At an open meeting held on 27 April 2011 the Commodity Futures Trading Commission (Commission or CFTC) approved proposed rules defining which products are "swaps" and the capital requirements for Swap Dealers and Major Swap Participants (SDs/MSPs). The CFTC has not yet released the text of the proposed rules. The Commission also approved a proposal to reopen the comment period on all closed rulemaking dockets for 30 days and to extend the comment period for all open rulemaking dockets for 30 days in order for commenters to have the benefit of the proposed definitions when commenting on the panoply of other proposed rules.
Proposed rule and interpretive guidance regarding the definition of "swap" (approved 4-1, Commissioner Sommers dissenting)
- The proposed rule excludes from the definition of
"swap" all forward contracts for nonfinancial
commodities, including energy commodities. The CFTC noted that the
forward exclusion "should be interpreted in a manner
consistent with the CFTC's historical interpretation of the
existing forward exclusion with respect to futures
contracts."
- The basic principles of the Commission's so-called
"Brent Interpretation" regarding "book-out"
transactions will apply to the forward exclusion from the swap
definition for nonfinancial commodities.
- Those options embedded in forward contracts would be treated
consistently with the Commission's pre-Dodd-Frank
interpretations, such that if an option on a forward is related to
price, then it is most likely not a swap, but if the option is
related to delivery, then the option may be a swap.
- The proposed rule withdraws the 1993 Energy Exemption and
subjects energy commodities to the same rules as other
commodities.
- The proposed rule will not address whether Financial
Transmission Rights (FTRs) are swaps. Instead, it proposes that
entities apply for a "public interest waiver" under
Section 722(f) of the Dodd-Frank Act.
- The proposed rule also includes an "anti-evasion provision" that would define as a swap any transaction that is "willfully structured" to evade the regulation of swaps under the Dodd-Frank Act. When determining whether a transaction is "willfully structured" to avoid regulation the Commission will consider whether a transaction was entered into for a "legitimate business purpose."
Proposed rule regarding capital requirements for swap dealers and major swap participants (approved 4-1, Commissioner O'Malia dissenting)
- The proposed rule adopts capital requirements for SDs/MSPs that
are Futures Commission Merchants (FCMs) and SDs/MSPs that are
nonbank subsidiaries of a bank holding company.
- SDs/MSPs that do not qualify as an FCM or nonbank subsidiary of a bank holding company, will be required to maintain "tangible net equity" equal to US$20 million, plus additional amounts for market risk and OTC derivatives credit risk. A firm's tangible net equity generally would be based on net equity as determined under U.S. GAAP, minus intangibles such as goodwill.
Other proposed rules
The Commission also approved two other rules. First, it approved a proposed rule on the protection of collateral for cleared swaps in bankruptcy. The proposed rule adopts a "Complete Legal Segregation" approach to protecting the collateral of cleared swaps customers. In the event of a default of both an FCM member and one or more of its cleared swaps customers, a Derivatives Clearing Organization (DCO) would have recourse against the collateral of defaulting customers, but not against the collateral of non-defaulting customers. Second, the Commission approved a proposed rule that conforms existing CFTC regulations to the provisions of the Dodd-Frank Act. Among other things, the rule requires that FCMs and introducing brokers maintain records for swap transactions that are analogous to those records they presently must maintain for futures transactions.
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