2018-24579
Federal Register, Volume 83 Issue 219 (Tuesday, November 13, 2018)
[Federal Register Volume 83, Number 219 (Tuesday, November 13, 2018)]
[Rules and Regulations]
[Pages 56666-56693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24579]
[[Page 56665]]
Vol. 83
Tuesday,
No. 219
November 13, 2018
Part IV
Commodity Futures Trading Commission
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17 CFR Part 1
De Minimis Exception to the Swap Dealer Definition; Final Rule
Federal Register / Vol. 83 , No. 219 / Tuesday, November 13, 2018 /
Rules and Regulations
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AE68
De Minimis Exception to the Swap Dealer Definition
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is amending the de minimis exception within the ``swap
dealer'' definition in the Commission's regulations by setting the
aggregate gross notional amount threshold for the de minimis exception
at $8 billion in swap dealing activity entered into by a person over
the preceding 12 months.
DATES: This rule is effective November 13, 2018.
FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, [email protected], Rajal Patel, Associate Director, 202-418-5261,
[email protected], or Jeffrey Hasterok, Data and Risk Analyst, 646-746-
9736, [email protected], Division of Swap Dealer and Intermediary
Oversight; Bruce Tuckman, Chief Economist, 202-418-5624,
[email protected] or Scott Mixon, Associate Director, 202-418-5771,
[email protected], Office of the Chief Economist; or Mark Fajfar,
Assistant General Counsel, 202-418-6636, [email protected], Office of
General Counsel, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Statutory and Regulatory Background
1. Statutory Authority
2. Regulatory History
3. Policy Considerations
4. De Minimis Calculation
B. The Proposal
II. Final Rule--$8 Billion Threshold
A. Proposal
B. Summary of Comments
1. Set Threshold at $8 Billion
2. Increase Threshold
3. Allow Threshold to Decrease
4. Other Comments
C. Final Rule and Commission Response
1. Rationale for Not Reducing AGNA Threshold to $3 Billion
2. Rationale for Not Increasing AGNA Threshold
3. Response to Other Comments
III. Proposed Rule Amendments Not Adopted
A. Swaps Entered into by Insured Depository Institutions in
Connection With Loans to Customers
1. Proposal
2. Summary of Comments
3. Commission Response
B. Swaps Entered Into to Hedge Financial or Physical Positions
1. Proposal
2. Summary of Comments
3. Commission Response
C. Swaps Resulting From Multilateral Portfolio Compression
Exercises
1. Proposal
2. Summary of Comments
3. Commission Response
D. Methodology for Calculating Notional Amounts
1. Proposal
2. Summary of Comments
3. Commission Response
IV. Other Matters Discussed in NPRM
A. Dealing Counterparty Count and Dealing Transaction Count
Thresholds
B. Exception for Exchange-Traded and/or Cleared Swaps
C. Exception for Non-Deliverable Forwards
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. General Costs and Benefits
2. Direct Cost and Benefits
3. Section 15(a)
D. Antitrust Considerations
I. Background
A. Statutory and Regulatory Background
1. Statutory Authority
Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act'') \1\ established a statutory
framework to reduce risk, increase transparency, and promote market
integrity within the financial system by regulating the swap market.
Among other things, the Dodd-Frank Act amended the Commodity Exchange
Act (``CEA'') \2\ to provide for the registration and regulation of
swap dealers (``SDs'').\3\ The Dodd-Frank Act directed the CFTC and the
U.S. Securities and Exchange Commission (``SEC'' and together with the
CFTC, ``Commissions'') to jointly further define, among other things,
the term ``swap dealer,'' \4\ and to exempt from designation as an SD a
person that engages in a de minimis quantity of swap dealing.\5\
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\1\ Public Law 111-203, 124 Stat. 1376 (2010), available at
https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf.
\2\ The CEA is found at 7 U.S.C. 1, et seq.
\3\ See generally 7 U.S.C. 6s.
\4\ Dodd-Frank Act section 712(d)(1). See the definitions of
``swap dealer'' in CEA section 1a(49) and Sec. 1.3 of Commission
regulations. 7 U.S.C. 1a(49); 17 CFR 1.3.
\5\ See Dodd-Frank Act section 721.
