United States: CFTC Staff Releases Preliminary Report Seeking Comment On Swap Dealer De Minimis Exception

On November 18, 2015, U.S. Commodity Futures Trading Commission ("CFTC") Staff issued its Swap Dealer general de minimis exception preliminary report, which provides data analyzing swap dealing activity and seeks comments and additional information on the exception. While the preliminary report does not offer alternatives to the general de minimis exception, CFTC Staff is seeking public comment on issues that include the methodology for calculating dealing activity, the threshold for the de minimis exception, and alternative approaches to the de minimis exception.

Section 1a(49)(D) of the Commodity Exchange Act requires the CFTC to exclude from the definition of "swap dealer" an entity that engages in a de minimis amount of swap dealing. In turn, the CFTC adopted Regulation 1.3(ggg), excluding entities from the swap dealer definition if they have entered into swap positions connected to swap dealing activities that, in the aggregate, do not exceed either of two gross notional amount thresholds during the preceding twelve-month period. The two thresholds are (1) the general de minimis threshold, which consists of a $3 billion ceiling, subject to a phase-in level of $8 billion scheduled to decrease to $3 billion on December 31, 2017, and (2) the "special entity" de minimis threshold, which consists of a $25 million ceiling for swaps in which the counterparty is a "special entity," including federal and state agencies, cities, counties, municipalities, and "any instrumentality, department, or corporation . . . established by a State or Subdivision of a State."

With respect to the "special entity" de minimis threshold, the CFTC issued a final rule to permit an entity to exclude utility operations-related swaps entered into with "utility special entities" from the "special entity" de minimis threshold, although such swaps still count toward the general de minimis threshold (see September 30, 2014 edition of the WER). In addition, certain swaps may be excluded from both de minimis thresholds, including swaps between affiliates, swaps hedging physical positions, and commodity trade options.

In the preliminary report, CFTC Staff explains that the purpose of the report is not to make suggestions regarding whether the CFTC should amend or adopt alternatives to the de minimis thresholds. Rather, CFTC Staff states that the report provides an opportunity for public input in the relevant policy considerations and to provide CFTC Staff's preliminary analysis of swap data pertaining to the general de minimis threshold before issuing a final report.

Regarding CFTC Staff's preliminary analysis, CFTC Staff states in the preliminary report that data indicates that up to an incremental 83 additional potential swap dealing entities in interest rate swaps and credit default swaps alone might be considered swap dealers if the general de minimis threshold fell to $3 billion. Furthermore, CFTC Staff states that swap data indicates that only a substantial increase or decrease in the general de minimis threshold would have an appreciable impact on regulatory coverage as measured by notional amount, transactions, or unique counterparties. CFTC Staff also explains that the data indicates that, while financial entities that transact in non-financial commodity swaps were more likely to have counterparty and transaction counts that may be indicative of dealing, there were also some non-financial entities that had counterparty and transaction counts that may be indicative of dealing. CFTC Staff also explains that the swap data indicates that non-financial entities in the non-financial commodity swap market, and a decision to exclude such firms from swap dealer registration, may require further analysis.

Finally, in addition to whether the general de minimis threshold should be increased or decreased, CFTC Staff seeks comment on de minimis exception alternatives, including whether (1) there should be a notional de minimis threshold specific to different asset classes, (2) the CFTC should use a multi-factor approach that could include counterparty count and/or transaction count metrics in the de minimis exception, (3) the CFTC should use a multi-tiered approach where the regulatory requirements associated with swap dealer registration depend on an entity's level of dealing activity, and (4) swaps that are traded on a swap execution facility or designated contract market and/or are cleared should be excluded from an entity's de minimis calculation.

In a separate statement, CFTC Commissioner J. Christopher Giancarlo stated that "the Report shows that a drop in the swap dealer registration from $8 billion to $3 billion would capture a significant number of market participants causing them to either register as swap dealers or reduce services to the marketplace. Yet, while expanding the CFTC's reach over potentially more market participants, the lower threshold would not have an appreciable impact on coverage of the marketplace . . . ." In addition, Commissioner Giancarlo argued that the drop in the threshold "would have the effect of causing many 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 swap dealers."

Comments on the preliminary report must be received on or before January 19, 2016. A copy of the preliminary report is available here. A copy of Commissioner Giancarlo's statement is available here.

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