to not count towards their de minimis calculations hedging
swaps, when such swaps meet certain conditions (the ``Hedging De
Minimis Provision''). Similar to the proposed IDI De Minimis Provision,
the Hedging De Minimis Provision does not revise the scope of activity
that constitutes swap dealing. Rather, the new provision would set out
explicit factors an entity can consider for purposes of assessing
whether hedging swaps must be counted towards the de minimis
[[Page 27463]]
calculation.\140\ The Commission notes that any swap that meets the
requirements of the Physical Hedging Exclusion in paragraph (6)(iii) of
the SD Definition would also meet the requirements of the proposed
Hedging De Minimis Provision, but meeting the requirements of the
Physical Hedging Exclusion is not a prerequisite for application of the
Hedging De Minimis Provision. In addition, as the Commission noted in
the SD Definition Adopting Release, if a swap does not satisfy the
criteria of the Hedging De Minimis Provision, this does not mean the
swap is necessarily swap dealing activity.\141\ Rather, such hedging
activity should then be considered in light of all the other relevant
facts and circumstances to determine whether the person is engaging in
activity (e.g., market making, accommodating demand) that brings the
person within the SD Definition.
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\140\ See section II.B.1. As discussed, a joint rulemaking with
the SEC is not required under the statute with respect to the de
minimis exception-related factors. 77 FR at 30634 n.464.
\141\ 77 FR at 30613.
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Proposed paragraph (4)(i)(D) states that to qualify for the Hedging
De Minimis Provision, a swap must be entered into by a person for the
primary purpose of reducing or otherwise mitigating one or more of the
specific risks to which it is subject, including, but not limited to,
market risk, commodity price risk, rate risk, basis risk, credit risk,
volatility risk, correlation risk, foreign exchange risk, or similar
risks arising in connection with existing or anticipated identifiable
assets, liabilities, positions, contracts or other holdings of the
person or any affiliate. Additionally, the person entering into the
hedging swap must not: (1) Be the price maker of the hedging swap; (2)
receive or collect a bid/ask spread, fee, or commission for entering
into the hedging swap; and (3) receive other compensation separate from
the contractual terms of the hedging swap in exchange for entering into
the hedging swap.
The requirements that the person not be a price maker of the swap
or receive compensation for the swap should ensure that the Hedging De
Minimis Provision does not improperly exclude swap dealing activity. As
discussed in the SD Definition Adopting Release, in connection with
swaps that hedge physical positions:
When a person enters into a swap for the purpose of hedging the
person's own risks in specified circumstances, an element of the
[SD] definition--the accommodation of the counterparty's needs or
demands--is absent. Therefore, consistent with our overall
interpretive approach to the definition, the activity of entering
into such swaps (in the particular circumstances defined in the
rule) does not constitute swap dealing. Providing an exception for
such swaps from the [SD] analysis reduces costs that persons using
such swaps would incur in determining if they are [SDs].\142\
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\142\ 77 FR at 30710.
The Commission believes that this rationale applies broadly to
swaps that hedge both financial and physical positions. When the person
is not the price maker of the hedging swap, or otherwise receiving
compensation, the person is not accommodating the needs of a
counterparty, such swap is generally not swap dealing activity, and
therefore should not be counted for purposes of the de minimis
exception. Adding this specific exception as a factor to be considered
for purposes of the de minimis calculation provides additional clarity
which advances the policy objectives of the de minimis threshold. In
particular, the Commission believes that the scope of the Hedging De
Minimis Provision would encourage greater use of swaps (i.e., greater
participation in the swap market) to hedge risks. Additionally, the
proposed rule accounts for circumstances where entities may hedge risks
using affiliates. The flexible terms of the Hedging De Minimis
Provision should facilitate an efficient application of the SD
Definition that is more focused on activity that is covered by the
statutory and regulatory definition of swap dealing. As noted below,
the Hedging De Minimis Provision contains elements to ensure that it
does not improperly exclude swap dealing activity that should be
counted against the de minimis threshold.
The SD Definition Adopting Release also states that, generally,
swaps that hedge positions that were entered into as part of swap
dealing activity would also not need to be counted towards a person's
de minimis threshold calculation if they meet the requirements of the
proposed exception.\143\ The proposed Hedging De Minimis Provision is
consistent with the CFTC's position in the SD Definition Adopting
Release.
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\143\ The CFTC stated that ``the relevant question in
determining whether swaps count as dealing activity against the de
minimis thresholds is whether the swaps fall within the [SD
Definition] . . . . If hedging or proprietary trading activities did
not fall within the definition . . . they would not count against
the de minimis thresholds.'' Id. at 30631 n.433. DSIO later stated
that back-to-back swaps should each undergo a facts and
circumstances analysis to determine if they should be considered
swap dealing activity. See Frequently Asked Questions (FAQ)--[DSIO]
Responds to FAQs About Swap Entities (Oct. 12, 2012), available at
https://www.cftc.gov/idc/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf.
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Lastly, the proposed Hedging De Minimis Provision also includes, in
paragraphs (D)(3) through (D)(5), the following requirements that are
in the Physical Hedging Exclusion: (1) The swap must be economically
appropriate to the reduction of risks that may arise in the conduct and
management of an enterprise engaged in the type of business in which
the person is engaged; (2) the swap must be entered into in accordance
with sound business practices; and (3) the swap is not in connection
with activity structured to evade designation as an SD. The Commission
believes that these requirements are also appropriate for this broader
Hedging De Minimis Provision to ensure that swap dealing activity is
not improperly being excluded from a person's de minimis threshold
calculation.
2. Request for Comments
The Commission requests comments on the following questions. To the
extent possible, please quantify the impact of issues discussed in the
comments, including costs and benefits as applicable.
(1) Based on the policy considerations, is the proposed Hedging De
Minimis Provision appropriate? Why or why not?
(2) Is the proposed Hedging De Minimis Provision too narrowly or
broadly tailored?
(3) How will the proposed Hedging De Minimis Provision impact
entities that enter into swaps to hedge financial or physical
positions?
(4) The proposed Hedging De Minimis Provision would be used to
determine whether a person has exceeded the AGNA threshold set forth in
paragraph (4)(i)(A) of the SD Definition, whereas the Physical Hedging
Exclusion in paragraph (6)(iii) of the SD Definition addresses when a
swap is not considered in determining whether a person is an SD. How
might this distinction impact how entities analyze their swap dealing
activity and whether they would exceed the de minimis threshold?
D. Swaps Resulting From Multilateral Portfolio Compression Exercises
1. Background and Proposal
The Commission is proposing new paragraph (4)(i)(E) of the SD
Definition, which would allow a person to exclude from its de minimis
calculation swaps that result from multilateral portfolio compression
exercises (``MPCE De
[[Page 27464]]
Minimis Provision'').\144\ The MPCE De Minimis Provision is consistent
with DSIO no-action relief issued on December 21, 2012 (``Staff Letter
12-62'').\145\ Specifically, DSIO stated that it would not recommend
that the Commission take enforcement action against any person for
failure to include in its de minimis calculation the terminations of
swaps (in whole or in part) or swaps entered into as replacement swaps
as part of a multilateral portfolio compression exercise (as defined in
paragraph 23.500(h) of the Commission's regulations). The relief
provided was not time-limited.
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\144\ Similar to the proposed IDI De Minimis Provision and the
Hedging De Minimis Provision, the MPCE De Minimis Provision does not
revise the scope of activity that constitutes swap dealing. Rather,
the new provision sets out factors an entity can consider for
purposes of assessing whether swaps resulting from multilateral
portfolio compression exercises need to be counted towards the de
minimis calculation.
\145\ CFTC Staff Letter No. 12-62, supra note 54.
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The Commission concurs with the position taken in Staff Letter 12-
62. Generally, multilateral portfolio compression allows swap market
participants with large portfolios to ``net down'' the size and number
of outstanding swaps between them. The Commission is of the view that
this advances the policy considerations behind SD regulation by
reducing counterparty credit risk, lowering the AGNA of outstanding
swaps, and reducing operational risks by decreasing the number of
outstanding swaps. The Commission understands that multilateral
portfolio compression exercises do not permit participants to provide
liquidity or set prices in the market. A participant in a multilateral
portfolio compression exercise submits some criteria for its
participation in the exercise (e.g., credit or counterparty limits),
but the outcome of a compression cycle will depend on several variables
that the participants cannot know or control, such as the positions in
counterparties' portfolios and the criteria set by other participants.
Given this process, the Commission is of the view that multilateral
portfolio compression exercise swaps generally do not involve any of
the attributes the Commission has identified as indicative of swap
dealing activity.\146\ Further, the Commission notes that counting such
swaps towards a person's de minimis threshold could discourage
participation in multilateral portfolio compression exercises, reducing
the market benefit of the risk reduction such exercises provide.
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\146\ See, e.g., 77 FR at 30606-19 (e.g., accommodating demand,
market making, holding oneself out as a dealer in swaps, seeking to
profit by providing liquidity, etc.).
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To advance the policy objectives of the de minimis exception
discussed above, proposed paragraph (4)(i)(E) would allow a person to
exclude from its de minimis calculation swaps that result from
multilateral portfolio compression exercises. In particular, the MPCE
De Minimis Provision's explicit statement that such swaps do not need
to be counted towards the de minimis threshold would facilitate
efficient application of the SD Definition. Moreover, adding this
proposed exception to the regulatory text would therefore be consistent
with the goals of Project KISS. Additionally, to ensure that the scope
of this exception is not improperly exceeded, the proposed rule
includes an anti-evasion provision.
2. Request for Comments
The Commission requests comments on the following questions. To the
extent possible, please quantify the impact of issues discussed in the
comments, including costs and benefits, as applicable.
(1) Is the proposed MPCE De Minimis Provision appropriate? Why or
why not?
(2) Is the proposed MPCE De Minimis Provision too narrowly or
broadly tailored? Are there additional restrictions or conditions that
should apply in order for swaps resulting from multilateral portfolio
compression exercises to not count towards a person's de minimis
threshold?
(3) How will the proposed MPCE De Minimis Provision impact entities
that enter into multilateral portfolio compression exercises?
E. Methodology for Calculating Notional Amounts
1. Background and Proposal
Given the potential variety of methods that could be used to
calculate the notional amount for certain swaps, particularly for swaps
where notional amount is not a contractual term of the transaction
(e.g., NFC swaps), the Commission is proposing new paragraph (4)(vii)
of the SD Definition, which provides that the Commission may approve or
establish methodologies for calculating notional amounts for purposes
of determining whether a person exceeds the AGNA de minimis threshold.
Further, the Commission is proposing to delegate to the Director of
DSIO the authority to make such determinations.
In the SD Definition Adopting Release, the Commission did not
prescribe specific calculation methodologies for notional amounts
(except for leveraged swaps),\147\ and in the context of calculating
notional amounts to determine whether an entity was a major swap
participant (``MSP''), the Commission explicitly stated that it
``contemplate[d] the use of industry standard practices.'' \148\
Subsequent to issuance of the SD Definition Adopting Release, DSIO
issued interpretive responses to frequently asked questions regarding
calculating notional amounts for purposes of the de minimis exception
(the ``DSIO FAQ Guidance'').\149\
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\147\ The Commission noted that ``effective notional'' should be
used if the swap is leveraged or structurally enhanced. See 17 CFR
1.3, Swap dealer, paragraph (4)(i)(A); 77 FR at 30630.
\148\ 77 FR at 30670 n. 902.
\149\ See Frequently Asked Questions (FAQ)--[DSIO] Responds to
FAQs About Swap Entities (Oct. 12, 2012), available at https://www.cftc.gov/idc/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf.
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Further, for purposes of reporting swaps to trade repositories, the
Committee on Payments and Market Infrastructures (``CPMI'') and the
Board of the International Organization of Securities Commissions
(``IOSCO'') recently issued guidance regarding the definition, format,
and usage of key over-the-counter derivative data elements, which
included guidance on calculating certain notional amounts (the
``Technical Guidance'').\150\ The calculation methodologies described
in the Technical Guidance will be considered for adoption by the
Commission in future rulemakings related to swap data reporting.\151\
However, the Commission recognizes that the Technical Guidance does not
necessarily address how notional amounts should be calculated for
purposes of the de minimis exception under CFTC regulations.
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\150\ See CPMI and Board of IOSCO, Technical Guidance--
Harmonisation of critical OTC derivatives data elements (other than
UTI and UPI) (Apr. 2018), available at https://www.bis.org/cpmi/publ/d175.pdf.
\151\ See Technical Guidance, supra note 150, at 7 (``The
responsibility for issuing requirements for market participants on
the reporting of OTC derivative transactions to [trade repositories]
falls within the remit of the relevant authorities. Therefore, this
document does not represent guidance on which critical data elements
will be required to be reported in a given jurisdiction. Rather, if
such data elements are required to be reported in a given
jurisdiction, this document represents guidance to the authorities
in that jurisdiction on the definition, the format and the allowable
values that would facilitate consistent aggregation at a global
level.'').
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The Commission notes that market participants have already
requested clarity regarding how notional amounts should be calculated
for NFC swaps for purposes of determining whether a person exceeds the
AGNA de minimis
[[Page 27465]]
threshold.\152\ Additionally, the notional amount calculation
methodologies described in the DSIO FAQ Guidance, the methodologies
used by market participants as industry standard practice, and the
methodologies described in the Technical Guidance differ from one
another in some respects. Thus, the Commission believes additional
clarity about the appropriate notional amount calculation methodologies
for purposes of the SD de minimis threshold would be beneficial.
Further, additional questions may arise regarding notional amount
calculations, as it relates to the AGNA de minimis threshold, given the
broad array of swaps available across all asset classes and the
potential for new types of swap products becoming available in the
future. Therefore, the Commission is proposing new paragraph
(4)(vii)(A) of the SD Definition, which sets out a mechanism for the
Commission, on its own or upon written request by a person, to
determine the methodology to be used to calculate the notional amount
for any group, category, type, or class of swaps for purposes of
whether a person exceeds the AGNA de minimis threshold. The Commission
notes that the process for submitting a written request regarding the
methodology for notional amount calculations would be consistent with
the process described in Sec. 140.99 of the Commission's
regulations.\153\ Further, the proposed rule requires that such
methodology be economically reasonable and analytically supported, and
that any such determination be made publicly available and posted on
the CFTC website.\154\
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\152\ See, e.g., Letter from CEWG; Letter from Natural Gas
Supply Association (Jan. 15, 2016), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60595&SearchText=.
\153\ See 17 CFR 140.99.
\154\ Pursuant to this proposed rule, it is possible that
methodologies for calculating notional amounts for the de minimis
calculation could be approved or established that differ from
methodologies in the Technical Guidance. However, the purpose of the
Technical Guidance was not to consider specific requirements that
jurisdictions may have with respect to calculating notional amount
for registration purposes. The Commission notes that the proposed
approach is similar to one taken by the Canadian Securities
Administrators. See Proposed National Instrument 93-102 Derivatives:
Registration and Proposed Companion Policy 93-102 Derivatives:
Registration (Apr. 19, 2018) (collectively, the ``Proposed
Instrument''), available at https://www.albertasecurities.com/Regulatory%20Instruments/5399899%20_%20CSA%20Notice%2093-102.pdf.
The Proposed Instrument includes an alternative notional calculation
methodology--for the purpose of derivative dealer registration
thresholds--that differs from the Technical Guidance. See Proposed
Instrument at 6-7, 24-26.
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From time to time, DSIO issues interpretive guidance or no-action
letters to registrants on a variety of issues, often to address
uncertainty regarding the application of Commission regulations (e.g.,
the DSIO FAQ Guidance). Consistent with that practice, the Commission
also believes it is important to provide clarity regarding calculation
methodologies, as it relates to the AGNA de minimis threshold, to
market participants on a timely basis. Doing so would ensure that
persons are fully aware of whether their activities could lead to (or
presently entail) SD registration requirements in the event of market
or regulatory changes. Delegation by the Commission of this function to
DSIO should help to provide clarity on a timely basis, and provide
certainty that DSIO has the authority to make notional amount
calculation determinations. Therefore, the Commission is proposing new
paragraph (4)(vii)(B)(i) of the SD Definition, which delegates to the
Director of DSIO, or such other employee(s) that the Director may
designate, the authority to determine the methodology to be used to
calculate the notional amount for any group, category, type, or class
of swaps for purposes of whether a person exceeds the AGNA de minimis
threshold. Additionally, the Director of DSIO would be able to submit
any matter delegated pursuant to proposed paragraph (4)(vii)(A) to the
Commission for its consideration. Further, as is the case with existing
delegations to staff, the Commission would continue to reserve the
right to exercise the delegated authority itself at any time.