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CEA section 1a(49) defines the term ``swap dealer'' to include any
person who: (1) Holds itself out as a dealer in swaps; (2) makes a
market in swaps; (3) regularly enters into swaps with counterparties as
an ordinary course of business for its own account; or (4) engages in
any activity causing the person to be commonly known in the trade as a
dealer or market maker in swaps (collectively referred to as ``swap
dealing,'' ``swap dealing activity,'' or ``dealing activity'').\6\ The
statute also requires the Commission to promulgate regulations to
establish factors with respect to the making of a determination to
exempt from designation as an SD an entity engaged in a de minimis
quantity of swap dealing.\7\ CEA section 1a(49) further provides that
in no event shall an insured depository institution (``IDI'') be
considered to be an SD to the extent it offers to enter into a swap
with a customer in connection with originating a loan with that
customer.\8\
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\6\ 7 U.S.C. 1a(49)(A). In general, a person that satisfies any
one of these prongs is deemed to be engaged in swap dealing
activity. See also the definitions of ``swap'' in CEA section 1a(47)
and Sec. 1.3 of Commission regulations. 7 U.S.C. 1a(47); 17 CFR
1.3.
\7\ 7 U.S.C. 1a(49)(D).
\8\ 7 U.S.C. 1a(49)(A).
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2. Regulatory History
Pursuant to the statutory requirements, in December 2010, the
Commissions issued a proposing release (``SD Definition Proposing
Release'') \9\ further defining, among other things, the term ``swap
dealer.'' Subsequently, in May 2012, the Commissions issued an adopting
release (``SD Definition Adopting Release'') \10\ further defining,
among other things, the term ``swap dealer'' in Sec. 1.3 of the CFTC's
regulations (``SD Definition'') and providing for a de minimis
exception in paragraph (4) therein (``De Minimis Exception'').\11\ The
De Minimis Exception states that a person shall not be deemed to be an
SD unless its swaps connected with swap dealing activities exceed an
aggregate gross notional amount (``AGNA'') threshold of $3 billion
(measured over the prior 12-month period), subject to a phase-in period
during which the AGNA
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threshold is set at $8 billion.\12\ The phase-in period was originally
scheduled to terminate on December 31, 2017, and the AGNA threshold was
scheduled to decrease to $3 billion at that time. However, as discussed
below, pursuant to paragraph (4)(ii)(C)(1) of the De Minimis Exception,
the Commission issued two successive orders to set new termination
dates, and the phase-in period is currently scheduled to terminate on
December 31, 2019.\13\
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\9\ Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' 75 FR 80174
(proposed Dec. 21, 2010).
\10\ Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant,'' 77 FR
30596 (May 23, 2012).
\11\ See 17 CFR 1.3, Swap dealer. As discussed in more detail in
section II, the Commission notes that a joint rulemaking with the
SEC is not required to amend the De Minimis Exception, pursuant to
paragraph (4)(v) of the De Minimis Exception. See 17 CFR 1.3, Swap
dealer, paragraph (4)(v); 77 FR at 30634 n.464.
\12\ 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A). Paragraph
(4)(i)(A) also provides for a de minimis threshold of $25 million
with regard to swaps in which the counterparty is a ``special
entity'' (excluding ``utility special entities'' as provided in
paragraph (4)(i)(B) of the De Minimis Exception) as defined in CEA
section 4s(h)(2)(C), 7 U.S.C. 6s(h)(2)(C). This final rule would not
change the AGNA threshold for swaps with special entities.
\13\ See Order Establishing De Minimis Threshold Phase-In
Termination Date, 81 FR 71605 (Oct. 18, 2016); Order Establishing a
New De Minimis Threshold Phase-In Termination Date, 82 FR 50309
(Oct. 31, 2017).
