Leadership from the CFTC’s Division of Swap Dealer & Intermediary Oversight (DSIO) elaborated on the recently proposed amendments to the swap dealer de minimis exception, the highlight of which is the exemption from swap dealer registration at an $8 billion aggregate gross notional amount (AGNA) level measured over a 12-month period. The DSIO officials participated in a program held at the D.C. Bar in Washington D.C. and sponsored by its Derivatives, Securitization and Project Finance Committee. Micah Green, a partner at Steptoe & Johnson, LLP moderated the session.
Controversy and grave concerns surround the swap de minimis threshold. On June 4, 2018, the CFTC voted 2-1 to approve a proposed amendment to keep the swap dealer de minimis threshold unchanged at the $8 billion AGNA level. At the time, Commissioner Rostin Behnam expressed his grave concerns that the CFTC was moving far beyond the task before it and redefined swap dealing activity absent meaningful collaboration with the SEC, as required by the Dodd-Frank Act and to the detriment of market participants.
Absent the adoption of the proposed amendment (or other action), the threshold will be reduced to $3 billion on December 31, 2019. The implementation of the lower threshold has been delayed on two prior occasions. A lower de minimis threshold would necessarily have the effect of requiring smaller, or less active, market intermediaries to become registered as swaps dealers, as well as becoming subject to additional regulatory requirements.
Staff asserts $8 billion is the right level. Matthew B. Kulkin, DSIO Director noted that maintaining the $8 billion threshold reflected a delicate balancing act of exercising appropriate oversight for active swap market participants, while accommodating those businesses that deal in swaps infrequently or as an ancillary activity. Kulkin further observed that keeping the levels where they were introduced a level of stability and predictability into the process.
Rajal Patel, a DSIO Associate Director also pointed to research conducted by the division that reducing the threshold to $3 billion would likely result in 13 additional parties needing to register as swap dealers but the AGNA coverage would increase a miniscule amount, from 99.95 percent of transactions to 99.96 percent. In other words, Patel contended that not much would be gained from lowering the de minimis threshold. Moreover, he also noted that not much would be gained if the threshold was increased to an amount over $8 billion.
Additional changes reflected in the proposal. Aside from the de minimis threshold, Erik Remmler, a DSIO Deputy Director noted some other key differences in the proposal from current requirements. These include:
- excluding certain swaps in connection with originating loans with customers for purposes of counting towards the de minimis threshold calculation;
- expanding the insured depository institution (IDI) exception;
- excluding certain financial hedges from the de minimis threshold count;
- codifying no-action letters that would exclude swaps conducted under multilateral compression scenarios; and
- providing that the Commission may allow for determining methodologies to be used to calculate the notional amount for swaps, and delegate to the DSIO’s Director the authority to make such determinations.
Next steps. Erik Remmler noted that the proposed rule could be finalized in phases. Particularly, attention is being given to the December 31, 2019 sunset date when the $3 billion threshold amount will take effect absent further action. He noted the commission wants to provide certainty and predictability to market participants. The public comment period for the proposed rule will remain open until August 13, 2018.