Consistent with the requirements of proposed paragraph (4)(vii)(A), any
determination made pursuant to this proposed delegation must be
economically reasonable and analytically supported, and be made
publicly available and posted on the CFTC website. As is the case with
staff interpretive letters, once a determination is made, either by the
Commission or the Director of DSIO, all persons may rely on the
determination.
Rather than codifying all permitted notional amount calculation
methodologies for purposes of the AGNA de minimis threshold, or
requiring other Commission action each time new methodologies are
approved, the Commission believes that providing delegated authority
gives the Commission and staff appropriate flexibility to promptly
respond to future market developments regarding notional amount
calculation methodologies. The Commission expects that subsequent to
adopting this delegation of authority, either the Commission or the
Director of DSIO will determine methodologies for calculating notional
amounts for certain categories of swaps.
2. Request for Comments
The Commission welcomes comments on the following questions
regarding the proposed process for determining methodologies for
calculating notional amounts, and the proposed delegation of authority.
To the extent possible, please quantify the impact of issues discussed
in the comments, including costs and benefits, as applicable.
(1) Is the proposed process to determine the methodology to be used
to calculate the notional amount for any group, category, type, or
class of swaps appropriate? Why or why not?
(2) Is the proposed process too narrowly or broadly tailored?
(3) Is the restriction that a methodology be economically
reasonable and analytically supported appropriate? Why or why not? What
other standards may be appropriate for this purpose?
(4) How will the proposed process impact persons that enter into
swaps where notional amount is not a stated contractual term?
(5) Is the proposed delegation of authority too narrowly or broadly
tailored?
(6) How will the proposed delegation of authority impact persons
that enter into swaps where notional amount is not a stated contractual
term?
(7) Is there a better alternative to this proposed process? If so,
please describe.
The Commission also welcomes comments on the following questions
regarding calculation of notional amounts for purposes of the de
minimis exception. Comments regarding the calculation of notional
amounts should focus on the de minimis exception (rather than other
Commission regulations, such as the reporting requirements in part 45).
To the extent possible, please quantify the comments, including costs
and benefits, as applicable.
(1) Should the notional amount (either stated or calculated) for
transactions with embedded optionality be delta-adjusted by the delta
of the underlying options, provided that the methods are economically
reasonable and analytically supported? Should delta-adjusted notional
amounts be used for all asset classes and product types, or only some?
(2) For swaps without stated contractual notional amounts, should
``price times volume'' generally be used
[[Page 27466]]
as the basis for calculating the notional amount?
(3) What other notional amount calculation methods, aside from
``price times volume,'' could be used for swaps without a stated
notional amount that renders a calculated notional amount equivalent
more directly comparable to the stated contractual notional amount
typically available in IRS, CDS, and FX swaps? \155\
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\155\ ``Price times volume'' is similar to a cash flow
calculation, while ``stated contractual notional'' is usually the
basis that forms a cash flow calculation when combined with price,
strike, fixed rate, coupon, or reference index. Therefore, ``stated
contractual notional amount'' may be described as more similar to
``volume'' than ``price times volume.'' For example, for a $100
million interest rate swap, the stated notional amount is typically
the basis of the periodic calculated cash flows instead of the
actual cash flows, which are calculated using the stated notional
amount and the stated ``price'' per leg (such as a fixed or floating
rate index).
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(4) For swaps without a stated contractual notional amount, does
calculation guidance exist in other jurisdictions and/or regulatory
frameworks, such as in banking, insurance, or energy market
regulations? Should persons be permitted to use such guidance to
calculate notional amounts for purposes of a de minimis threshold
calculation?
(5) What should be used for ``price'' when calculating notional
amounts for swaps without a stated contractual notional? Contractual
stated price, such as a fixed price, spread, or option strike? The spot
price of the underlying index or reference? The implied forward price
of the underlying? A different measure of price not listed here? Should
the price of the last available transaction in the commodity at the
time the swap is entered into be used for this calculation? Is it
appropriate to use a ``waterfall'' of prices to calculate notional
amount, depending on the availability of a price type? \156\
---------------------------------------------------------------------------
\156\ For example, contractual stated fixed price might be
required to be used first. Lacking a stated fixed price in the swap,
spot price of the underlying would then be used instead.
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(6) What metric should be used for ``price'' for certain basis
swaps with no fixed price or fixed spread?
(7) How should the ``price'' of swaps be calculated for swaps with
varying prices per leg, such as a predetermined rising or falling price
schedule?
(8) What metric should be used for ``volume'' when calculating
notional amounts for swaps without a stated contractual notional
amount? Should the Commission assume that swaps with volume optionality
will be exercised for the full quantity or should volume options be
delta-adjusted, too?
(9) Should the total quantity for a ``leg'' be used, or an
approximation for a pre-determined time period, such as a monthly or
annualized quantity approximation? \157\
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\157\ For an example of ``monthly notional amount
approximation'' rather than aggregated total notional quantity, see
Proposed Instrument, supra note 154, at 24-26.
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(10) How should the ``volume'' of swaps be calculated for swaps
with varying notional amount or volume per leg, such as amortizing or
accreting swaps?
(11) Should the U.S. dollar equivalent notional amount be
calculated across all ``legs'' of a swap by calculating the U.S. dollar
equivalent notional amount for each leg and then calculating the
minimum, median, mean, or maximum notional amount of all legs of the
swap?
(12) Should the absolute value of a price times volume calculation
be used, or should the calculation allow for negative notional amounts?
(13) Given that a derivatives clearing organization (``DCO'') has
to mark a swap to market on a daily basis, it may be possible to
determine ``implied volatilities'' for swaptions and options that are
regularly marked-to-market, such as cleared swaps, in order to delta-
adjust them. Should DCO evaluations be used when there are not better
market prices available?
III. Other Considerations
In addition to the proposed rule amendments discussed above, the
Commission is seeking comment on other potential considerations for the
de minimis threshold, including: (1) Adding a minimum dealing
counterparty count and a minimum dealing transaction count threshold;
(2) excepting from the de minimis threshold calculation swaps that are
exchange-traded and/or cleared; and (3) excepting from the de minimis
threshold calculation swaps that are categorized as non-deliverable
forwards. The Commission may take into consideration comments received
regarding any of these factors in formulating the final rule or may in
the future consider proposing an amendment to the SD Definition to
reflect any of these factors for purposes of the de minimis threshold
calculation.
A. Dealing Counterparty Count and Dealing Transaction Count Thresholds
1. Background
The Commission is re-considering the merits of using AGNA, by
itself, to determine if an entity's swap dealing activity is de
minimis. Specifically, the Commission is seeking comment on whether an
entity should be able to qualify for the de minimis exception if its
level of swap dealing activity is below any of the following three
criteria: (1) An AGNA threshold, (2) a proposed dealing counterparty
count threshold, or (3) a proposed dealing transaction count threshold.
Section 1a(49)(D) of the CEA directs the Commission to exempt from
designation as an SD an entity that engages in a de minimis quantity of
swap dealing, and provides the Commission with broad discretion to
promulgate regulations to establish factors with respect to the making
of this determination to exempt.\158\ The SD Definition Proposing
Release suggested three possible criteria for determining when an
entity engaged in more than a de minimis quantity of dealing activity:
AGNA of swap dealing activity, number of dealing transactions, and
number of dealing counterparties.\159\ In selecting these three factors
as possible appropriate measurements of an entity's ``quantity'' of
swap dealing activity, the Commission also noted that ``a range of
alternative approaches may be reasonable.'' \160\ The Commission stated
that it selected the proposed factors in an effort to focus the de
minimis exception on ``entities for which registration would not be
warranted from a regulatory point of view in light of the limited
nature of their dealing activities.'' \161\ The SD Definition Adopting
Release did not include factors beyond an AGNA threshold in the de
minimis exception.\162\
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\158\ 7 U.S.C. 1a(49)(D).
\159\ SD Definition Proposing Release, 75 FR at 80180.
\160\ Id. (``Thus, while the proposed factors discussed below
reflect our attempt to delimit the de minimis exemption
appropriately, we recognize that a range of alternative approaches
may be reasonable, and we are particularly interested in commenters'
suggestions as to the appropriate factors.'').
\161\ Id.
\162\ In reaching this conclusion, the Commissions considered
concerns expressed by commenters that ``a standard based on the
number of swaps . . . or counterparties can produce arbitrary
results by giving disproportionate weight to a series of smaller
transactions or counterparties.'' 77 FR at 30630.
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The Commission seeks comment on whether and how the inclusion of
these additional factors might account for modest variations in an
entity's level of dealing activity that occur over time and provide
entities with enhanced flexibility to manage their dealing activity
below the registration threshold. The Commission also seeks comment on
whether these additional criteria could better assist the Commission in
identifying those entities whose dealing activity is limited and reduce
instances of ``false positives'' of any one measure of activity, such
as where an entity's dealing activity may marginally exceed
[[Page 27467]]
the current $8 billion AGNA threshold, but still be so ``limited in
nature'' that it does not warrant SD regulation.
For example, the inclusion of dealing counterparty count and
dealing transaction count thresholds in the de minimis exception could
help account for differences in transaction sizes across asset classes.
As commenters have noted, certain asset classes tend to have higher
average notional amounts per swap than others.\163\ As a result, a
market participant that executes a small number of dealing transactions
with only a few counterparties in an asset classes for which the
notional amount of each transaction is comparatively large may be
required to register, whereas a market participant with the exact same
number of dealing transactions and dealing counterparties in an asset
class with a smaller average notional amount may not be required to
register. Moreover, differences in the average tenor and frequency of
swap transactions also exist across asset classes. For example,
depending upon the underlying activity that the counterparty is trying
to hedge, a person may prefer to enter into a single one-year, $1
billion swap, or four consecutive three-month, $1 billion swaps. One
hedging strategy results in a calculation of $1 billion for purposes of
the de minimis threshold, the other in a calculation of $4 billion for
purposes of the threshold. The Commission seeks comment on whether
consideration of dealing counterparty count and dealing transaction
count could address the impact of such differences and facilitate
relatively equal amounts of de minimis dealing across asset classes.
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\163\ See, e.g., Preliminary Report, supra note 21, at 52;
Letter from American Bankers Association (Jan. 19, 2016) (``Risk
mitigating commodity swaps are . . . of a shorter tenor and a
smaller average notional size as compared to other asset
classes.''), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60596&SearchText=.
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In addition to differences across asset classes, the Commission
recognizes that an entity's swap dealing volume may fluctuate over
time. For example, as compared to the first quarter of 2017, during the
first quarter of 2018, overall IRS notional amount activity rose by
approximately 25 percent, while trade count grew by approximately 16
percent.\164\ The Commission seeks comment on whether the inclusion of
additional metrics in the de minimis exception could provide market
participants with greater flexibility to serve their existing customer
base during periods of volatility or economic stress, without the
concern that such episodic increases in dealing activity may somehow
trigger SD registration. The Commission notes this result could also
further one of the policy goals of the de minimis exception, which is
to enable end-user counterparties to execute hedging swaps with firms
with whom they have ongoing business relationships, rather than forcing
such entities to establish separate relationships with registered SDs.
It could also potentially provide increased liquidity in the swap
market during periods of financial stress.
---------------------------------------------------------------------------
\164\ Based on historical information from archived CFTC Swaps
Reports, available at https://www.cftc.gov/MarketReports/SwapsReports/Archive/index.htm.
---------------------------------------------------------------------------
The Commission seeks comment on whether including dealing
counterparty count and dealing transaction count thresholds in the de
minimis exception, in conjunction with an AGNA calculation, would
further the policy goals underlying the exception. The Commission also
seeks comment on whether adding minimum dealing counterparty count and
dealing transaction count thresholds would be consistent with the
Commission's goal of ensuring that person's engaged in more than a de
minimis level of dealing are subject to SD regulation.
2. Potential Thresholds
The Commission recognizes the importance of appropriately
calibrating potential dealing counterparty count and dealing
transaction count thresholds in order to further the Commission's
interest in identifying and exempting de minimis dealing activity. As
part of its preliminary consideration of this approach, the Commission
performed an analysis of the counterparty counts and transaction counts
of Likely SDs and registered SDs to determine at what thresholds
certain entities might be required to register using a multi-factor
approach. The Commission notes that it was unable to exclude non-
dealing counterparties and non-dealing trades.
As discussed above in section II.A.2.ii, there were 108 Likely SDs
at the $8 billion AGNA threshold with at least 10 counterparties (in
IRS, CDS, FX swaps, and equity swaps). The median counterparty count
for these 108 Likely SDs was 132 counterparties and the median
transaction count was 5,233 trades. Of these 108 Likely SDs with at
least 10 counterparties, 106 also had at least 100 transactions, and
there were 88 Likely SDs that had at least 15 counterparties and 500
transactions.
There were 78 registered SDs that had at least $8 billion in AGNA
of swaps activity. The median counterparty count for these 78 entities
was 186 counterparties and the median transaction count was 12,004
trades. Of these 78 registered SDs, 72 had at least 10 counterparties
and at least 100 transactions. Additionally, 70 of the 78 registered
SDs had at least 15 counterparties and 500 transactions.
Based on this preliminary analysis, the Commission is seeking
comment on whether it would be appropriate to establish a dealing
counterparty count threshold of 10 counterparties and a dealing
transaction count threshold of 500 transactions.
For purposes of calculating a person's counterparty count under
this approach, the Commission seeks comment on whether it should allow
counterparties that are members of a single group of persons under
common control to be treated as a single counterparty. In addition, the
Commission seeks comment whether it should consider excluding
registered SDs and MSPs from an entity's counterparty count. Similar to
the current dealing AGNA threshold, the de minimis calculation for
counterparty counts and transaction counts could also incorporate
aggregation (after application of relevant de minimis calculation-
related exclusions) of the counterparty counts and transaction counts
of affiliated entities that are not registered SDs.\165\
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\165\ See 17 CFR 1.3, Swap dealer, paragraph (4).
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The Commission understands that the use of additional criteria
could lead to entities that engage in high levels of AGNA of swap
dealing activity not having to register as SDs if they have low
counterparty counts or low transaction counts. In order to account for
this possibility, the Commission seeks comment on whether it would be
appropriate to include an AGNA backstop above which entities would have
to register as SDs, regardless of their counterparty counts or
transaction counts. For example, under this approach, if an entity
exceeds some level of AGNA of dealing activity greater than $8 billion,
it would be required to register as an SD, regardless of its number of
dealing counterparties or dealing transactions. With respect to a
potential AGNA backstop, the Commission seeks comment on whether a $20
billion AGNA threshold would be appropriate.
A minimum dealing counterparty and dealing transaction threshold,
in combination with an AGNA amount backstop, might provide a higher
AGNA de minimis threshold to small dealers that only plan to
occasionally deal swaps with a limited number of counterparties or
execute a limited number of transactions. As noted above,
[[Page 27468]]
this higher effective threshold could also provide additional
flexibility for small dealers to provide clients with dealing services
without the costs of registration, as long as the dealer can structure
the business to remain below the counterparty count and transaction
count limits and the higher AGNA backstop. Generally, adding additional
metrics could potentially serve to better identify the types of
entities that are engaged in swap dealing activity. However, as
commenters have noted previously, the use of additional metrics could
make the de minimis calculation more complex.
Given these considerations, the Commission welcomes comments on the
following:
(1) Taking into account the Commission's policy objectives, should
minimum dealing counterparty counts and minimum dealing transaction
counts be considered in determining an entity's eligibility for the de
minimis exception?
(2) Would a dealing counterparty count threshold of 10 dealing
counterparties be appropriate? Why or why not? Is another dealing
counterparty count threshold more appropriate?
(3) Would a dealing transaction count threshold of 500 dealing
transactions be appropriate? Why or why not? Is another dealing
transaction count threshold more appropriate?
(4) Under what circumstances might entities have a relatively high
AGNA of swap dealing activity, but low dealing counterparty counts or
low dealing transaction counts?
(5) Would an AGNA backstop of $20 billion be appropriate? Why or
why not? Is another AGNA backstop level more appropriate?
(6) Would adding dealing counterparty count and dealing transaction
count thresholds simplify the SD analysis for certain market
participants, and if so, how and for which categories of participants?
(7) Would adding dealing counterparty count and dealing transaction
count thresholds complicate the SD analysis for certain market
participants, and if so, how and for which categories of participants?
(8) Should registered SDs or MSPs be counted towards the dealing
counterparty count threshold?
(9) Should dealing counterparty and dealing transaction counts be
aggregated across multiple potential swap dealing entities, similar to
the existing AGNA aggregation standard? \166\
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\166\ 17 CFR 1.3, Swap dealer, paragraph (4); 78 FR at 45323.
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(10) For counterparty count purposes, should counterparties that
are all part of one corporate family be counted as distinct
counterparties, or as one counterparty?
