Who Are The Swap Dealers?

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We recently passed the first rolling 12-month period for determining which entities will surpass the CFTC’s de minimis swap dealing levels and thus be “swap dealers” under the Dodd-Frank Act. So, who are they?

The National Futures Association maintains an up-to-date registry of swap dealers and major swap participants, along with their respective CFTC registration statuses. The registry shows that there are currently 94 companies with provisional or pending registration as swap dealers. Almost all of the companies are large banking or financial services companies and their affiliates, including Goldman Sachs, JP Morgan, Citibank, Bank of America, Merrill Lynch, Credit Suisse, and others.

However, three large energy/physical commodity companies are also registered as swap dealers: BP Energy Company, Shell Trading Risk Management LLC, and Cargill Incorporated. The CFTC recently approved a “limited purpose swap dealer designation” for Cargill and its affiliate, Cargill Financial Service International, Inc.–the first time such a designation has been granted. Pursuant to the order, the Cargill affiliates will be treated as swap dealers with respect to swap activities engaged in through Cargill’s “Cargill Risk Management Business Unit” and as non-swap dealers with respect to all other swap activities.

The NFA registry shows that just 2 companies—Cournot Financial Products LLC and MBIA Insurance Corporation—are registered as major swap participants.

Dodd-Frank Amendments to Master Agreements with Swap Dealer Counterparties

Swap Dealers are subject to comprehensive regulation under the Dodd-Frank Act. As a result, they must obtain certain representations from their counterparties and otherwise ensure that their swap transactions with counterparties satisfy the CFTC’s swap dealer regulations. The International Swaps and Derivatives Association (ISDA) has published two protocols—the ISDA August 2012 DF Protocol and the ISDA March 2013 DF Protocol—to address many of these swap dealer requirements. Approximately 11,000 companies have adhered to these protocols, showing their wide adoption. The protocols may be incorporated into existing master agreements (the ISDA and any other master swap agreement in place between matched counterparties) by: (1) “adhering” to the protocol through submission of an adherence letter and payment of $500 to ISDA and (2) exchange of questionnaires with counterparties. This may be done via an online system provided by ISDA/Markit.

Alternatively, the operative “Supplement” portion of each protocol may be incorporated into individually designated master agreements by an executed amendment. The International Energy Credit Association (IECA) has published amending agreements designed to incorporate the August 2012 and March 2013 ISDA DF Supplements into designated master agreements, with minor modifications that arguably make the Supplements friendlier to end users. IECA has also published a “Dodd-Frank Act Representations and Reporting Amending Agreement” that is a convenient means of obtaining mutual representations and assigning the swap reporting responsibility between two end user counterparties for Dodd-Frank compliance purposes.