United States: CFTC Chair Will Delay Swap Dealer De Minimis Threshold Transition

Last Updated: October 19 2017
Article by Steven D. Lofchie, Nihal S. Patel and Robert Zwirb

Most Read Contributor in United States, December 2018

CFTC Chair Christopher Giancarlo stated that he will extend the current swap dealer de minimis threshold ( CFTC Rule 1.3(ggg)(4)) through at least the end of 2019. In testimony before the U.S. House Committee on Agriculture, Chair Giancarlo provided greater detail on the agency agenda for 2017 (see written remarks and video).

Chair Giancarlo said he would keep the current de minimis threshold at $8 billion. The threshold previously was scheduled to drop to $3 billion at the end of 2017, but had been extended through 2018 (see  previous coverage). He said that the delay will allow the CFTC additional time to develop new rules. CFTC Commissioner Rostin Behnam criticized the delay, saying: "Instead of kicking this critical issue into the future again, the Commission should take further action now or let the current rule take effect." CFTC Commissioner Brian Quintenz stated that allowing the threshold to drop to $3 billion would create a "black hole," capturing entities that do not pose systemic risk, and that the CFTC should work to adopt a "rational and effective threshold." (According to one news report, Mr. Quintenz also recently called the amount a "meaningless and ambiguous metric," and added that "[i]t doesn't tell you differences in what's underlying a swap. It doesn't tell you the differences in tenors in a swap.")

Chair Giancarlo identified swap reforms as a particular area of focus for the agency. He criticized the CFTC implementation of its swaps trading rules, and encouraged the development of a revised framework that (i) is aligned more closely with the structure of the swaps market and (ii) adheres to the "express language and spirit of Dodd-Frank." He highlighted efforts to bolster swaps data reporting to produce a more accurate picture of counterparty credit and harmonize global swaps data reporting rules. He pointed to a CFTC Roadmap that lays out objectives and timelines for achieving a framework that facilitates high-quality swaps data reporting.

Chair Giancarlo restated his positions on several key agency agenda items. He testified that he remains committed to supporting effective enforcement policies and procedures and highlighted the Division of Enforcement's implementation of a self-reporting program. He emphasized the need to adapt to changing financial markets, citing LabCFTC and other initiatives. Chair Giancarlo expressed the importance of facilitating innovation and ensuring that necessary regulatory adjustments are made to keep pace with emerging technologies. He voiced a general commitment to review rules and regulations to reduce burdens through initiatives such as Project KISS. He also reiterated support for a cross-border deference-based approach to CCP regulation and warned European Union officials against reforming CCP supervision rules without consulting the CFTC.

On the issue of cybersecurity, Chair Giancarlo acknowledged the challenges associated with balancing the need to review market data with the risks presented by government handling of proprietary intellectual property for market participants. He noted that the CFTC is understaffed in the area of cybersecurity, and is in need of funding to prevent cyber intrusions.

Commentary / Steven Lofchie

If the swap dealer de minimis threshold were to drop, every swap dealer that does between $3 billion and $8 billion of business would either stop dealing entirely or drop its dealing activity below the new threshold. While those numbers sound large, in reality, the way in which the calculations are done makes it a generally very small number, particularly in economic value. Any firm doing less than $8 billion of swap dealing business is not a remotely meaningful participant in the swaps dealing markets, and it would seem unlikely that forcing small firms out of the dealing business would benefit the economy.

Commentary / Nihal Patel

The additional delay is unsurprising. The CFTC has not given any indication that it is close to adopting a new approach and market participants would essentially be subject to the new threshold from January 1, 2018 (given the 12-month counting lookback in the rule). Notably, not a single member of the Commission today took part in the adoption of the original rule. (Only one current Commissioner participated in the decision to delay implementation  a year ago.)

While the two new commissioners issuing supporting statements had policy differences, they both agreed that the current state of affairs is not ideal and that the CFTC should address the issue by adopting a new rule. In addition, as  Chair Massad noted when the CFTC adopted the delay last year, the CFTC should complete its capital rules before addressing the threshold, given the importance that those rules will have for market participants determining whether to register.

Commentary / Bob Zwirb

While the Chairman correctly calls for more time to ensure that the swap dealer de minimis threshold is appropriately set based on empirical data, it is disappointing that he endorses going forward with the position limits rule for which there is no compelling policy rationale.

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