(11) Should a facts and circumstances analysis apply to determine
if an amendment or novation to an existing swap is swap dealing
activity that counts towards a person's dealing transaction count? Why
or why not?
(12) Would adding dealing counterparty count and dealing
transaction count thresholds address the impact of differences in
transaction sizes across asset classes?
(13) Would it be more appropriate for a multi-factor threshold to
only include a dealing counterparty count threshold or a dealing
transaction count threshold, rather than adding both criteria?
(14) Are there other criteria that should be included in the de
minimis exception? If so, what are they and how could the Commission
efficiently collect, calculate, and track them?
B. Exchange-Traded and/or Cleared Swaps
The Commission is seeking comment on whether an exception from the
de minimis calculation for swaps that are executed on an exchange
(e.g., a swap execution facility (``SEF'') or designated contract
market (``DCM'')) and/or cleared by a DCO is appropriate,\167\ and may
take into consideration comments received regarding possible exceptions
based on these factors in formulating the final rule. The Commission is
mindful of the need to consider how the existing de minimis exception
may be affecting the utilization of exchange trading \168\ and/or
clearing in the swap market, as well as the extent to which the policy
goals of SD registration and regulation may be advanced through
exchange trading and clearing.
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\167\ The Commission notes that swap market participants have
submitted comments that address this topic. See, e.g., Letters from
FIA, FSR, Northern Trust, and SIFMA, supra note 58; Final Staff
Report, supra note 24, at 14 (citing comment letters submitted in
response to Preliminary Staff Report, supra note 21).
\168\ For example, one of the CEA's objectives is to promote the
trading of swaps on swap execution facilities and to promote pre-
trade price transparency in the swaps market. 7 U.S.C. 7b-3(e).
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The Commission believes that excepting such swaps from the de
minimis calculation could improve utilization of exchanges and/or
clearing.\169\ Generally, systemic risk considerations for SD
regulation should be less significant for swaps that are cleared
because risk management is handled centrally by the DCO. Counterparties
to the swap post margin with the DCO and firms clearing swaps on behalf
of customers are registered with the Commission as futures commission
merchants and subject to capital requirements.\170\ In addition,
clearing would potentially be encouraged if the Commission adds an
exception for cleared swaps for purposes of the de minimis threshold
calculation, furthering one of the key tenets of the Dodd-Frank Act.
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\169\ Swaps subject to a clearing requirement pursuant to CEA
section 2(h) must be executed on a SEF or DCM, unless no SEF or DCM
makes the swap available to trade or a clearing exception under CEA
section 2(h)(7) applies. 7 U.S.C. 2(h)(8).
\170\ See CEA section 4d(f), 7 U.S.C. 6d(f); 17 CFR 1.17.
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Additionally, counterparty protection policy considerations for SD
regulation may be less significant for exchange-traded swaps because
the counterparty protections and trade terms would generally be
provided by the exchange. Through execution of swaps on exchanges,
counterparties benefit from viewing the prices of available bids and
offers and from having access to transparent and competitive trading
systems or platforms. Further, a number of the external business
conduct standard requirements otherwise applicable to SDs do not apply
when a swap is executed anonymously on an exchange. These requirements
are either inapplicable to such transactions by their terms (because,
for example, the counterparty is anonymous), or do not apply to the SD
because the exchange fulfills the requirements.\171\ However,
counterparties could receive reduced levels of protection if trades
previously executed over-the-counter move to anonymous trading on
exchanges, though this concern is partially mitigated because products
traded on exchanges are generally standardized and non-negotiated.
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\171\ See, e.g., 17 CFR 23.402 (``know your counterparty''
requirements only apply when the counterparty's identity is known to
the SD prior to execution); 17 CFR 23.430 (requirements to verify
counterparty eligibility are not applicable when the swap is
executed on a DCM, or on a SEF if the identity of the counterparty
is not known to the SD), 17 CFR 23.431 (disclosure of material
information and scenario analysis is not required when the SD does
not know the identity of counterparty prior to initiation of a
transaction on a SEF or DCM).
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In addition to the benefits described above, the market efficiency,
orderliness, and transparency goals of SD regulation would also
potentially be enhanced since the obligations of, for example,
reporting trade information and engaging in portfolio reconciliation
and compression exercises would be centrally (and more efficiently)
managed by the exchange and/or DCO, as applicable.
[[Page 27469]]
The Commission notes that an exclusion exists in paragraph (6)(iv)
of the SD Definition for certain exchange-traded and cleared swaps
entered into by floor traders (``Floor Trader Exclusion''). In the SD
Definition Adopting Release, the Commission declined to distinguish
exchange-traded swaps under the SD Definition, noting, among other
things, that:
[A] variety of exchanges, markets, and other facilities for the
execution of swaps are likely to evolve in response to the
requirements of the Dodd-Frank Act, and there is no basis for any
bright-line rule excluding swaps executed on an exchange, given the
impossibility of obtaining information about how market participants
will interact and execute swaps in the future, after the
requirements under the Dodd-Frank Act are fully in effect.\172\
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\172\ See 77 FR at 30610.
Nonetheless, the Commission created a carve-out for exchange-traded
and cleared swaps executed by floor traders. Subject to certain
conditions, the Floor Trader Exclusion allows registered floor traders
who trade swaps solely using proprietary funds for their own account to
exclude exchange-traded and cleared swaps from their de minimis
calculation. Therefore, while execution and clearing are factors in the
Floor Trader Exclusion, they are not the sole basis for it. The Floor
Trader Exclusion enables floor traders to provide liquidity to
exchanges in non-dealing capacities, such as proprietary trading,
without potentially triggering SD regulation. However, the Commission
notes that the market benefits of the Floor Trader Exclusion may be
complemented if the de minimis exception also applied to all exchange-
traded and/or cleared swaps.
The CFTC has not conducted robust data analysis regarding the
potential impact of an exception from the de minimis calculation for
swaps that are exchange-traded and/or cleared. However, excepting such
swaps from the de minimis calculation would also likely lead to
adjustments in how the swap market operates; therefore, it is difficult
to forecast what percentage of transactions would ultimately be
exchange-traded and/or cleared if such an exception were implemented.
The Commission also notes that clearing is a post-execution activity
and is not tied to the pre-execution swap dealing activities that
determine whether a person needs to register as an SD. Therefore,
adding a clearing-related factor to the de minimis exception may cause
conflation between swap dealing and clearing.
The Commission understands that this exception could result in
entities that engage in a significant amount of swap dealing activity
in exchange-traded and/or cleared swaps not having to register as SDs.
In order to account for this possibility, the Commission seeks comment
on whether it would be appropriate to establish a AGNA backstop such
that once an entity's swap dealing activity in exchange-traded and/or
cleared swaps exceeds a certain notional amount, it would be required
to register as an SD. Alternatively, the Commission is also considering
whether it may be appropriate to apply a haircut to the notional
amounts of exchange-traded and/or cleared swaps for purposes of the de
minimis calculation. Under this approach, persons would only need to
count a certain percentage of their total notional amount of exchange-
traded and/or cleared swaps towards their de minimis threshold. These
alternatives would ensure that persons with significant amounts of
exchange-traded and cleared swaps would still likely be required to
register as SDs.
Given these considerations, the Commission welcomes comments on the
following:
(1) How would an exception for exchange-traded swaps from a
person's de minimis calculation impact the policy considerations
underlying SD regulation and the de minimis exception?
(2) How would an exception for cleared swaps from a person's de
minimis calculation impact the policy considerations underlying SD
regulation and the de minimis exception?
(3) How would an exception for exchange-traded and cleared swaps
from a person's de minimis calculation impact the policy considerations
underlying SD regulation and the de minimis exception?
(4) Should all exchange-traded swaps be excepted from the de
minimis calculation, or only certain transactions? If so, which
transactions? Should only those trades that are anonymously executed be
excepted? How would the Commission judiciously differentiate, monitor,
and track such transactions apart from other exchange-traded swaps?
(5) Should all cleared swaps be excepted from the de minimis
calculation, or only certain transactions? If so, which transactions?
Should the Commission differentiate between trades that are intended to
be cleared and trades that are actually cleared? How would the
Commission judiciously differentiate, monitor, and track such
transactions apart from other cleared swaps?
(6) Should all exchange-traded and cleared swaps be excepted from
the de minimis calculation, or only certain transactions? If so, which
transactions? How would the Commission judiciously differentiate,
monitor, and track such transactions apart from other exchange-traded
and cleared swaps?
(7) If exchange-traded swaps are excepted from a person's de
minimis calculation, what other conditions, if any, should apply for
the trade to qualify for the exception?
(8) If cleared swaps are excepted from a person's de minimis
calculation, what other conditions, if any, should apply for the trade
to qualify for the exception?
(9) If exchange-traded and cleared swaps are excepted from a
person's de minimis calculation, what other conditions, if any, should
apply for the trade to qualify for the exception?
(10) If exchange-traded swaps are excepted from the de minimis
calculation, should the Commission establish a notional backstop above
which an entity must register? If so, what is the appropriate level for
the backstop?
(11) If cleared swaps are excepted from the de minimis calculation,
should the Commission establish a notional backstop above which an
entity must register? If so, what is the appropriate level for the
backstop?
(12) If exchange-traded and cleared swaps are excepted from the de
minimis calculation, should the Commission establish a notional
backstop above which an entity must register? If so, what is the
appropriate level for the backstop?
(13) Should persons be able to haircut the notional amounts of
their exchange-traded swaps for purposes of the de minimis calculation?
If so, would a 50 percent haircut be appropriate? Why or why not?
(14) Should persons be able to haircut the notional amounts of
their cleared swaps for purposes of the de minimis calculation? If so,
would a 50 percent haircut be appropriate? Why or why not?
(15) Should persons be able to haircut the notional amounts of
their exchange-traded and cleared swaps for purposes of the de minimis
calculation? If so, would a 50 percent haircut be appropriate? Why or
why not?
(16) Would an exception for exchange-traded swaps increase the
volume of swaps executed on SEFs or DCMs?
(17) Would an exception for cleared swaps increase the volume of
swaps that are cleared?
[[Page 27470]]
(18) Would an exception for exchange-traded and cleared swaps
increase the volume of swaps executed on SEFs or DCMs and the volume of
swaps that are cleared?
(19) Are there any unique costs or benefits associated with
excepting exchange-traded swaps from an entity's de minimis
calculation?
(20) Are there any unique costs or benefits associated with
excepting cleared swaps from an entity's de minimis calculation?
(21) Are there any unique costs or benefits associated with
excepting exchange-traded and cleared swaps from an entity's de minimis
calculation?
(22) Has the Floor Trader Exclusion encouraged additional trading
on SEFs and DCMs?
(23) Has the Floor Trader Exclusion encouraged additional clearing
of swaps?
(24) Should the Commission consider additional modifications to the
Floor Trader Exclusion in lieu of a broader exception for all exchange-
traded and/or cleared swaps?
(25) How should transactions executed on exempt multilateral
trading facilities, exempt organized trading facilities, and/or exempt
DCOs be treated?
C. Non-Deliverable Forwards
Section 1a(47) of the CEA defines the term ``swap,'' \173\ and
establishes that foreign exchange swaps \174\ and foreign exchange
forwards \175\ shall be considered swaps unless the Secretary of the
Treasury makes a written determination that either foreign exchange
swaps or foreign exchange forwards or both should be not be regulated
as swaps \176\ (to avoid confusion with the term ``FX swap'' as
otherwise used in this release, the terms ``foreign exchange swap'' and
``foreign exchange forward'' as used in this section III.C refer only
to those products as defined by CEA sections 1a(25) and 1a(24),
respectively).
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\173\ 7 U.S.C. 1a(47).
\174\ As defined in CEA section 1a(25). 7 U.S.C. 1a(25) (The
term ``foreign exchange swap'' is defined to mean a transaction that
solely involves an exchange of two different currencies on a
specific date at a fixed rate that is agreed upon on the inception
of the contract covering the exchange; and a reverse exchange of
those two currencies at a later date and at a fixed rate that is
agreed upon on the inception of the contract covering the
exchange.).
\175\ As defined in CEA section 1a(24). 7 U.S.C. 1a(24) (The
term ``foreign exchange forward'' is defined to mean a transaction
that solely involves the exchange of two different currencies on a
specific future date at a fixed rate agreed upon on the inception of
the contract covering the exchange.).
\176\ 7 U.S.C. 1a(47)(E).
---------------------------------------------------------------------------
In November 2012, the Secretary of the Treasury signed a
determination that exempts both foreign exchange swaps and foreign
exchange forwards from the definition of ``swap,'' in accordance with
the CEA (``Treasury Determination'').\177\ The Treasury Determination
further explained that foreign exchange options, currency swaps, and
non-deliverable forwards (``NDFs'') may not be exempted from the CEA's
definition of ``swap'' because they do not satisfy the statutory
definitions of a foreign exchange swap or foreign exchange
forward.\178\ The Treasury Determination explained that:
---------------------------------------------------------------------------
\177\ 77 FR 69694.
\178\ Id. at 69695.
[A]n NDF is a swap that is cash-settled between two
counterparties, with the value of the contract determined by the
movement of exchange rates between two currencies. On the contracted
settlement date, the profit to one party is paid by the other based
on the difference between the contracted NDF rate (set at the
trade's inception) and the prevailing NDF fix (usually a close
approximation of the spot foreign exchange rate) on an agreed
notional amount. NDF contracts do not involve an exchange of the
agreed-upon notional amounts of the currencies involved. Instead,
NDFs are cash settled in a single currency, usually a reserve
currency. NDFs generally are used when international trading of a
physical currency is relatively difficult or prohibited.\179\
---------------------------------------------------------------------------
\179\ Id. at 69703 (citing 77 FR at 48254-55).
The Commission understands from market participants that NDFs
provide an important market function because they are used to hedge
exposures to restricted currencies when the exposure is held by someone
outside of the home jurisdiction. The Commission also understands that
NDFs are economically and functionally similar to deliverable foreign
exchange forwards in that the same net value is transmitted in either
structure.
Further, the Commission has learned from market participants that
markets continue to treat both NDFs and deliverable foreign exchange
forwards as the same functional product. Like deliverable foreign
exchange forwards, NDFs settle on a net rather than gross basis, which
significantly mitigates counterparty risk in this context. In some
cases, market participants that previously had settled deliverable
foreign exchange forwards on a net basis (whether to minimize
counterparty risk or for other reasons) now take steps so as to ensure
they are able to avail themselves of the exemption from swap status
afforded by the Treasury Determination, including settlement of foreign
exchange forwards on a gross basis.
The Commission could determine to amend the de minimis exception in
paragraph (4) of the ``swap dealer'' definition in Sec. 1.3 of the
Commission's regulations by excepting NDFs from consideration when
calculating the AGNA of swap dealing activity for purposes of the de
minimis threshold. Excepting NDFs would result in a more comparable
regulatory treatment for these transactions when compared with foreign
exchange swaps and foreign exchange forwards pursuant to the Treasury
Determination.
Given these considerations, the Commission welcomes comments on the
following:
(1) Should the Commission except NDFs from consideration when
calculating the AGNA of swap dealing activity for purposes of the de
minimis exception? Why or why not?
(2) Are there other foreign exchange derivatives that the
Commission should except from consideration for counting towards the de
minimis threshold?
(3) Do NDFs pose any particular systemic risk in a manner distinct
from foreign exchange swaps and foreign exchange forwards?
(4) If the Commission were to except NDFs from consideration when
calculating the AGNA for purposes of the de minimis exception, are
there particular limits that the Commission should consider in
connection with this exception?
(5) What would be the market liquidity impact if the Commission
were to except NDFs from counting towards the de minimis threshold?
(6) Is there material benefit to the market in requiring
participants that transact in NDFs to register with the Commission,
while not imposing similar obligations on participants that transact in
deliverable foreign exchange forwards? If so, what benefits accrue from
imposing such registration obligations?
(7) Please provide any relevant data that may assist the Commission
in evaluating whether to except NDFs from counting towards the de
minimis threshold.
(8) Please provide any additional comments on other factors or
issues the Commission should consider when evaluating whether to except
NDFs from counting towards the de minimis threshold.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider
[[Page 27471]]
whether the regulations they propose will have a significant economic
impact on a substantial number of small entities.\180\ This Proposal
only affects certain entities that are close to the de minimis
threshold in the SD Definition. For example, the Proposal would affect
entities with a relevant AGNA of swap dealing activity between $3
billion and $8 billion. Moreover, it also would affect entities that
engage in swap dealing activity above an AGNA of $3 billion that also
enter into hedging swaps, or, in the case of IDIs, that enter into
loan-related swaps. That is, the Proposal is relevant to entities that
engage in swap dealing activity with a relevant AGNA measured in the
billions of dollars. The Commission does not believe that these
entities would be small entities for purposes of the RFA. Therefore,
the Commission believes that this Proposal will not have a significant
economic impact on a substantial number of small entities, as defined
in the RFA.
