By John Filar Atwood
CFTC Chair Timothy Massad said today that he will recommend, through a Commission order, a one-year extension of the date on which the swap dealer de minimis threshold is scheduled to drop from $8 billion to $3 billion, thereby subjecting many more companies to the swap dealer registration requirements. Unless the Commission takes action, he noted, the threshold will be lowered at the end of 2017, which means firms would have to start tracking their activity starting January 1, 2017 to determine whether they must register as swap dealers.
In remarks at the North American OTC Derivatives Summit, Massad said that adopting the extension would give the CFTC and industry participants more time to consider the issue. He noted that some in the industry have suggested that the Commission should just make $8 billion the permanent threshold, but he believes a delay is the appropriate course of action for now.
Background. The de minimis threshold determines when an entity’s swap dealing activity requires registration as a swap dealer, which triggers oversight by the CFTC, and disclosure, recordkeeping, and documentation requirements. The threshold was set jointly by the CFTC and the SEC in 2012. The agencies established a threshold at $3 billion in notional amount of swap dealing activity over the course of a year, but provided a phase-in period during which the threshold is $8 billion.
CFTC report. The CFTC staff last month issued a final report on the de minimis threshold, which supplements a November 2015 preliminary report and assesses the threshold against the available market data. Massad said that the report estimates that based on current data, if the threshold were at $3 billion today instead of $8 billion, and levels of activity remained the same, more companies would be required to register as swap dealers. However, the outstanding notional amount of interest rate (IRS) and credit default swaps (CDS) that would be covered would increase only about one percent.
Massad acknowledged that many smaller banks are concerned that they would be required to register if the threshold were to fall. Their activity is tied to their lending business, in which they provide swaps to help commercial borrowers hedge their exposures. He noted that the smaller banks do not have significant market shares in the IRS or CDS market, and swap activity is not a large part of their overall banking activities, so it is important to consider the costs that might be imposed on them if the threshold were lower.
Other priorities. Another reason for the CFTC to build in more time to consider the threshold, according to Massad, is that the agency first needs to adopt a rule setting capital requirements for swap dealers. It makes sense to finalize this rule before turning to the threshold, he said, adding that he asked the other CFTC commissioners to consider a reproposal of the rule.
Massad also favors a delay in the drop of the de minimis threshold because the threshold also pertains to commodity swaps, a market on which the CFTC does not have sufficient data. He said that he has heard concerns that letting the threshold fall might affect the liquidity of commodity swaps, but also that failing to do so might undermine the CFTC’s efforts to protect customers and prevent manipulation.
Margin rules. In his remarks, Massad also addressed the European Commission’s decision to delay the implementation of the rules on margin for uncleared swaps, and why the CFTC elected to maintain the September 1, 2016 compliance date. While the EC’s decision was disappointing to him, Massad said that he has received assurances from EC officials that they will try to minimize the delay.
Among the reasons the CFTC stood by the original compliance date was the scope of the initial date, according to Massad. The September 1 date applies only to swaps between the largest swap dealers, which is transactions between counterparties that each have $3 trillion in gross exposure. An estimated 20 global firms are affected by the initial date, he noted.
The compliance date still applies to all of the largest swap dealers in Europe, which are required, as of September 1, to post margin in their transactions with U.S., Canadian, and Japanese institutions. The only transactions that are not covered are transactions between two European institutions, in which neither is a European affiliate of a U.S., Canadian, or Japanese firm, Massad noted.
Massad said that a more important reason the Commission stayed with the September 1 initial compliance date was that its primary responsibility is to ensure the full implementation of U.S. laws. While coordination with other regulators is an important and worthy goal, he stated, the purpose of the margin requirements ultimately is to preserve the stability of the U.S. financial system.