The first open meeting of the CFTC under the chairmanship of J. Christopher Giancarlo, and as attended by Commissioners Brian Quintenz and Rostin Behnam, revealed fissures and discord among Commission members. While three proposed rules were approved by the Commission, Behnam, the sole Democrat on the CFTC, voted against two of the proposals.
Behnam also lodged concerns that he was essentially cut out of the loop from providing input in connection with amendments related to the Volcker Rule. He noted, “My message is we’re better than this. I came to this agency ready to roll up my sleeves and work together with the chairman and Commissioner Quintenz to make our rules better.” Benham also voted against the Commission’s proposed rule to keep the swap dealer de minimis exception threshold at $8 billion rather than reducing it to $3 billion as scheduled. He issued a statement of dissent on this score as well.
Giancarlo supports keeping the swap dealer de minimis threshold unchanged. The Commission’s action marks yet another chapter in a long drawn out history surrounding this issue. In testimony before Congress in October 2017, Chairman Giancarlo asserted more time was needed to study the rule. The threshold reduction to $3 billion had been delayed on two prior occasions. Most recently, it was set to take effect on December 31, 2019. A lower de minimis threshold would have the effect of requiring smaller, or less active, market participants to become registered as swaps dealers, as well as becoming subject to additional regulatory requirements.
Giancarlo justified keeping the de minimis threshold at $8 billion, asserting that its reduction to $3 billion would not have an appreciable impact on coverage of the marketplace, noting “[A]ny impact would be less than one percent - an amount that is truly de minimis.” On the other hand, the Chairman observed, “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,” he added.
Benham expresses grave concerns. Commissioner Behnam asserted that “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, and to the detriment of market participants eager for regulatory certainty.”
Behnam also noted that the proposed rule purports to create Commission authority to determine the methodology to be used to calculate the notional amount and then immediately delegates that authority to the director of the Division of Swap Dealer and Intermediary Oversight (DSIO). Expressing his dismay, he noted, “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.” He continued, “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.”
Proposed rule doesn’t go far enough for Quintenz. According to Commissioner Quintenz, the entire notion of linking swap dealer registration and oversight to an aggregate gross notional value measure is suspect at best. Rather, he believes that the criteria for determining swap dealer registration should be more closely correlated to risk. Quintenz expressed “some reservations about this proposal’s continued reliance on a one-size-fits-all notional value test for swap dealer registration.” He asserted, “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.” He concluded, “A public policy choice which drives away market participants and reduces market activity is undeniably flawed.”
Volcker Rule. According to Chairman Giancarlo, “this proposed rule seeks to simplify and tailor the Volcker Rule to increase efficiency, right-size firms’ compliance obligations, and allow banking entities - especially smaller ones - to more efficiently provide services to clients.” He further notes that the rule “adopts a risk-based approach relying on a set of clearly articulated standards for both prohibited and permitted activities and investments.”
Commissioner Behnam disagrees and notes “we are missing the mark here. In fact, we are actually further complicating the Volcker rule and calling it simplification.” Behnam points to the proposed rule creating three categories of banking entities with different rules for each and concludes by asking whether we should have this complex tapestry at all.
Indemnification rule. Notably, all three commissioners voted in favor of the final rule on amendments to the swap data access provisions of Part 49 of the CFTC regulations, formerly known as the swap data repository (SDR) indemnification rule. This rule in designed to put the Commission and its foreign counterparts in a much better position to consider and evaluate data, and ultimately identify heightened market risk.