---------------------------------------------------------------------------
\180\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that this Proposal will not have
a significant economic impact on a substantial number of small
entities. The Commission invites comment on the impact of this Proposal
on small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1955 (``PRA'') \181\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget (``OMB'') control number. The proposed rules will not impose
any new recordkeeping or information collection requirements, or other
collections of information that require approval of OMB under the PRA.
---------------------------------------------------------------------------
\181\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The Commission notes that all reporting and recordkeeping
requirements applicable to SDs result from other rulemakings, for which
the CFTC has sought OMB approval, and are outside the scope of
rulemakings related to the SD Definition.\182\ The CFTC invites public
comment on the accuracy of its estimate that no additional
recordkeeping or information collection requirements, or changes to
existing collection requirements, would result from the Proposal.
---------------------------------------------------------------------------
\182\ Parties wishing to review the CFTC's information
collections on a global basis may do so at www.reginfo.gov, at which
OMB maintains an inventory aggregating each of the CFTC's currently
approved information collections, as well as the information
collections that presently are under review.
---------------------------------------------------------------------------
C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\183\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. In this section, the Commission considers the costs and
benefits resulting from its determinations with respect to the Section
15(a) factors, and seeks comments from interested persons regarding the
nature and extent of such costs and benefits.
---------------------------------------------------------------------------
\183\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
The Proposal amends the de minimis exception in paragraph (4) of
the SD Definition in Sec. 1.3 by: (1) Setting the de minimis exception
threshold at $8 billion in AGNA of swap dealing activity, the same as
the current phase-in level, and removing the phase-in process; (2)
adding an exception from the de minimis threshold calculation for swaps
entered into by IDIs in connection with originating loans to customers;
(3) adding an exception from the de minimis threshold calculation for
swaps entered into by a person for purposes of hedging financial or
physical positions; (4) codifying prior DSIO guidance regarding the
treatment of swaps that result from multilateral portfolio compression
exercises; and (5) providing that the Commission may determine the
methodology to be used to calculate the notional amount for any group,
category, type, or class of swaps, and delegating to the Director of
DSIO the authority to make such determinations.
As part of this cost-benefit consideration, the Commission will:
(1) Discuss the costs and benefits of each of the proposed changes; and
(2) analyze the proposed amendments as they relate to each of the 15(a)
factors.
1. $8 Billion De Minimis Threshold
As discussed above, the SD Definition provides an exception from
the SD Definition for persons who engage in a de minimis amount of swap
dealing activity. Currently, a person shall not be deemed to be an SD
unless swaps entered into in connection with swap dealing activity
exceed an AGNA threshold of $3 billion (measured over the prior 12-
month period), subject to a phase-in period that is currently in
effect, during which the AGNA threshold is set at $8 billion. The
Commission is proposing to amend the de minimis exception to the SD
Definition to set the de minimis threshold at the current $8 billion
phase-in level.
There are general policy-related costs and benefits associated with
the proposal to set the de minimis threshold at $8 billion. In addition
to these policy considerations, the proposal to set the de minimis
threshold at $8 billion would also have specific monetary costs and
benefits as compared to a lower or higher threshold. The current $8
billion phase-in level threshold, along with the prospect that the
threshold would decrease to $3 billion after December 31, 2019 in the
absence of further Commission action, sets the baseline for the
Commission's consideration of the costs and benefits of the proposed
alternatives. Accordingly, the Commission considers the costs and
benefits that would result from maintaining the current $8 billion
phase-in level threshold, or alternatively, a threshold level below or
above the current $8 billion threshold. The status quo baseline also
includes other aspects of existing rules related to the de minimis
exception. The analysis also takes into account any no-action relief,
to the extent such relief is being relied upon. As the Commission is of
the preliminary belief that the existing no-action relief related to
the de minimis exception is being fully relied upon by market
participants, the cost-benefit discussion that follows also considered
the effects of that relief.
(i) Policy-Related Costs and Benefits
There are several policy objectives underlying SD regulation and
the de minimis exception to SD registration. As discussed above in
section I.C, the primary policy objectives of SD regulation include
reducing systemic risk, increasing counterparty protections, and
increasing market efficiency, orderliness, and transparency.\184\ To
achieve these policy
[[Page 27472]]
objectives, registered SDs are subject to a broad range of
requirements, including, among other things, registration, internal and
external business conduct standards, reporting, recordkeeping, risk
management, posting and collecting margin on uncleared swaps, and chief
compliance officer designation and responsibilities. The Commission
also considers policy objectives furthered by a de minimis exception,
which include increasing efficiency, allowing limited ancillary
dealing, encouraging new participants to enter the swap dealing market,
and focusing regulatory resources.\185\ These policy considerations
have general costs and benefits associated with them depending on the
level of the de minimis threshold.
---------------------------------------------------------------------------
\184\ See 77 FR at 30628-30, 30707-08.
\185\ See id.
---------------------------------------------------------------------------
As noted in the SD Definition Adopting Release, generally, the
lower the de minimis threshold, the greater the number of entities that
are subject to the SD-related regulatory requirements, which could
decrease systemic risk, increase counterparty protections, and promote
swap market efficiency, orderliness, and transparency.\186\ However, a
lower threshold could have offsetting effects that might decrease the
policy benefits of lowering the de minimis exception threshold. For
example, it is likely that a lower threshold would lead to reduced
ancillary dealing activity and discourage new participants from
entering into the swap market.
---------------------------------------------------------------------------
\186\ See id. at 30628-30, 30703, 30707.
---------------------------------------------------------------------------
(a) Maintaining the $8 Billion De Minimis Phase-In Threshold
At the $8 billion threshold, the 2017 Transaction Coverage and 2017
AGNA Coverage ratios indicate that nearly all swaps were covered by SD
regulation, giving rise to the benefits from the policy objectives of
SD regulation discussed above. Specifically, as seen in Table 1 in
section II.A.2.i, almost all swap transactions involved at least one
registered SD as a counterparty, approximately 99 percent or greater
for IRS, CDS, FX swaps, and equity swaps. For NFC swaps, approximately
86 percent of transactions involved at least one registered SD as a
counterparty. Overall, approximately 98 percent of all swap
transactions involved at least one registered SD. As seen in Table 2,
almost all AGNA of swaps activity included at least one registered SD,
approximately 99 percent or greater for IRS, CDS, FX swaps, and equity
swaps.
Further, the Commission notes that the 6,440 entities that did not
enter into any transactions with a registered SD had limited activity
overall. As discussed in section II.A.2.i, the 6,440 entities entered
into 77,333 transactions, representing approximately 1.7 percent of the
overall number of transactions during the review period. Additionally,
collectively, the 6,440 entities had $68 billion in AGNA of swaps
activity, representing approximately 0.03 percent of the overall AGNA
of swaps activity during the review period. The Commission believes
that this limited activity indicates that to the extent these entities
are engaging in swap dealing activities, such activity is likely
ancillary and in connection with other client services, potentially
indicating that the policy rationales behind a de minimis exception are
being advanced at the current $8 billion threshold.
Additionally, with respect to NFC swaps, Table 13 in section
II.A.2.iv indicates that registered SDs still entered into the
significant majority (86 percent) of the overall market's total
transactions and faced 83 percent of counterparties in at least one
transaction, indicating that the existing $8 billion de minimis
threshold has helped extend the benefits of SD registration to much of
the NFC swap market. The trading activity of the 42 unregistered
entities with 10 or more NFC swap counterparties represents
approximately 13 percent of the overall NFC swap market by transaction
count. However, as compared to the existing 44 registered SDs with at
least 10 counterparties, these 42 In-Scope Entities have significantly
lower mean transaction and counterparty counts, indicating that they
may only be providing ancillary dealing services to accommodate
commercial end-user clients, also potentially indicating that the
policy rationales behind a de minimis exception are being advanced at
the current $8 billion threshold.
(b) $3 Billion De Minimis Threshold
The Commission is of the view that the systemic risk mitigation,
counterparty protection, and market efficiency benefits of SD
regulation would be enhanced in only a very limited manner if the de
minimis threshold decreased from $8 billion to $3 billion, as would be
the case if the current regulation and the existing Commission order
establishing an end to the phase-in period on December 31, 2019 were
left unchanged. As seen in Table 4 in section II.A.2.ii, the Estimated
AGNA Coverage would increase from approximately $221,020 billion (99.95
percent) to $221,039 billion (99.96 percent), an increase of $19
billion (a 0.01 percentage point increase). As seen in Table 5, the
Estimated Transaction Coverage would increase from 3,795,330 trades
(99.77 percent) to 3,797,734 trades (99.83 percent), an increase of
2,404 trades (a 0.06 percentage point increase). As seen in Table 6,
the Estimated Counterparty Coverage would increase from 30,879
counterparties (88.80 percent) to 31,559 counterparties (90.75
percent), an increase of 680 counterparties (a 1.96 percentage point
increase). The effect of these limited increases is further mitigated
by the fact that at the current $8 billion phase-in threshold, the
substantial majority of transactions are already covered by SD
regulation--and related counterparty protection requirements--because
they include at least one registered SD as a counterparty.
For NFC swaps, as discussed in section II.A.2.iv, without notional-
equivalent data, it is unclear how many of the 42 In-Scope Entities
with 10 or more counterparties that are not registered SDs would
actually be subject to SD registration at a $3 billion de minimis
threshold. It is possible that a portion of the swaps activity for some
or all of these entities qualifies for the physical hedging exclusion
in paragraph (6)(iii) of the SD Definition, and therefore would not be
considered swap dealing activity, regardless of the de minimis
threshold level.\187\
---------------------------------------------------------------------------
\187\ Hypothetically, if all 42 entities registered, the
percentage of all NFC swaps facing at least one registered SD would
rise from approximately 86 percent to 98 percent.
---------------------------------------------------------------------------
As discussed in section II.A.2.ii with respect to IRS, CDS, FX
swaps, and equity swaps, and section II.A.2.iv with respect to NFC
swaps, the Commission also notes that it is possible that a lower de
minimis threshold could lead to certain entities reducing or ceasing
swaps activity to avoid registration and its related costs. Although
the magnitude of this effect is unclear, reduced swap dealing activity
could lead to increased concentration in the swap dealing market,
reduced availability of potential swap counterparties, reduced
liquidity, increased volatility, higher fees, wider bid/ask spreads, or
reduced competitive pricing. The end-user counterparties of these
smaller swap dealing entities may be adversely impacted by the above
consequences and could face a reduced ability to use swaps to manage
their business risks.
(c) Higher De Minimis Threshold
Conversely, a higher de minimis threshold would potentially
decrease the number of registered SDs, which could have a negative
impact on
[[Page 27473]]
achieving the SD regulation policy objectives. For example, a higher de
minimis threshold would allow a greater amount of swap dealing to be
undertaken without certain counterparty protections. This might impact
the integrity of swap market to some extent. However, the Commission is
unable to quantify how the integrity of swap market might be harmed. On
the other hand, the higher the de minimis threshold, the greater the
number of entities that are able to engage in dealing activity without
being required to register, which could increase competition and
liquidity in the swap market. A higher threshold could also allow the
Commission to expend its resources on entities with larger swap dealing
activities warranting more oversight.
As seen in Table 9 in section II.A.2.iii, in comparison to an $8
billion threshold, a $100 billion threshold would reduce the Estimated
AGNA Coverage from approximately $221,020 billion (99.95 percent) to
$220,877 billion (99.88 percent), a decrease of $143 billion (a 0.06
percentage point decrease). As seen in Table 10, in comparison to an $8
billion threshold, a $100 billion threshold would reduce the Estimated
Transaction Coverage from 3,795,330 trades (99.77 percent) to 3,773,440
trades (99.20 percent), a decrease of 21,890 trades (a 0.58 percentage
point decrease). The decreases would be more limited at higher
thresholds of $20 billion or $50 billion. The data also indicates that
at higher thresholds, there is a more pronounced decrease in Estimated
Counterparty Coverage. As seen in Table 11, the Estimated Counterparty
Coverage would decrease from 30,879 counterparties (88.80 percent) to
28,234 counterparties (81.19 percent), a decrease of 2,645
counterparties (a 7.61 percentage point decrease). The decrease would
be lower at thresholds of $20 billion and $50 billion, at 2.80
percentage points and 5.71 percentage points, respectively.
Although it has not conducted an analysis of AGNA activity in NFC
swaps, the Commission is of the preliminary view that increasing the de
minimis threshold could potentially lead to fewer registered SDs
participating in in the NFC swap market, similar to its observations
with respect to IRS, CDS, FX swaps, and equity swaps discussed above in
section II.A.2.iii. This could reduce the number of entities
transacting with registered SDs.
The cost of reduced protections for counterparties would be
realized to the extent a higher threshold would result in fewer swaps
involving at least one registered SD. Additionally, depending on how
the swap market adapts to a higher threshold, it is also possible that
the reduction in Estimated Regulatory Coverage would be greater than
the data indicates to the extent that a higher de minimis threshold
leads to an increased amount of swap dealing activity between entities
that are not registered SDs. In such a scenario, Estimated Regulatory
Coverage could potentially decrease more than the data indicates,
negatively impacting the policy goals of SD regulation.
(d) Preliminary Entity-Netted Notional Amounts Analysis
As previously discussed, analysis indicates that the Estimated AGNA
Coverage is not very sensitive to changes in de minimis threshold
level. Staff also conducted a preliminary analysis of the sensitivity
of entity-netted notional amounts (``ENNs'') \188\ of Likely SDs in the
IRS market to changes in the de minimis threshold level. The ENNs
analysis normalizes notional amounts to five-year risk equivalents and
nets long and short positions within counterparty pairs in the same
currency.\189\
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\188\ See Introducing ENNs: A Measure of the Size of Interest
Rate Swap Markets, supra note 65.
\189\ Each entity is net long or net short ENNs against each of
its counterparties, and each entity's total long and short ENNs are
the sums of its long and short ENNs, respectively, across all of its
counterparties. See id.
---------------------------------------------------------------------------
The preliminary analysis indicates that IRS ENNs are generally not
overly sensitive to the de minimis threshold levels between $3 billion
and $50 billion, providing additional support for staff's preliminary
consideration of the policy-related costs and benefits discussed above.
Table 15 shows the results of an analysis of the de minimis threshold
in terms of ENNs for the IRS market.
Table 15--ENNs for IRS Likely SDs
[Minimum 10 counterparties]
--------------------------------------------------------------------------------------------------------------------------------------------------------
IRS ENNs totals ($Bn) Change in ENNs totals vs. $8 Bn (%)
Notional threshold ($Bn) Number of -----------------------------------------------------------------------------------------------
likely SDs Long Short Net Long Short Net
--------------------------------------------------------------------------------------------------------------------------------------------------------
3....................................... 121 9,812 8,307 1,505 0.6 1.1 (1.8)
8....................................... 108 9,750 8,219 1,532 .............. .............. ..............
20...................................... 93 9,707 8,191 1,516 (0.4) (0.3) (1.0)
50...................................... 81 9,617 8,105 1,512 (1.4) (1.4) (1.3)
100..................................... 72 9,464 8,026 1,439 (2.9) (2.3) (6.1)
--------------------------------------------------------------------------------------------------------------------------------------------------------
The 108 Likely SDs at $8 billion identified by the AGNA analysis in
section II.A.2.ii above represented approximately $9.8 trillion of long
ENNs and $8.2 trillion of short ENNs on December 15, 2017. A reduction
in the de minimis threshold from $8 billion to $3 billion would have
only a modest effect on the coverage of risk transfer as measured by
IRS ENNs, adding only 0.6 percent of additional long ENNs and 1.1
percent of additional short ENNs. Similarly, an increase in the de
minimis threshold from $8 billion to $50 billion would modestly
decrease long ENNs by 1.4 percent and short ENNs by 1.4 percent. The
decrease would be more limited at a threshold of $20 billion.\190\
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\190\ IRS ENNs totals for a hypothetical de minimis threshold of
$100 billion, however, begin to show increased sensitivities
compared to other de minimis thresholds examined.
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(ii) Direct Cost and Benefits of Setting an $8 Billion Threshold
It is likely that for any de minimis threshold, some firms will
have AGNA of swap dealing activity sufficiently close to the threshold
so as to require analysis to determine whether their AGNA qualifies as
de minimis. Hence, with a $3 billion threshold, some set of entities
will likely have to incur the direct costs of analyzing whether they
[[Page 27474]]
would exceed the de minimis threshold, and with an $8 billion
threshold, a (mostly) different set of entities would have to continue
to incur costs of analyzing their activity.
