External Meetings: Definitions Meeting with ISDA

The meeting was to follow up on questions raised at a meeting with ISDA on March 31, 2011, and to hear ISDA’s reactions to the Joint Staff Roundtable on the Swap Dealer and Major Swap Participant (MSP) Definitions on June 16, 2011.  During the meeting, ISDA expressed the following views:
ISDA believes there is a consensus in the swap industry, which was also expressed at the roundtable, that the terms swap dealer and market maker in swaps are essentially synonymous.  The defining characteristic of both terms is a willingness to enter into swaps on both sides of the market on a reasonably constant basis.  A person who actively enters into swaps on one side of the market may be an MSP, but would not be a dealer.
Another characteristic of dealers is that they enter into swaps with a profit motive, in the sense of seeking to profit from the swap itself or any related fees.
Dealers also capture (i.e., obtain the benefit of) the bid/offer spread in a large number of the swaps they enter into; non-dealers capture the bid/offer spread in fewer swaps.
Although the statutory definition of swap dealer contains four “prongs” joined by the word “or,” ISDA’s view as a matter of statutory construction is that the definition is a list of synonyms, or different ways of expressing the same concept.  Congress used this construct to express that a person who is a swap dealer in any of these four different ways should be covered by the definition, but the four prongs are each referring to the same essential concept.
ISDA’s primary concern with the proposed definition is that, unless it is limited in some manner, the definition could cover virtually all swap activities, which ISDA did not think was the intent of the statute.
ISDA believes a swap dealer is a person who is ready to enter into swaps on either side of the market, subject only to risk limits.  Dealers profit by setting the terms of swaps they enter into in a manner that generates a profit over time (i.e., capturing the bid/ask spread).
ISDA also reiterated two points from their comment letters – notional amount is not a good test for the de minimis exception because it is not necessarily reflective of risk, and the CFTC should consider applying, in the swap dealer definition, elements of the dealer/trader distinction under the Securities Exchange Act of 1934.