On November 18, the staff of the Commodity Futures Trading Commission (CFTC) issued a much anticipated report on the de minimis exception from the “swap dealer” definition, the Swap Dealer De Minimis Exception Preliminary Report (the Preliminary Report). Unfortunately, and as further discussed below, the CFTC staff refrained from offering a recommendation on whether the CFTC should retain the $8 billion swap dealing activity de minimis threshold currently in place. The CFTC is accepting public comments in response to the Preliminary Report until January 19, 2016.
The Dodd-Frank Wall Street Reform and Consumer Protection Act1 amended the Commodity Exchange Act2 to create a new category of persons, “swap dealers,” on which it has imposed myriad compliance obligations, including registration with the CFTC. The CFTC and the Securities and Exchange Commission (SEC) adopted joint rules in 2012 to further define the term “swap dealer” and to exempt persons engaged in a de minimis level of swap dealing from registration as a swap dealer and, thereby, the compliance obligations that apply to swap dealers. Under the CFTC’s and SEC’s joint rules, the de minimis swap dealing activity threshold is set at $3 billion gross notional value3 over a 12-month period.4 However, the de minimis threshold is currently in a phase-in period and is set at $8 billion gross notional value over a 12-month period. After the phase-in period ends on December 31, 2017, the threshold amount will automatically decrease to $3 billion, unless the CFTC takes action prior to that date.5
CFTC Regulation 1.3(ggg)(4)(ii)(B) directs the CFTC staff to prepare and publish for public comment a preliminary report on the definition of the term “swap dealer” and the de minimis exception. The Preliminary Report does not make recommendations to the CFTC but explores general policy issues that might contribute to further analysis and the possible amendment of the de minimis exception. The CFTC is seeking public comment on the Preliminary Report and will consider those comments before the CFTC staff issues the final report on the term “swap dealer” and on the de minimis exception.
The Preliminary Report is divided into five sections. Section I provides an introduction and overview of the de minimis exception and the public comment process for the Preliminary Report. Section II outlines the definition of the term “swap dealer,” as well as other relevant regulatory provisions. Specifically, these subsections summarize (i) the definition of “swap dealing,” (ii) the de minimis exception, (iii) the calculation of swap dealing activity, and (iv) the establishment of the notional amount threshold and of the phase-in period. Next, Section III describes the data, methodology, and analysis used by the CFTC staff in preparing the Preliminary Report. Section IV then discusses the policies and rationales underlying the swap dealer registration requirement and the de minimis exception.
Last, Section V analyzes the aforementioned data in light of the registration requirement, the de minimis exception, an increased or decreased de minimis exception, and alternative approaches to the de minimis exception. Specifically, in this section the CFTC staff analyzes the data and asks the public for comment on numerous issues, including whether the CFTC should either increase or decrease the amount of the de minimis exception. Furthermore, the CFTC staff considers whether alternative regulatory approaches—instead of the current de minimis exception—would better serve the CFTC’s policy objectives and regulatory goals. These alternative approaches include: (i) a notional de minimis threshold for each specific asset class, (ii) a multi-factor approach, including Counterparty Count and/or Transaction Count metrics, (iii) a multi-tiered approach with regulatory requirements commensurate to a swap dealer’s level of dealing activity, and (iv) an approach excluding, from a person’s de minimis calculation, swaps executed on a swap execution facility or designated contract market and/or cleared swaps.
The CFTC is currently accepting public comments on the Preliminary Report. Following the public comment period, the CFTC staff will consider the comments received and issue a final report to the CFTC. After considering the Preliminary Report and all comments submitted in response to it, the CFTC may (no earlier than August 2016, nine months after the Preliminary Report was published) either (i) terminate the phase-in period, or (ii) propose through rulemaking an alternative to the $3 billion threshold to the de minimis exception.6 If the CFTC does not take either of these actions, however, then the current schedule under CFTC Regulation 1.3(ggg) will apply. Specifically, the $8 billion threshold will continue to apply until the phase-in period terminates on December 31, 2017, after which time the $3 billion threshold would apply.
1 Pub. L. 111-203, 124 Stat. 1376 (2010).
2 7 U.S.C. § 1 et seq. (2012).
3 In calculating a person’s gross notional value, to determine whether that person exceeds the de minimis threshold and therefore qualifies as a swap dealer, the CFTC exempted various swaps from this calculation, including certain swaps entered into: (i) for a “person’s own account, … but not as a part of regular business”; (ii) with majority-owned affiliates; (iii) by a cooperative with a member; (iv) for the purpose of hedging physical positions; and (v) by floor traders. CFTC Regulation 1.3(ggg)(2), (6).
4 There is also a separate de minimis exception threshold of $25 million gross notional value for swap dealing activity in which the counterparty is a special entity. See CFTC Regulation 1.3(ggg)(4). This de minimis threshold for special entities, however, is not subject to a phase-in period and is not addressed in the Preliminary Report.
5 CFTC Regulation 1.3(ggg)(4)(i).
6 CFTC Regulation 1.3(ggg)(4)(ii)(C).