Based on the available data, the Commission estimates that if the
de minimis threshold were set at $3 billion, approximately 22 currently
unregistered entities would need to conduct an initial analysis of
whether they would be above the threshold.\191\ The Commission
estimates that the potential total direct cost of conducting the
initial analysis for the 22 entities would average approximately
$79,000 per entity, or approximately $1.7 million in the
aggregate.\192\ Certain of those entities with ongoing swap dealing
activity that is near a $3 billion threshold may also need to conduct
periodic de minimis calculation analyses to assess whether they qualify
for the exception. The Commission estimates that approximately 11
entities may need to conduct such analyses.\193\ Further, the
Commission estimates that the potential annual direct cost of
conducting these ongoing analyses for those 11 entities would be
approximately $40,000 per entity, or $440,000 in the aggregate.\194\
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\191\ Commission staff analyzed the swaps activity of market
participants over a one-year period to develop this estimate. The
estimate includes 22 In-Scope Entities that had 10 or more
counterparties and between $1 billion and $5 billion in AGNA of
swaps activity in IRS, CDS, FX swaps, and equity swaps. Entities
that were already registered SDs were excluded. The estimate does
not account for entities that primarily are entering into NFC swaps
because notional amount information was not available for that asset
class.
\192\ This estimate is based on the following staff requirements
for this determination: 25 hours for an OTC principal trader at
$695/hour, 40 hours for a compliance attorney at $335/hour, 35 hours
for a chief compliance officer at $556/hour, 80 hours for an
operations manager at $290/hour, and 20 hours for a business analyst
at $273/hour. These individuals would be responsible for
identifying, analyzing, and aggregating the swap dealing activity of
a firm and its affiliates. The estimates of the number of personnel
hours required have been updated from the SD Definition Adopting
Release in light of the Commission's experience in implementing the
SD Definition.
The estimates of the hourly costs for these personnel are from
SIFMA's Management & Professional Earnings in the Securities
Industry 2013 survey, modified to account for an 1,800-hour work-
year and multiplied by 5.35 to account for firm size, employee
benefits, and overhead, which is the same multiplier that was used
when the SD Definition was adopted. See 77 FR at 30712 n.1347.
The Commission recognizes that particular entities may, based on
their circumstances, incur costs substantially greater or less than
the estimated averages.
\193\ The estimate of 11 entities is approximately 50 percent of
the 22 entities that would need to undertake an initial analysis.
This estimate assumes that many entities would, following the
initial analysis, determine that they would either need to register
or choose not to engage in enough dealing activity to require
ongoing monitoring.
\194\ The Commission estimates that the ongoing analysis would
be streamlined as a result of the initial analysis, and therefore
would be less costly. For purposes of this calculation, the
Commission preliminarily estimates that the cost of the ongoing
analysis would be approximately 50 percent of the cost of the
initial analysis.
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Conversely, the Commission assumes that a higher threshold would
permit certain entities to no longer incur ongoing costs of assessing
whether they are above the threshold. The Commission estimated the
savings that would result from a higher de minimis threshold of $20
billion. Based on the available data, the Commission estimates that if
the de minimis threshold were set at $20 billion, approximately 29
entities would no longer need to conduct an ongoing analysis of whether
they would be above the new threshold, while 4 entities may begin
conducting such an analysis.\195\ The Commission estimates that the
ongoing cost savings for the net 25 entities that would no longer be
conducting periodic de minimis threshold analyses would average
approximately $40,000 per entity, or $1 million in the aggregate per
year.\196\
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\195\ Commission staff analyzed the swaps activity of market
participants over a one-year period to develop this estimate. The
estimate includes 29 In-Scope Entities that had between $3 billion
and $15 billion, and 4 In-Scope Entities that had between $15
billion and $25 billion, in AGNA of swaps activity in IRS, CDS, FX
swaps, and equity swaps, and at least 10 counterparties. The
estimate does not account for entities that primarily are entering
into NFC swaps because notional amount information was not available
for that asset class.
\196\ The Commission estimates that the ongoing analysis would
be streamlined as a result of the initial analysis, and therefore
would be less costly. For purposes of this calculation, the
Commission preliminarily estimates that the cost of the ongoing
analysis would be approximately 50 percent of the cost of the
initial analysis.
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(iii) Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
(a) Protection of Market Participants and the Public
Providing regulatory protections for swap counterparties who may be
less experienced or knowledgeable about the swap products offered by
SDs (particularly end-users who use swaps for hedging or investment
purposes) is a fundamental policy goal advanced by the regulation of
SDs.
The Commission is proposing to maintain the current de minimis
phase-in threshold of $8 billion in AGNA of swap dealing activity. As
discussed above, the Commission recognizes that a $3 billion de minimis
threshold may result in more entities being required to register as SDs
compared to the proposed (and currently in-effect) $8 billion
threshold, thereby extending counterparty protections to a greater
number of market participants. However, this benefit is relatively
small because, at the current $8 billion phase-in threshold, the
substantial majority of transactions are already covered by SD
regulation--and related counterparty protection requirements--since
they include at least one registered SD as a counterparty.\197\
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\197\ As discussed in section II.A.2.i, the 2017 Transaction
Coverage was approximately 98 percent.
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On the other hand, as noted above, a threshold above $8 billion may
result in fewer entities being required to register as SDs, thus
extending counterparty protections to a fewer number of market
participants. Although the Estimated Transaction Coverage and Estimated
AGNA Coverage would not decrease much at higher thresholds of up to
$100 billion, the decrease in Estimated Counterparty Coverage is more
pronounced at higher de minimis thresholds, potentially indicating that
the benefit of SD counterparty protections requirements could be
reduced at higher thresholds.
SD regulation is also intended to reduce systemic risk in the swap
market. Pursuant to the Dodd-Frank Act, the Commission has proposed or
adopted regulations for SDs, including margin and risk management
requirements, designed to mitigate the potential systemic risk inherent
in the swap market. Therefore, the Commission recognizes that a lower
de minimis threshold may result in more entities being required to
register as SDs, thereby potentially further reducing systemic risk.
Conversely, a higher de minimis threshold may result in fewer entities
being required to register an SD and, thus, possibly increase
systematic risk.
However, the Commission's data appears to indicate that the
additional entities that would need to register at the $3 billion de
minimis threshold are engaged in a comparatively smaller amount of swap
dealing activity. Many of these entities might be expected to have
fewer counterparties and smaller overall risk exposures as compared to
the SDs that engage in swap dealing in excess of the $8 billion level.
Accordingly, the Commission believes that that the incremental
reduction in systemic risk that may be achieved by registering dealers
that engage in dealing between the $3 billion and $8 billion thresholds
is limited.
The data also indicates that at higher thresholds of $20 billion,
$50 billion, or $100 billion, fewer entities would be
[[Page 27475]]
required to register as SDs, though the change in regulatory coverage
as measured by Estimated AGNA Coverage and Estimated Transaction
Coverage would be small. Thus, the Commission preliminarily believes
that the increase in systemic risk that may occur due to a higher
threshold would not be significant. However, depending on how the
market adapts to a higher threshold, the level of regulatory coverage
could potentially decrease more than the data indicates.
Additionally, as discussed above, the ENNs analysis suggests that
the change in the extent to which market risk is held by persons
identified as Likely SDs is not very sensitive to the changes in the
thresholds considered here.
The Commission preliminarily believes that setting the de minimis
threshold at $8 billion will not substantially diminish the protection
of market participants and the public as compared to a $3 billion
threshold. Further, as discussed, the Commission does not expect that
an increase in the threshold would increase the protection of market
participants and the public.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
Another goal of SD regulation is swap market efficiency,
orderliness, and transparency. These market benefits are achieved
through regulations requiring, for example, SDs to keep detailed daily
trading records, report trade information, provide counterparty
disclosures about swap risks and pricing, and engage in portfolio
reconciliation and compression exercises.
As compared to a $3 billion de minimis threshold, an $8 billion
threshold may have a negative effect on the efficiency and integrity of
the markets as fewer entities are required to register as SDs and fewer
transactions become subject to SD-related regulations. However, the
Commission also recognizes that the efficiency and competitiveness of
the swap market may be negatively impacted if the de minimis threshold
is set too low, by potentially increasing barriers to entry that may
stifle competition and reduce swap market efficiency. For example, if
entities choose to reduce or cease their swap dealing activities in
response to the $3 billion de minimis threshold, the number or
availability of market makers for swaps may be reduced, which could
lead to increased costs for potential counterparties and end-users.
Conversely, a higher threshold may increase market liquidity,
efficiency, and competition as more entities engage in swap dealing
without SD registration as a barrier to entry. However, a higher
threshold may also result in fewer swaps being subject to SD-related
regulations requiring, for example, disclosures, portfolio
reconciliation, portfolio, compression, potentially reducing the
financial integrity of markets.
Considering these countervailing factors, the Commission believes
that setting the de minimis threshold at $8 billion will not
significantly diminish the efficiency, competitiveness, and financial
integrity of markets as compared to a $3 billion threshold. Further, as
discussed, an increase in the threshold would potentially have both
positive and negative effects to the efficiency, competitiveness, and
financial integrity of the markets.
(c) Price Discovery
All else being equal, the Commission preliminarily believes that
price discovery will not be harmed and might be improved if there are
more entities engaging in ancillary dealing due to increased
competitiveness among swap counterparties. The Commission is
preliminarily of the view that, as compared to a $3 billion threshold,
an $8 billion de minimis threshold would encourage participation of new
SDs and promote ancillary dealing because those entities engaged in
swap dealing activities below the threshold would not need to incur the
direct costs of registration until they exceeded a higher threshold.
Similarly, raising the threshold above $8 billion could lead to
even more entities engaging in ancillary dealing.
(d) Sound Risk Management
The Commission notes that a higher de minimis threshold could lead
to impaired risk management practices because a lower number of
entities would be required by regulation to: (1) Develop and implement
detailed risk management programs; (2) adhere to business conduct
standards that reduce operational and other risks; and (3) satisfy
margin requirements for uncleared swaps. For the same reason, a lower
threshold could positively impact risk management since more entities
would be required to comply with the above mentioned risk-related SD
regulations.
(e) Other Public Interest Considerations
The Commission has not identified any other public interest
considerations with respect to setting the de minimis threshold at $8
billion in AGNA of swap dealing activity.
2. Swaps Entered Into by Insured Depository Institutions in Connection
With Loans to Customers
The proposed IDI De Minimis Provision would require that the loans
and related swaps generally meet requirements that, as compared to the
requirements of the IDI Swap Dealing Exclusion in paragraph (5) of the
SD Definition, reflect: (1) A revised timing requirement for when the
swap must be entered into; (2) an expansion of the types of swaps that
are eligible; (3) a reduced syndication percentage requirement; (4) an
elimination of the notional amount cap; and (5) a refined explanation
of the types of loans that would qualify. Any swap that meets the
requirements of the IDI Swap Dealing Exclusion in paragraph (5) of the
SD Definition would also meet the requirements of this new IDI De
Minimis Provision.
(i) Policy-Related Costs and Benefits
Similar to the IDI Swap Dealing Exclusion in paragraph (5) of the
SD Definition, the IDI De Minimis Provision allows IDIs to tailor the
risks of a loan to the loan customer's and the lender's needs and
promotes the risk-mitigating effects of swaps. The IDI De Minimis
Provision, however, allows more flexibility, which should expand the
universe of swaps that do not have to be counted towards the de minimis
threshold, as well as decrease concentration in the markets for swaps
and loans. For example, the different requirements for both timing and
the relationship of the swap to the loan will increase the ability of
IDIs to enter into certain swaps and not be concerned that they would
have to be counted towards the de minimis threshold. This should
enhance market liquidity, which is helpful for customers of IDIs that
may not have access to larger SDs. Conversely, expanding the universe
of swaps not required to be counted towards the de minimis threshold
also expands the number of swaps potentially not subject to SD
regulation and consequently, could decrease customer protections. As
mentioned in section II.B.1, however, the proposed IDI De Minimis
Provision will likely benefit mostly small and mid-sized IDIs, which
mitigates the concern that systemic risk will increase as a result of
the proposed change.
As indicated by Table 14 in section II.B.1, the level of activity
between unregistered IDIs and other unregistered persons is between
only approximately 0.003 percent and 0.007 percent of the total AGNA of
swaps activity, depending on the range of AGNA of
[[Page 27476]]
swaps activity being examined (at AGNAs of between $1 billion and $50
billion). Given those low percentages, the Commission is of the view
that the policy benefits of SD regulation likely would not be
significantly diminished if the proposed IDI De Minimis Provision is
adopted and some unregistered IDIs marginally expand the number and
AGNA of swaps they enter into with customers in connection with loans
to those customers. Further, though these entities are active in the
swap market, the Commission is of the view that their activity poses
less systemic risk as compared to larger IDIs because of their limited
AGNA of swaps activity as compared to the overall size of the market.
The Commission believes that the benefits of added market liquidity
may be more significant than the costs of potentially reduced customer
protections. The cost of reduced customer protections is mitigated
because such swaps would still be required to be reported to the CFTC
and IDIs would still be subject to prudential regulatory requirements,
thereby providing oversight with respect to such swaps.
(ii) Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
(a) Protection of Market Participants and the Public
The IDI De Minimis Provision proposed amendment may expand the
universe of swaps that fall outside the scope of SD regulations,
potentially increasing systemic risk and reducing counterparty
protections. However, the IDIs would still be subject to prudential
regulatory requirements, potentially mitigating this concern.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
The efficiency, competitiveness, and financial integrity of the
markets may also be affected by the addition of the IDI De Minimis
Provision since it provides IDIs more flexibility to enter into swaps
in connection with loans without registering as SDs. With the added
flexibility, the number of IDIs offering swaps in connection with loans
may increase, which might have a positive impact on the efficiency and
competiveness of the market for swaps and loans. However, the added
flexibility may also result in fewer swaps being subject to SD-related
regulations.
(c) Price Discovery
The IDI De Minimis Provision could lead to better price discovery
as small and mid-sized banks increase their level of ancillary dealing
activity, which might increase the frequency of swap transaction
pricing.
(d) Sound Risk Management
The proposed IDI De Minimis Provision should increase the usage of
swaps for risk mitigation, which might reduce the risk resulting from
the defaulting of loan customers. Additionally, having more IDIs
offering swaps in connection with loans might decrease concentration in
the market for loan-related swaps and thereby decrease risk as well.
(e) Other Public Interest Considerations
The Commission has not identified any other public interest
considerations with respect to the proposed IDI De Minimis Provision.
3. Swaps Entered Into To Hedge Financial or Physical Positions
The Commission is proposing new paragraph (4)(D), which provides a
general exception from the SD de minimis threshold calculation for
certain hedging swaps. To meet the requirements of the Hedging De
Minimis Provision, a swap must be entered into by a person for the
primary purpose of reducing or otherwise mitigating one or more of its
specific risks, including, but not limited to, market risk, commodity
price risk, rate risk, basis risk, credit risk, volatility risk,
correlation risk, foreign exchange risk, or similar risks arising in
connection with existing or anticipated identifiable assets,
liabilities, positions, contracts, or other holdings of the person or
any affiliate. Additionally, the entity entering into the hedging swap
must not: (1) Be the price maker of the hedging swap; (2) receive or
collect a bid/ask spread, fee, or commission for entering into the
hedging swap; and (3) receive other compensation separate from the
contractual terms of the hedging swap in exchange for entering into the
hedging swap.
(i) Policy-Related Costs and Benefits
Generally, the proposed Hedging De Minimis Provision is not
expected to impact how such swaps are treated for purposes of the de
minimis threshold calculation, but rather provides additional clarity
to market participants, which allows them to determine more easily
whether swaps entered into for purposes of hedging financial or
physical positions are counted towards the de minimis threshold. The
Commission believes that the clarity will benefit certain entities by
encouraging economically-appropriate risk mitigation, potentially
reducing systemic risk broadly. The proposed exception should reduce
costs that persons engaging in such swaps would incur in determining if
they are SDs. Such added clarity may also improve market liquidity as
entities feel more comfortable entering into a swap for the purpose of
hedging, knowing that the swap would not necessarily constitute swap
dealing. In addition to increased market liquidity, the additional
clarity should encourage economically appropriate risk mitigation.
Conversely, it is possible that improper application of the Hedging
De Minimis Provision could lead to certain swap dealing activity being
treated as hedging activity that does not need to be counted towards
the de minimis threshold. This may reduce the level of the Commission's
regulatory coverage of the swap market. However, the Commission
believes that the requirements of the proposed Hedging De Minimis
Provision limit the likelihood that dealing activity would be treated
as hedging activity by market participants.
