SEC and CFTC Adopt Swaps Dealers Definitions

The CFTC voted 4-1 yesterday to adopt a regulation defining swap dealers as firms conducing swaps of derivatives with a notional value of $8 billion a year. The threshold will then fall to $3 billion after five years.  Additionally, the CFTC voted 5-0 in favor of a separate rule that treats commodity options like all other swaps.

There is still some ambiguity around the definition since the CFTC added an explicit exemption for swaps that are used to hedge market risks. Trades that will do things like reducing exposure to interest-rate fluctuations will not count toward the threshold.

According to a Reuters article on the meeting: 

“The CFTC gave itself wide latitude to change the threshold. The agency would collect two-and-a-half years of swaps data, then study that data, and then the CFTC would have nine months to determine whether to bring down the trigger from $8 billion in annual swap trades to $3 billion.”

Republican CFTC Commissioner Scott O'Malia voted against the final swap dealer rule because it includes "several unnecessary and astonishing contortions that may lead to potentially adverse inconsistencies and instabilities in the years that follow."  

Following are the opening statements from the CFTC Commissioners and relevant documents from the meeting.

Opening Statements 

Opening Statement of Chairman Gary Gensler
 

Opening Statement of Commissioner Bart Chilton

 

Opening Statement of Commissioner Scott D. O’Malia
 

Statement of Dissent of Commissioner Scott D. O’Malia

 

Opening Statement of Commissioner Mark P. Wetjen 

Opening Statement of Commissioner Jill E. Sommers 

Additional Documents 

Fact Sheet: Final Rule: Final and Interim Final Rulemaking Regarding Commodity Options
Q&A: Final Rule: Final and Interim Final Rulemaking Regarding Commodity Options
— Approved 5 - 0 

Fact Sheet: Final Rules Regarding Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant”
Q&A: Final Rules Regarding Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant”
— Approved 4 - 1 

The SEC also voted to approve swap dealer rules on Wednesday which were similar to the CFTC’s but contained a few key differences.

Since the SEC had more swap data to work with, they were able to closely tailor the thresholds to the different derivatives markets under their regulation.

According to Reuters:  

“For single-name credit-default swaps, which make up the vast majority of the security-based swaps market, the $8 billion threshold will apply during the phase-in period and then taper down to $3 billion. For all other security-based swaps, such as equity swaps, a much smaller threshold will apply, with an initial phase-in level of $400 million that later goes down to $150 million.” 

The SEC estimates that fewer than 50 clearinghouses, exchanges and other platforms will register as swap dealers with the agency, which only oversees security-based swaps under Dodd-Frank.

Following is a link to the SEC Fact Sheet: Defining Swaps-Related Terms