(ii) Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
(a) Protection of Market Participants and the Public
The Commission notes that certain swaps that are now currently
counted towards the de minimis threshold could now be hedging swaps
that would not be counted, which could potentially mean less regulatory
coverage and protection for market participants. However, as discussed,
the Commission believes that the proposed exception for swaps entered
into to hedge financial or physical positions has a number of
requirements that greatly reduce the likelihood that swap dealing
activity would improperly not be counted towards an entity's de minimis
threshold calculation, reducing the potential impact to systemic risk
and counterparty protections.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
With respect to the Hedging De Minimis Provision, market liquidity
may improve as entities would be able to execute hedging swaps knowing
that the swaps would not necessarily constitute swap dealing that
counts towards the de minimis threshold.
[[Page 27477]]
(c) Price Discovery
The Hedging De Minimis Provision could lead to better price
discovery as more entities gain certainty that hedging swaps are not
considered dealing activity, and therefore increase their hedging-
related activity because they are less likely to have to register as an
SD.
(d) Sound Risk Management
The added clarity that certain hedging swaps need not be counted
towards an entity's de minimis calculation could lead to improved risk
management as certain entities increase their hedging activities.
(e) Other Public Interest Considerations
The Commission has not identified any other public interest
considerations with respect to the proposed Hedging De Minimis
Provision.
4. Swaps Resulting From Multilateral Portfolio Compression Exercises
(i) Policy-Related Costs and Benefits
The Commission believes that swaps which result from multilateral
portfolio compression exercises and which meet the requirements of the
existing Staff Letter No. 12-62 would also meet the requirements of the
proposed rule amendment, and are already not considered swaps that have
to count towards a person's de minimis threshold. The Commission is of
the preliminary belief that the existing no-action relief is being
fully relied upon by market participants, and therefore, this proposed
change could lead to increased certainty for market participants,
without any significant policy-related costs for the swap market.
(ii) Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
(a) Protection of Market Participants and the Public
Multilateral portfolio compression exercises help to better align
initial margin between appropriate counterparties when, for example, a
swap with a compression exercise participant has been backed-to-backed
between two SD affiliates in the same holding company. In such cases,
the original outward facing swap with the first affiliate and the back-
to-back affiliate swap may be replaced with an outward facing swap with
the second affiliate. Thus, having SDs engage in compression exercises
may increase the protections that posting initial margin provides
market participants and the public, namely, a counterparty has a senior
claim to posted initial margin and may not have to become a general
creditor in a bankruptcy. To the extent that a provision explicitly
excepting multilateral portfolio compression exercise swaps from the de
minimis calculation encourages more participation in compression
exercises, market participants and the public may be better protected.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
The increased certainty that swaps resulting from multilateral
portfolio compression exercises do not need to be counted towards a
person's de minimis threshold could encourage persons to enter into
multilateral portfolio compression exercises on a more regular basis,
potentially increasing the financial integrity of the markets.
(c) Price Discovery
Prices from swap compression exercises are not publicly reported
because they are not price-forming trades. As such, the Commission has
not identified any price discovery considerations with respect to the
MPCE De Minimis Provision.
(d) Sound Risk Management
The increased certainty that swaps resulting from multilateral
portfolio compression exercises do not need to be counted towards a
person's de minimis threshold could encourage persons to enter into
multilateral portfolio compression exercises on a more regular basis,
potentially reducing risk.
(e) Other Public Interest Considerations
The Commission has not identified any other public interest
considerations with respect to the MPCE De Minimis Provision.
5. Methodology for Calculating Notional Amounts
(i) Policy-Related Costs and Benefits
To allow for more timely clarity to market participants, the
Commission is proposing new paragraph (4)(vii) of the SD Definition,
which provides that the Commission may determine the methodology to be
used to calculate the notional amount for any group, category, type, or
class of swaps, and delegates to the Director of DSIO the authority to
determine methodologies for calculating notional amounts. Additionally,
any such methodology shall be economically reasonable and analytically
supported, and be made publicly available on the CFTC website. The
Commission believes that this proposed amendment would facilitate
timely clarity regarding notional amount calculation methodologies for
purposes of the de minimis threshold, and help ensure that persons are
fully aware of whether their activities could lead to (or presently
entail) SD registration requirements in the event of market or
regulatory changes. As is the case with existing delegations to staff,
the Commission would continue to reserve the right to exercise the
delegated authority itself at any time.
(ii) Section 15(a)
(a) Protection of Market Participants and the Public
The Commission has not identified any protection of market
participants and the public considerations with respect to the proposed
rule for determining the methodology for calculating notional amounts
and the delegation of authority.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission has not identified any efficiency, competitiveness,
and financial integrity of the markets considerations with respect to
the proposed rule for determining the methodology for calculating
notional amounts and the delegation of authority.
(c) Price Discovery
The Commission has not identified any price discovery
considerations with respect to the proposed rule for determining the
methodology for calculating notional amounts and the delegation of
authority.
(d) Sound Risk Management
The Commission believes that most market participants understand
the risks of the swaps they engage in. To the extent that the proposed
amendment compels SDs to assess the deltas of embedded options in
swaps, however, the proposed amendment could lead to an audit trail for
SDs that might ultimately improve risk management (if estimated deltas
did not exist already).
(e) Other Public Interest Considerations
The Commission believes that the proposed rule for determining the
methodology for calculating notional amounts and the delegation of
authority will ensure that persons are fully aware of whether their
activities could lead to (or presently entail) SD registration
requirements in the event of market or regulatory changes.
6. Request for Comment
The Commission invites comments from the public on all aspects of
its
[[Page 27478]]
preliminary consideration of costs and benefits associated with this
Proposal. The questions below relate to areas that the Commission
preliminarily believes may be relevant. In addressing these or any
other aspect of the Commission's preliminary assessment, commenters are
encouraged to submit any data or other information that they may have
quantifying or qualifying the costs and benefits of the proposed
alternatives.
(1) What are the costs and benefits to market participants
associated with each proposed change? Please explain and, to the extent
possible, quantify these costs and benefits.
(2) What are the direct costs associated with SD registration and
compliance? What is the smallest notional amount of dealing swaps that
an entity must enter into in order for the profitability of its swap
dealing activity to exceed SD registration and compliance costs?
(3) Are there indirect benefits to registering as an SD? For
example, does being a registered SD make an entity a more desirable
counterparty? Are many of the benefits of transacting with an SD not
relevant because many requirements are part of standard ISDA
agreements?
(4) Besides the direct costs of registration and compliance, are
there any indirect costs to becoming a registered SD? What are these
costs?
(5) Would the entities with dealing activity between $3 billion and
$8 billion incur similar registration and compliance costs as compared
to entities with dealing activity above $8 billion? Would those dealers
be impacted differently by those costs?
(6) What are the costs and benefits to the public associated with
each proposed change? Please explain and, to the extent possible,
quantify these costs and benefits.
(7) How does each proposed change affect the efficiency,
competitiveness, and financial integrity of markets?
(8) How does each proposed change affect price discovery for the
swap market?
(9) How does each proposed change affect sound risk management for
swap market participants?
(10) How does each proposed change affect other public interests
that the Commission may elect to consider?
(11) Has the Commission identified all of the relevant categories
of costs and benefits in its preliminary consideration of the costs and
benefits? Please describe any additional categories of costs or
benefits that the Commission should consider.
(12) The Commission preliminarily believes that cross-border
aspects of this rulemaking are similar to domestic applications. Do the
costs and benefits of the proposed changes, as applied in cross-border
contexts, differ from those costs and benefits resulting from their
domestic application, and, if so, in what ways and to what extent?
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of the CEA.\198\
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\198\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether this Proposal implicates any other specific
public interest to be protected by the antitrust laws.
The Commission has considered this Proposal to determine whether it
is anticompetitive and has preliminarily identified no anticompetitive
effects. The Commission requests comment on whether this Proposal is
anticompetitive and, if it is, what the anticompetitive effects are.
Because the Commission has preliminarily determined that this
Proposal is not anticompetitive and has no anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the CEA. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the CEA that would otherwise be served by adopting this
Proposal.
List of Subjects in 17 CFR Part 1
Commodity futures, Definitions, De minimis exception, Insured
depository institutions, Swaps, Swap dealers.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 1 as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24
(2012).
0
2. In Sec. 1.3, amend the definition of the term ``Swap dealer'' as
follows:
0
a. Revise paragraph (4)(i)(A);
0
b. Add paragraphs (4)(i)(C), (D), and (E);
0
c. Remove and reserve paragraph (4)(ii); and
0
d. Add paragraph (4)(vii).
The revisions and additions read as follows:
Sec. 1.3 Definitions.
* * * * *
Swap Dealer. * * *
(4) De minimis exception--(i)(A) In general. Except as provided in
paragraph (4)(vi) of this definition, a person that is not currently
registered as a swap dealer shall be deemed not to be a swap dealer as
a result of its swap dealing activity involving counterparties, so long
as the swaps connected with those dealing activities into which the
person--or any other entity controlling, controlled by or under common
control with the person--enters over the course of the immediately
preceding 12 months have an aggregate gross notional amount of no more
than $8 billion, and an aggregate gross notional amount of no more than
$25 million with regard to swaps in which the counterparty is a
``special entity'' (as that term is defined in section 4s(h)(2)(C) of
the Act, 7 U.S.C. 6s(h)(2)(C), and Sec. 23.401(c) of this chapter),
except as provided in paragraph (4)(i)(B) of this definition. For
purposes of this definition, if the stated notional amount of a swap is
leveraged or enhanced by the structure of the swap, the calculation
shall be based on the effective notional amount of the swap rather than
on the stated notional amount.
* * * * *
(C) Insured depository institution swaps in connection with
originating loans to customers. Solely for purposes of determining
whether an insured depository institution has exceeded the aggregate
gross notional amount threshold set forth in paragraph (4)(i)(A) of
this definition, an insured depository institution may exclude swaps
entered into by the insured depository institution with a customer in
connection with originating a loan to that customer, subject to the
requirements of paragraphs (4)(i)(C)(1) through (4)(i)(C)(6) of this
definition.
(1) Timing of execution of swap. The insured depository institution
enters into the swap with the customer no
[[Page 27479]]
earlier than 90 days before execution of the applicable loan agreement,
or no earlier than 90 days before transfer of principal to the customer
by the insured depository institution pursuant to the loan, unless an
executed commitment or forward agreement for the applicable loan
exists, in which event the 90 day restriction does not apply;
(2) Relationship of swap to loan. (i) The rate, asset, liability or
other term underlying such swap is, or is related to, a financial term
of such loan, which includes, without limitation, the loan's duration,
rate of interest, the currency or currencies in which it is made and
its principal amount; or
(ii) Such swap is required as a condition of the loan, either under
the insured depository institution's loan underwriting criteria or as
is commercially appropriate, in order to hedge risks incidental to the
borrower's business (other than for risks associated with an excluded
commodity) that may affect the borrower's ability to repay the loan;
(3) Duration of swap. The duration of the swap does not extend
beyond termination of the loan;
(4) Level of funding of loan. (i) The insured depository
institution is committed to be, under the terms of the agreements
related to the loan, the source of at least 5 percent of the maximum
principal amount under the loan; or
(ii) If the insured depository institution is committed to be,
under the terms of the agreements related to the loan, the source of
less than 5 percent of the maximum principal amount under the loan,
then the aggregate notional amount of all swaps entered by the insured
depository institution with the customer in connection with the
financial terms of the loan cannot exceed the principal amount of the
insured depository institution's loan;
(5) The swap is considered to have been entered into in connection
with originating a loan with a customer if the insured depository
institution:
(i) Directly transfers the loan amount to the customer;
(ii) Is a part of a syndicate of lenders that is the source of the
loan amount that is transferred to the customer;
(iii) Purchases or receives a participation in the loan; or
(iv) Under the terms of the agreements related to the loan, is, or
is intended to be, the source of funds for the loan;
(6) The loan to which the swap relates shall not include:
(i) Any transaction that is a sham, whether or not intended to
qualify for the exception from the de minimis threshold in this
definition; or
(ii) Any synthetic loan.
(D) Swaps entered into for the purpose of hedging. Solely for
purposes of determining whether a person has exceeded the aggregate
gross notional amount threshold set forth in paragraph (4)(i)(A) of
this definition, the person may exclude swaps that are entered into for
the purpose of hedging, subject to the requirements of paragraphs
(4)(i)(D)(1) through (4)(i)(D)(6) of this definition.
(1) The person is entering into the swap for the primary purpose of
reducing or otherwise mitigating one or more specific risks for the
person, which includes, without limitation, market risk, price risk,
rate risk, basis risk, credit risk, volatility risk, foreign exchange
risk, liquidity risk, or similar risks arising in connection with
existing or anticipated identifiable assets, liabilities, positions,
contracts, or other holdings of the person or any affiliate of the
person;
(2) For that swap, the person is not the price maker and does not
receive or earn a bid/ask spread, fee, commission, or other
compensation for entering into the swap;
(3) The swap is economically appropriate to the reduction of risks
that may arise in the conduct and management of an enterprise engaged
in the type of business in which the person is engaged;
(4) The swap is entered into in accordance with sound business
practices; and
(5) The person does not enter into the swap in connection with
activity structured to evade designation as a swap dealer.
(E) Swaps resulting from multilateral portfolio compression
exercises. Solely for purposes of determining whether a person has
exceeded the aggregate gross notional amount threshold set forth in
paragraph (4)(i)(A) of this definition, the person may exclude swaps
that result from multilateral portfolio compression exercises, as
defined in Sec. 23.500 of this chapter, to the extent the person does
not enter into the multilateral portfolio compression exercise in
connection with activity structured to evade designation as a swap
dealer.
(ii) [Reserved]
* * * * *
(vii) Methodology for calculation of notional amounts. (A) For
purposes of paragraph (4) of this definition, the Commission may on its
own, or upon written request by a person, determine the methodology to
be used to calculate the notional amount for any group, category, type,
or class of swaps. Such methodology shall be economically reasonable
and analytically supported. Each such determination shall be made
publicly available and posted on the Commission website.
(B) Delegation. (i) The Commission hereby delegates to the Director
of the Division of Swap Dealer and Intermediary Oversight, or such
other employee or employees as the Director may designate from time to
time, the authority in paragraph (4)(vii)(A) of this definition to
determine the methodology to be used to calculate the notional amount
for any group, category, type, or class of swaps.
(ii) The Director of the Division of Swap Dealer and Intermediary
Oversight may submit any matter which has been delegated to him or her
under paragraph (4)(vii)(B)(i) of this definition to the Commission for
its consideration.
(iii) Nothing in this paragraph (4)(vii)(B) may prohibit the
Commission, at its election, from exercising the authority delegated to
the Director of the Division of Swap Dealer and Intermediary Oversight
under paragraph (4)(vii)(A) of this definition.
* * * * *
Issued in Washington, DC, on June 5, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to De Minimis Exception to the Swap Dealer Definition--
Commission Voting Summary, Chairman's Statement, and Commissioners'
Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioner Quintenz
voted in the affirmative. Commissioner Behnam voted in the negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
Since becoming Chairman, I have committed to resolving this
outstanding issue and giving market participants the regulatory
certainty they need. Still, as you know, last year I requested that
the Commission postpone a decision on the de minimis threshold for a
year. That decision was understandably disappointing to some,
including my fellow Commissioners, who said they were then ready to
vote on it.
Yet, as I told Congress at the time, I did not just want to
address the de minimis threshold; I wanted to get it right.
Today, I believe the staff has had adequate time to analyze the
most current and comprehensive trading data and arrive at a
recommendation for the best path forward in terms of managing risk
to the financial system. The staff has provided
[[Page 27480]]
Commissioners with full access to the data they have used in their
analysis. They have also conducted additional and specific data
analyses requested by Commissioners.
The data shows quite clearly that a drop in the de minimis
definition from $8 billion to $3 billion would not have an
appreciable impact on coverage of the marketplace. In fact, any
impact would be less than one percent--an amount that is truly de
minimis.
On the other hand, the drop in the threshold would pose
unnecessary burdens for non-financial companies that engage in
relatively small levels of swap dealing to manage business risk for
themselves and their customers. That would likely cause 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,
Wall Street swap dealers.
In my travels around the country over the past four years on the
Commission, I have met numerous small swaps trading firms that make
markets in local markets or in select asset classes. These firms are
often housed in small community banks, local energy utilities or
commodity trading houses. They all trade below the $8 billion
threshold. Almost all of them say that if the de minimis threshold
were to drop to $3 billion, they would reduce their trading
accordingly. They just cannot afford to be registered as swap
dealers.
Who are the winners if these small firms reduce their market
making activities? Big Wall Street banks. Who are the losers if
these small firms reduce their market making activities? Small
regional lenders, energy hedgers and Ag producers, who become more
dependent on Wall Street trading liquidity. Who is the really big
loser? The U.S. economy, which becomes more financially concentrated
and less economically diverse.
That is why I think the proposed rule rightly balances the
mandate to register swap dealers whose activity is large enough in
size and scope to warrant oversight without detrimentally affecting
community banks and agricultural co-ops that engage in limited swap
dealing activity and do not pose systemic risk. Leaving the
threshold at the $8 billion level allows firms to avoid incurring
new costs for overhauling their existing procedures for monitoring
and maintaining compliance with the threshold. It fosters increased
certainty and efficiency in determining swap dealer registration by
utilizing a simple objective test with a limited degree of
complexity. And it ensures that smaller market makers and the
counterparties with which they trade can engage in limited swap
dealing without the high costs of registration and compliance as
intended by Congress when it established the de minimis dealing
exception to begin with.
The changes proposed today will also not count swaps of Insured
Depository Institutions (IDIs) made in connection with loans. They
would allow, for example, an insured depository institution swap
dealer to write a swap with a customer 181 days after entering into
a loan without counting it towards the $8 billion threshold. These
types of changes will allow small and regional banks to further
serve customers' needs without the added burden of unnecessary
regulation and associated compliance costs.
This proposal incorporates feedback and input from my two fellow
Commissioners and their fine staffs. We now look forward to feedback
from the public and market participants. We ask numerous questions
about whether any additional exceptions or calculations should be
included in the final rule. Three years ago, I raised the question
of whether there should be an exclusion from counting cleared swaps
towards the registration threshold and that question is asked again.
Your response to questions regarding adding other potential
components will help the Commission assess whether further
adjustments to the de minimis exception may be appropriate in the
final rule.
As discussed in the adopting release, staff continues to consult
with the SEC and prudential regulators regarding the changes in the
proposal in particular some of the questions regarding exclusions. I
remain committed to working with Chair Jay Clayton and the SEC in
areas where harmonization is necessary and appropriate.
I also remain committed to finalizing this rule before the end
of the year. I recognize that market participants need certainty.
Today's proposal is a major step forward in doing just that. I
applaud staff for this proposal and look forward to feedback.
Appendix 3--Supporting Statement of Commissioner Brian D. Quintenz
I support this proposed rulemaking governing swap dealer
registration, which is fundamental to the Commission's effective
oversight of the swaps market.
Swap dealers are subject to extensive and costly regulatory
requirements: Registration fees; minimum capital requirements;
posting margin for uncleared swaps; IT costs for trade processing,
reporting, confirmation, and reconciliation activities; costs to
create and send clients daily valuation reports; costs for
recordkeeping obligations; third party audit expenses; legal fees to
develop and implement business conduct rules and many, many more. If
that sounds like a big bill, it is. A prominent economic research
firm estimated the present value of the cost for swap dealer
registration compliance at $390 million per firm.\1\
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\1\ See National Economic Research Associates, Cost-Benefit
Analysis of the CFTC's Proposed Swap Dealer Definition 1 (Dec. 20,
2011) (``NERA Report''), https://www.nera.com/content/dam/nera/publications/archive2/PUB_SwapDealer_1211.pdf. It is difficult to
estimate the initial and incremental, ongoing costs of swap dealer
regulation. NERA's report regarding the costs of registration for
non-financial energy firms remains one of the only comprehensive
analyses produced.
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Those significant requirements and costs are imposed to advance
equally significant policy objectives, such as the reduction of
systemic risk, increased counterparty protections, and enhanced
market efficiency and integrity. Therefore, the registration
threshold, as the trigger mechanism for those costs and objectives,
must be appropriately and specifically calibrated to ensure that the
correct market group shoulders the burdens of swap dealer
regulations because they are best situated to realize the
corresponding policy goals of that registration.
I have stated previously, in great detail and with considerable
evidence, the importance of appropriately calibrating the de minimis
threshold so that entities posing no systemic risk and with a
relatively small market footprint are not regulated under a regime
that is more appropriate for the world's largest, most complex
financial institutions.\2\ If we fail to calibrate this threshold
appropriately, firms at the margin will likely reduce their activity
to avoid registration as opposed to serving their clients' interests
and accepting the burdens of registration. A public policy choice
which drives away market participants and reduces market activity is
undeniably flawed.
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\2\ Keynote Address of Commissioner Brian Quintenz before the
Smart Financial Regulation Roundtable (Nov. 2017), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz3.
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From my first confirmation hearing in 2016 to the present
day,\3\ including meetings with elected representatives, my second
confirmation hearing,\4\ interviews with the press,\5\ discussions
with market participants, and in public remarks at event forums, \6\
I have been adamant that notional value is a poor measure of
activity and a meaningless measure of risk, and therefore, by
itself, is a deficient metric by which to impose large costs and
achieve substantial policy objectives.\7\ Therefore, I have some
reservations about this proposal's continued reliance on a one-size-
fits-all notional value test for swap dealer registration.
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\3\ Transcript, ``Hearing to Consider Pending CFTC
Nominations,'' Senate Agriculture, Nutrition, and Forestry
Committee, September 15, 2016, 2016 WL 4938280 p.12.
\4\ Transcript, ``Hearing to Consider Pending CFTC
Nominations,'' Senate Agriculture, Nutrition, and Forestry
Committee, July 27, 2017, 2017 WL 3215667 p.14 (``With regard to the
de minimis threshold level, I think when this threshold was set
originally it was really done without the benefit of a lot of data.
I think if there is a scenario where this shortfall reduces from $8
billion to $3 billion [that] instead of increasing registration, it
would drive participants out of the market or force them to reduce
their activity because of the cost that would be imposed upon
them.'').
\5\ Bain, Benjamin, ``CFTC Swaps Dealer Threshold Criticized by
Its Newest Republican,'' Bloomberg (Oct. 9, 2017); and DeFrancesco,
Dan, ``CFTC's Quintenz: Dealer Threshold Could Exclude Cleared
Swaps--Commissioner Suggests Risks should be Better Considered in De
Minimis Reappraisal,'' Risk.Net (Oct. 24, 2017).
\6\ ``Fireside Chat: CFTC Commissioners,'' FIA Expo Chicago (Oct
19, 2017) available at: https://expo2017.fia.org/articles/fireside-chat-cftc-commissioners, at 9'30'' through 10'25''.
\7\ For further discussion, see comment letter to CFTC from
Financial Services Roundtable dated January 19, 2016 (``We do not
see a benefit to requiring an entity that enters into a small number
of swaps with a large notional amount but little exposure to choose
between exiting the market or registering as a swap dealer, nor
should entities that are taking on very large exposures without
crossing a notional threshold, or a trade or counterparty count
metric, be unregulated because they have concentrated risk in a
small number of trades.'').
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I still, and will continue to, believe that the criteria for
determining swap dealer registration should be more closely
correlated to risk. However, if any final rule is going to
[[Page 27481]]
settle for an activity-based threshold, a notional value metric
should at least be combined with additional measures (such as
dealing counterparty count and dealing transaction count) to
determine what constitutes a de minimis quantity of swap dealing
activity. Including additional measures should mitigate instances of
``false positives'' that could result from the use and deficiencies
of any one activity-based metric.\8\
---------------------------------------------------------------------------
\8\ For further discussion, see letter from Institute of
International Bankers dated January 19, 2016.
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While it would have been my preference that this concept appear
in this proposal's rule text as the operative standard, I am very
grateful to the Chairman and the Division of Swap Dealer and
Intermediary Oversight (DSIO) for including a robust discussion in
the preamble on the merits of replacing the current notional value
de minimis threshold with a three-prong test. Specifically, the
preamble suggests an entity could qualify for the de minimis
exception if its dealing activity is below any of the following
three criteria: (i) A notional threshold, (ii) a proposed dealing
counterparty count threshold, or (iii) a proposed dealing
transaction count threshold. In other words, an entity would have to
surpass all three hurdles collectively in order to lose the de
minimis exception's safe harbor.
I have included several questions in the proposal that ask for
feedback on this approach, particularly with respect to the dealing
counterparty and transaction count thresholds which I believe would
provide market participants with additional flexibility to serve
their clients' needs without triggering a very costly and burdensome
registration process. I thank the staff of DSIO for including my
questions in the proposal and welcome market participant's feedback
on this potential approach.
I also welcome comments on the Proposed Rule's preamble
discussion on accounting for exchange-traded or cleared swaps in an
entity's de minimis calculation. Many of the policy goals of swap
dealer regulation are accomplished when a swap is exchange-traded
and cleared. For example, systemic risk concerns are diminished with
respect to cleared swaps: The swaps are standardized, the executing
counterparties do not incur counterparty credit risk because they
face the clearinghouse and not each other, and each side is required
to post margin that helps guarantee performance and prevent unfunded
losses from accumulating. Removing such swaps from the de minimis
calculation would better align the registration threshold with risk
and would also, I believe, encourage additional liquidity on SEFs. I
am hopeful that with the benefit of additional industry comment and
further Commission analysis, the Commission will either adopt an
exclusion for exchange-traded and cleared swaps or adjust their
notional weighting in an entity's de minimis calculation.
We must remember, the Commission is not establishing the de
minimis exception in a vacuum. Subsequent to the adoption of the
swap dealer definition, other regulatory requirements have gone into
effect which also advance the goals of swap dealer registration,
such as mandatory clearing, SEF trading, reporting swap data to
repositories, and margin requirements for uncleared swaps. For
example, regardless of whether an entity is registered as a swap
dealer, its swap activity is transparent to the Commission because
of the swap data and real-time reporting requirements that apply to
all market participants.
When the Commission first established the $8 billion de minimis
threshold in 2012, it did so without the benefit of swap data.\9\
Now almost six years later, staff has conducted a comprehensive
analysis of the available swap data collected by Commission-
registered SDRs and presented estimates about the impact that lower
or higher notional amount thresholds would have on swap dealer
registration. Although much work remains to be done to further
refine the data, particularly with respect to the non-financial
commodity asset class, I commend staff for their hard work,
progress, and thoughtful analysis. I believe the data in the
Proposed Rule clearly supports maintaining the de minimis threshold
at $8 billion or potentially increasing it. For example, at a $20
billion notional threshold, the estimated amount of notional swap
activity that would no longer be covered by swap dealer regulation
is approximately only 1/100th of 1 percent of the $221 trillion
market analyzed. I am interested to hear from commenters about the
policy and market implications of maintaining or raising the de
minimis threshold.
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\9\ See Hearing to Review the 2016 Agenda of the Commodity
Futures Trading Commission Before the H. Comm. on Agric., 114th
Cong. 17 (2016) (response of Timothy Massad, former CFTC Chairman,
to question posed by Congressman David Scott (D-GA)), https://agriculture.house.gov/uploadedfiles/114-40_-_98680.pdf.
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Finally, I would like to commend the Chairman and DSIO for
including many important improvements to the de minimis exception in
this proposal which I fully support. For instance, I support an
appropriate Insured Depository Institution exception that will allow
for banks to serve their clients' needs. By removing unnecessary
timing restrictions and expanding the types of credit extensions
that qualify for the exception, the proposal should improve the
ability of IDIs to help their customers hedge loan-related risks as
the statute intended. I also support the proposed rule's
clarification that swaps that hedge financial risks may be excluded
from an entity's de minimis count. Market participants should be
able to use swaps to manage their financial and physical risks
without concern that such activity may trigger swap dealer
registration.
I will vote in favor of issuing this proposal to the public for
feedback and look forward to hearing from market participants about
how these proposed amendments may be further refined or calibrated
to increase the efficacy of the de minimis threshold to meet the
goals of swap dealer registration.
Appendix 4--Dissenting Statement of Commissioner Rostin Behnam
Introduction
I respectfully dissent from the Commodity Futures Trading
Commission's (the ``Commission'' or ``CFTC'') notice of proposed
rulemaking addressing the de minimis exception to the swap dealer
definition (the ``Proposal''). I have a number of concerns with
specific criteria of the various exceptions proposed and
contemplated in the Proposal. However, my gravest concern is that
the Commission is moving far beyond the task before it--setting the
aggregate gross notional amount threshold for the de minimis
exception--to redefine swap dealing activity absent meaningful
collaboration with the Securities and Exchange Commission (``SEC''),
as required by the Dodd-Frank Act,\1\ and to the detriment of market
participants eager for regulatory certainty. Equally concerning, the
Proposal's various ancillary components not only detract from its
core purpose, but may signify the Commission's willingness to
exploit the de minimis exception to undermine the swap dealer
definition and circumvent Congressional intent.
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\1\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, section 712(d), 124 Stat. 1376, 1644 (2010)
(the ``Dodd-Frank Act''). Additionally, with respect to rulemakings
and orders regarding swap dealers, among other things, section
712(a) requires the CFTC to consult and coordinate to the extent
possible with the SEC and the prudential regulators to ensure
consistency and comparability, to the extent possible. Such
consultation must occur before the CFTC commences such rulemaking or
order issuance. The Proposal indicates only that the Commission ``is
consulting with the SEC and prudential regulators regarding the
changes to the SD Definition discussed in this Proposal,''
indicating that the Commission may not have adhered to the letter or
spirit of section 712(a) or (d) of the Dodd-Frank Act with respect
to the Proposal.
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As discussed in the preamble to the Proposal, the regulatory
history sets forth a clear path towards--and a deadline to
complete--today's determination to propose an amendment that would
set the aggregate gross notional amount (``AGNA'') threshold for the
de minimis exception at $8 billion in swap dealing activity entered
into by a person over the preceding 12 months prior to the
termination of the phase-in period on December 31, 2019.\2\ Since
the Commission's
[[Page 27482]]
first Order Establishing a New De Minimis Threshold Phase-in
Termination Date in 2016,\3\ market participants have endured undue
and prolonged uncertainty because the Commission has not acted
decisively on the de minimis threshold. When the Commission punted
again in October 2017, I urged the Commission to take further action
now or let the current rule take effect.\4\
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\2\ Since the initial establishment of the AGNA at $3 billion in
May 2012, and initial five year phase-in period during which the
AGNA threshold was set at $8 billion, the Commission issued two
successive orders extending the phase-in, and issued preliminary and
final staff reports concerning the de minimis threshold, as required
by paragraph 4(ii)(B) of the swap dealer definition. Additionally,
the Commission has more than five years of swap dealer oversight
experience; given that the first swap dealers submitted applications
for preliminarily registration in December 2017. See Further
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,''
``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' 77 FR 30596
(May 23, 2012) (``SD Definition Adopting Release''); Order
Establishing De Minimis Threshold Phase-In Termination Date, 81 FR
71605 (Oct. 18, 2016) (``Initial Phase-In Termination Date Order'');
Order Establishing a New De Minimis Threshold Phase-In Termination
Date, 82 FR 50309 (Oct. 31, 2017) (``Second Phase-In Termination
Date Order''); Swap Dealer De Minimis Exception Preliminary Report
(Nov. 18, 2015), available at https://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis_1115.pdf; Swap Dealer De
Minimis Exception Final Staff Report (Aug. 15, 2016), available at
https://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis081516.pdf.
\3\ Initial Phase-In Termination Date Order, supra note 2.
\4\ Second Phase-In Termination Date Order, supra note 2; Rostin
Behnam, Statement on De Minimis Threshold (Oct. 11, 2017), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement101117a.
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It is now June 2018. Given the twelve month lookback for
calculating the AGNA, absent Commission action, market participants
will need to start tracking their swap dealing activity on January
1, 2019 to determine whether their dealing activity would require
registration when the phase-in period ends on December 31, 2019. The
Commission has less than six months to either finalize the Proposal
or kick it down the road again by issuing a third order establishing
yet another phase-in termination date sometime in the future.
Six months is an ambitious time frame for even a simple rule.
While CFTC-specific data is not available, at least one study
concluded that the average amount of time for federal regulatory
agencies to finalize rules is generally between 14 and 20 months.\5\
The Part 49 amendments that we also voted on today, for example,
took over 16 months between the Commission proposal and a final
rule, and that rule only addressed a single industry comment letter
that was nine pages long. However, given our extensive history with
the AGNA for the de minimis exception, I believe that had the
Commission observed the course it was on, and focused on the task at
hand, it could have crafted the Proposal to address the issues most
critical to market participants (the de minimis threshold, the
exclusion for insured depository institution swaps in connection
with originating loans to customers or ``IDI Swap Dealing
Exclusion,'' and the hedging swap exclusion), consistent with
requirements of the Commodity Exchange Act (the ``CEA'' or ``Act'')
and Congressional intent and within the six month window we are now
in.
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\5\ Jason Webb Yackee and Susan Webb Yackee, Delay in Notice and
Comment Rulemaking: Evidence of Systemic Regulatory Breakdown?, in
Regulatory Breakdown: The Crisis of Confidence in U.S. Regulation
169 (Cary Coglianese ed., 2012).
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Instead, the Commission, having waited too long to address these
critical issues jointly with the SEC, veered off course, and relies
too heavily on an alternative means to reach its destination: The de
minimis exception.\6\ Though this alternative path is within the
Commission's authority, I believe that in utilizing the de minimis
exception to address longstanding concerns with the IDI and physical
hedging exclusions, the Commission stopped respecting the difference
between what is permissible and what is proper. As a consequence,
the Proposal morphed into a loophole for the Commission to explore
the extent to which it may unilaterally alter the swap dealer
definition. Such overreach not only may call into question the
integrity of this agency, but it could prolong the uncertainty
currently plaguing market participants as they (and the general
public) sort through the matters ancillary to the de minimis AGNA
threshold, which alone raise over 50 individual questions in
requests for comments.
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\6\ See 17 CFR 1.3, Swap dealer, paragraph (4)(v), providing
that the Commission may by rule or regulation change the
requirements of the de minimis exception described in paragraphs
(4)(i) through (iv).
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Commission Authority Under Regulation 1.3, Swap Dealer, Paragraph
(4)(v)
Under paragraph 4(v) of the swap dealer definition, the
Commission may change the requirements of the de minimis exception
by rule or regulation, and may do so independent of the SEC (``De
Minimis Exception Authority'').\7\ While this authority permits the
Commission to revisit the de minimis threshold, in the SD Definition
Adopting Release, the Commission stated that in determining whether
to revisit the threshold, it intended to focus on whether the de
minimis exception (1) results in a swap dealer definition that
encompasses too many entities whose activities are not significant
enough to warrant full Title VII regulation; (2) results in an undue
amount of dealing activity to fall outside of the regulatory
framework; or (3) leads to inappropriate reductions in counterparty
protections.\8\
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\7\ Id.; see also SD Definition Adopting Release, 77 FR at
30634, n. 464.
\8\ SD Definition Adopting Release, 77 FR at 30634-5.
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While the Commission's authority with respect to the de minimis
exception is broad, the Commission cannot lose sight of its purpose,
as set forth in the CEA,\9\ and the underlying Congressional
intent.\10\ As well, this authority is not intended to provide a de
facto means to alter the swap dealer definition, by for example,
excepting from consideration swaps that are exchange-traded and/or
cleared when calculating the AGNA for purposes of the de minimis
threshold, or excepting from such consideration entire categories of
swaps.
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\9\ See CEA section 1a(49)(D), 7 U.S.C. 1a(49)(D).
\10\ See SD Definition Adopting Release, 77 FR at 30629, n. 413
(``Congress incorporated a de minimis exception to the swap dealer
definition to ensure that smaller institutions that are responsibly
managing their commercial risk are not inadvertently pulled into
addition regulations.'') (quoting 156 Cong. Rec. S6192 (daily ed.
July 22, 2010) (letter from Senators Dodd and Lincoln to
Representatives Frank and Paterson).
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Exclusions vs. Exceptions
IDI De Minimis Provision
Turning to the Proposal, and the critical issues, I am concerned
with the Commission's use of its De Minimis Exception Authority to
address longstanding concerns that the IDI Swap Dealing Exclusion,
which was jointly adopted with the SEC as paragraph (5) to the swap
dealer definition (``SD Definition), is unnecessarily restrictive,
lacks clarity, and limits the ability of IDIs to serve customers in
connection with their lending activity--which is inconsistent with
the CEA.\11\ As explained in the Proposal, ``rather than proposing
to revise the scope of activity that constitutes swap dealing,''
which would require a joint rulemaking with the SEC, the Commission
is proposing to amend paragraph (4) of the SD Definition, which
addresses only the de minimis exception. Accordingly, the Proposal
is to include both the IDI Swap Dealing Exclusion and a separate,
slightly broader IDI De Minimis Provision in the SD Definition.
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\11\ See CEA 1a(49)(A), 7 U.S.C. 1a(49)(A) (providing that ``in
no event shall an insured depository institution be considered to be
a swap dealer to the extent it offers to enter into a swap with a
customer in connection with originating a loan with that
customer'').
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Conducting a side-by-side comparison of the current text of
paragraph (5) and proposed paragraph (4)(i)(C) of the SD Definition,
it is difficult to understand what hurdles may have prevented the
CFTC and SEC from engaging in a joint rulemaking to address these
relatively modest differences, which are generally well supported by
the record. It's especially noteworthy given the close working
relationship between the two agencies and ongoing harmonization
efforts.\12\ The end result is that, if finalized, instead of simply
disregarding or ``excluding'' all swap activity that meets a single
set of criteria, IDIs will have to develop an additional analysis to
address swap activity that cannot be excluded from their
determinations for purposes of the SD Definition, but might
nevertheless be excepted from their AGNAs when calculating dealing
activity for the purpose of the de minimis threshold. It is
difficult to understand why the Commission would want to create
additional regulatory burdens in the context of this Proposal, and
the document provides no explanation other than that the Commission
has discretion under its De Minimis Exception Authority.
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\12\ See, e.g. CFTC (@CFTC), @CFTC & @SEC_News teams are hard at
work on Title VII harmonization, Twitter (Feb. 27, 2018, 4:53 p.m.),
https://twitter.com/CFTC/status/968605066889515009; Chris Giancarlo
(@giancarloCFTC), Twitter (Feb. 27, 2018, 9:18 p.m.) https://twitter.com/giancarloCFTC/Status/968671749737992192.
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Hedging De Minimis Provision
I am similarly concerned that the Commission's use of its De
Minimis Exception Authority to provide greater regulatory certainty
with respect to swaps entered to hedge physical or financial
exposures (the ``Hedging De Minimis Provision'') will--out of an
abundance of caution--be utilized by market participants
[[Page 27483]]
as a limitation on the universe of hedging swaps they consider to be
outside their swap dealing activity. In this instance, instead of
amending the Physical Hedging Exclusion,\13\ which is in the nature
of a safe harbor and provides that, subject to certain requirements,
swaps entered into by a person for hedging physical positions are
not considered for purposes of determining whether that person is a
swap dealer, the Commission is proposing an exception with respect
to a person's AGNA for the de minimis threshold for swaps entered to
hedge financial or physical positions. While this exception will, if
finalized, exist in the Commission regulations alongside the
Physical Hedging Exclusion, it is not truly a safe-harbor and could
end up limiting the discretion inherent in the SD Definition.
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\13\ 17 CFR 1.3, Swap dealer, paragraph (6)(iii).
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An exception, as proposed for the Hedging De Minimis Provision,
ostensibly creates a precise rule, leaving compliance staff or even
regulatory enforcement agencies with limited discretion when
evaluating difficult scenarios. As the Commission has stated, ``In
general, entering into a swap for the purpose of hedging is
inconsistent with swap dealing.'' \14\ The Commission also has
emphasized that all relevant facts and circumstances about a swap
ought to be considered when determining whether a person is a swap
dealer.\15\ It seems that an exception limited solely to determining
whether a person has exceeded the AGNA de minimis threshold may
prove unduly limiting and inconsistent with the SD Definition.\16\
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\14\ SD Definition Adopting Release, 77 FR at 30611.
\15\ See, e.g., CFTC Fact Sheet: Final Rules Regarding Further
Defining ``Swap Dealer,'' ``Major Swap Participant and ``Eligible
Contract Participant'' (Apr. 18, 2012), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/msp_ecp_factsheet_final.pdf.
\16\ See Frequently Asked Questions (FAQ)--[DSIO] Responds to
FAQs About Swap Entities (Oct. 12, 2012), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf.
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Premature Delegation
The Proposal purports to create Commission authority to
determine the methodology to be used to calculate the notional
amount for any group, category, type, or class of swaps for purposes
of the AGNA de minimis threshold calculation and immediately
delegates that authority to the Director of the Division of Swap
Dealer and Intermediary Oversight (``DSIO''). The Commission has, to
my knowledge, not released public guidance on this issue since
2012.\17\ The Proposal cites two letters, one responding to the
Chairman's recent Project KISS initiative, and the other responding
to the request for comments on the Swap Dealer De Minimis Exception
Preliminary Report,\18\ in support of the inherent need to empower
the Director of DSIO to independently--and without limitation--
provide clarity about the appropriate notional amount calculation
methodologies for purposes of the de minimis threshold in a timely
manner. As well, both the public guidance and requests cited in the
Proposal address or respond to the need for clarity regarding
commodity swaps, further calling into question the breadth of the
proposed delegation.
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\17\ Id.
\18\ See n.152 of the Proposal, Letter from CEWG; Letter from
Natural Gas Supply Association (Jan. 15, 2016), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60595&SearchText=.
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For most swaps, calculation of notional amount is a matter of
standard industry practice. There is not any controversy as to how
notional amount is calculated. Giving the Director of DSIO broad
authority to determine how this calculation is made for all
categories of swaps is a remedy that is not commensurate to the
limited issue of how to determine the notional value of commodity
swaps. It also provides an opportunity for mischief. This provision
could subsume the entire de minimis threshold by giving the Director
of DSIO broad authority to determine what swaps count toward the
threshold--and perhaps more importantly, what swaps do not.
I'm concerned that the Commission is proposing to both establish
its authority and immediately delegate such authority without any
internal discussion, without any public deliberation, and within
this Proposal. The Commission has simply not articulated a sound
rationale for moving abruptly forward on this rule proposal without
fulsome consideration of its legal authority, potential risks, and
possible alternatives. Indeed, upon review of the Proposal, it came
to my attention that the Commission's proposed delineation of
authority to determine the methodology for calculating notion
amounts in proposed paragraph (D)(vii)(A) of the SD Definition may
contradict its De Minimis Exception Authority.
The De Minimis Exception Authority provides that the Commission
may by rule or regulation change the requirements of the de minimis
exception. Given that the methodology for calculating notional
amounts for purposes of the AGNA for the de minimis threshold would
be a ``requirement'' of that exception, one could assume that the
authority to alter it resides with the Commission, and that the
Commission would need to engage in rulemaking to establish a
methodology. Of course, the De Minimis Exception Authority includes
a ``may'' versus a ``shall,'' and therefore the Commission has
discretion to engage in rulemaking, but I believe the ``may''
applies more generally to suggest that the Commission may change the
requirements of the de minimis exception, and if it chooses to do
so, rulemaking is the vehicle. My point is that the Commission's
precise authority and attendant parameters are unclear, and it would
therefore be more prudent to first, define the parameters of the
notional amount calculation issue, conduct additional research and
explore our options to address it, and then propose a more cogent
solution in a separate rulemaking so as not to further detract from
the more salient and critical issues before the Commission as part
of this Proposal.
Ancillary Matters
Having become comfortable with using its De Minimis Exception
Authority, the Commission appears to have determined to use this
Proposal to seek comment on ``other potential considerations for the
de minimis threshold.'' These considerations run the gamut from re-
considering the merits of using AGNA by itself by seeking comment on
adding alternative criteria in the form of a dealing counterparty or
dealing transaction count threshold to excepting from consideration
when calculating the AGNA for purposes of the de minimis threshold
(1) swaps that are exchange-traded and/or cleared and (2) swaps that
are categorized as non-deliverable forward transactions. These
``considerations'' result in the combined inclusion of more than 50
individual requests for comment, detracting from any reasonable
market participant's (or the public's) ability to provide comments
on the more critical issues raised by this Proposal. Moreover, each
``potential consideration'' raises individual concerns as to whether
the Commission is attempting to undermine the swap dealer definition
and circumvent Congressional intent.
Dealing Counterparty Count and Dealing Transaction Count Thresholds
The Commission is seeking comment on whether an entity should be
able to qualify for the de minimis exception if its level of swap
dealing activity is below any one of three criteria: (1) An AGNA
threshold; (2) a proposed dealing counterparty count threshold; or
(3) a proposed dealing transaction count threshold. In support of
its request for comment, already limited Commission staff resources
were utilized to construct an alternative to the proposal aimed at
suggesting that, despite its analysis in the Proposal in support of
setting the AGNA threshold for the de minimis exception at $8
billion, a $20 billion AGNA ``backstop'' threshold was appropriate.
This analysis and attendant request for comment suddenly appeared in
the Proposal after hours on May 31, 2018, providing my office less
than 17 hours to respond before DSIO intended to submit a final
voting copy to the Commission's Office of the Secretariat.
Not only is the inclusion of this request for comment in this
Proposal overwhelmingly misplaced, but its inclusion at such a late
hour in the process undermines the inherent fairness of the
rulemaking process. Foremost, the Commission already rejected the
use of counterparty and transaction count thresholds as
determinative criteria for the de minimis threshold.\19\ Moreover,
the Commission is required to take the Swap Dealer De Minimis
Exception Final Staff Report (``Final Staff Report'') and comments
into account when weighing further action on the de minimis
exception at the end of the phase-in.\20\ According to the Final
Staff Report, ``many of the commenters stated that the Commission
should not use the alternative factors of Counterparty and/or
Transaction Count as part of a de minimis exception because they are
misleading or
[[Page 27484]]
arbitrary indicators of dealing activity.'' \21\ The footnote cites
11 comment letters representing at least 12 entities including major
industry and trade organizations.\22\ In comparison, only two
commenters supported the use of the alternative factors.\23\
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\19\ SD Definition Adopting Release, 77 FR at 30630.
\20\ Id. at 30634.
\21\ Swap Dealer De Minimis Exception Final Staff Report, supra
note 2 at 15.
\22\ Id. at note 45.
\23\ Id. at note 49.
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While I believe it may be appropriate for the Commission to
explore other factors or criteria in defining the scope of the de
minimis threshold, inclusion of even a request for comments on
dealing counterparty count and dealing transaction count thresholds
should be out of scope--even as a request for comment--for this
Proposal, which speaks directly to the end of the phase-in, and is
proceeding on a constrained time schedule such that even providing
Commissioners the courtesy of ample opportunity to evaluate the
merits of including this line of questioning was dispensed with.
Exchange-Traded and/or Cleared Swaps
Similar to the dealing counterparty and transaction count
threshold, the Commission has already rejected arguments that swaps
executed on an exchange should not be considered in determining if a
person is a swap dealer.\24\ However, beyond that, the breadth of
the request for comment suggests that a discussion regarding how the
utilization of exchange trading and/or clearing in the swap market
may address the underlying policy goals of swap dealer registration
is significant and raises issues that should be considered in the
context of a joint discussion with the SEC and prudential regulators
regarding the SD Definition. Even further, it may require
Congressional action to amend the statutory swap dealer definition,
which does not distinguish exchange traded and/or cleared swaps from
over-the-counter swaps, and in fact, may suggest that there is no
distinction given the focus on market making, which significantly
occurs on exchanges.\25\ In responding to this request for comment,
I hope that commenters address whether an exception for exchange-
traded and/or cleared swaps--even if limited to consideration when
calculating the AGNA for purposes of the de minimis threshold--would
be consistent with the statutory definition of ``swap dealer'' in
CEA section 1a(49) and Congressional intent.
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\24\ See SD Definition Adopting Release, 77 FR at 30610.
\25\ See, e.g., Id. at 30608.
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Non-Deliverable Forwards
Similarly, I believe that the issue of whether the Commission
should consider an exception for NDFs from consideration when
calculating the AGNA of swap dealing activity for purposes of the de
minimis threshold is inappropriate. Such an exception ignores that
the SD Definition is activities-based.\26\ The real issue that
should be addressed is whether NDFs are swaps and, if so, whether
they ought to be excluded from consideration in the SD
Definition.\27\ Instead of attempting to begin a conversation
through use of its De Minimis Exception Authority, the Commission
should use its relationships with the Secretary of the Treasury, the
SEC and prudential regulators and engage in a meaningful dialog
regarding the appropriate categorization and consideration of NDFs
outside of this Proposal.
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\26\ Id.
\27\ As noted in the Proposal, the Secretary of the Treasury,
pursuant to authority in section 1a(47)(E) of the CEA, 7 U.S.C.
1a(47)(E), declined to exempt NDFs from the CEA's definition of
``swap.''
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Conclusion
I am disappointed with today's Proposal and would have liked to
been able to support the portions that were well supported by the
data and analysis and could lead to a clear and legally sound
resolution of the de minimis threshold, providing much needed
regulatory certainty for a critical cohort of market participants. I
am hopeful that market participants have sufficient time to evaluate
and respond to the most critical aspects of this Proposal and do not
get overwhelmed or overly optimistic with regard to lines of
questioning that take us further afield from Congressional intent
and therefore are less likely to come to fruition. I understand that
messaging creates expectations; sometimes, we must focus on what's
right and not what seems easy.
[FR Doc. 2018-12362 Filed 6-11-18; 8:45 am]
BILLING CODE 6351-01-P