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When the $3 billion AGNA threshold was established, the Commissions
explained that the information then available regarding certain
portions of the swap market was limited, and that they expected more
information to be available in the future (following the implementation
of swap data reporting), which would enable the Commissions to make a
more informed assessment of the De Minimis Exception and to revise it
as appropriate.\14\ In recognition of these limitations and in
anticipation of additional swap market data becoming available to the
CFTC through the reporting of transactions to swap data repositories
(``SDRs''), paragraph (4)(ii)(B) of the De Minimis Exception was
adopted, which directed CFTC staff to complete and publish for public
comment a report on topics relating to the definition of the term
``swap dealer'' and the de minimis threshold as appropriate, based on
the availability of data and information.\15\ Paragraph (4)(ii)(C) of
the De Minimis Exception provided that after giving due consideration
to the staff report and any associated public comment, the CFTC may
either set a termination date for the phase-in period or issue a notice
of proposed rulemaking to modify the De Minimis Exception.\16\
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\14\ See SD Definition Adopting Release, 77 FR 30632-34. In
making their determination, the Commissions considered the limited
and incomplete swap market data that was available at that time and
concluded that the $3 billion level appropriately considers the
relevant regulatory goals. Id. at 30632. The Commissions found merit
in determining the threshold by multiplying the estimated size of
the domestic swap market by a 0.001 percent ratio suggested by
several commenters. Id. at 30633.
\15\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(B).
\16\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(C).
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In November 2015, staff issued a preliminary report concerning the
De Minimis Exception (``Preliminary Staff Report'').\17\ After
consideration of the public comments received in response to the
Preliminary Staff Report,\18\ and further data analysis, in August 2016
staff issued a final staff report \19\ concerning the De Minimis
Exception (``Final Staff Report,'' and together with the Preliminary
Staff Report, ``Staff Reports''). The data analysis in the Staff
Reports provided some insights into the effectiveness of the De Minimis
Exception as currently implemented. For example, staff analyzed the
number of swap transactions involving at least one registered SD,\20\
which is indicative of the extent to which swaps are subject to SD
regulation at the current $8 billion AGNA threshold. Data reviewed for
the Final Staff Report indicated that approximately 96 percent of swap
transactions analyzed involved at least one registered SD.
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\17\ See Swap Dealer De Minimis Exception Preliminary Report
(Nov. 18, 2015), available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis_1115.pdf. For the
Preliminary Staff Report, staff analyzed data from April 1, 2014
through March 31, 2015.
\18\ The comment letters are available on the Commission website
at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1634.
\19\ See Swap Dealer De Minimis Exception Final Staff Report
(Aug. 15, 2016), available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis081516.pdf. For the Final
Staff Report, staff analyzed data from April 1, 2015 through March
31, 2016.
\20\ Given that all of the CEA section 4s requirements have not
yet been implemented by regulation, the term ``registered SD''
refers to an entity that is a provisionally registered SD. See 17
CFR 3.2(c)(3)(iii).
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To provide additional time for more information to become available
to study the De Minimis Exception, in October 2016 the Commission
issued an order, pursuant to paragraph (4)(ii)(C)(1) of the De Minimis
Exception, establishing December 31, 2018, as the new termination date
for the $8 billion phase-in period.\21\ To enable staff to conduct
additional analysis, in October 2017 the Commission further extended
the phase-in period to December 31, 2019.\22\ Generally, the extensions
provided additional time for Commission staff to conduct further data
analysis regarding the De Minimis Exception, and gave market
participants additional time to begin preparing for a change, if any,
to the AGNA threshold.
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\21\ 81 FR 71605.
\22\ 82 FR 50309.
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3. Policy Considerations
(i) Swap Dealer Registration Policy Considerations
The policy goals underlying SD registration and regulation
generally include reducing systemic risk, increasing counterparty
protections, and increasing market efficiency, orderliness, and
transparency.
Reducing systemic risk: The Dodd-Frank Act was enacted in the wake
of the financial crisis of 2008, in significant part, to reduce
systemic risk, including the risk to the broader U.S. financial system
created by interconnections in the swap market.\23\ Pursuant to the
Dodd-Frank Act, the Commission has adopted regulations designed to
mitigate the potential systemic risk inherent in the previously
unregulated swap market.\24\
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\23\ Dodd-Frank Act, Preamble (indicating that the purpose of
the Dodd-Frank Act was to promote the financial stability of the
United States by improving accountability and transparency in the
financial system, to end ``too big to fail,'' to protect the
American taxpayer by ending bailouts, to protect consumers from
abusive financial services practices, and for other purposes). See
also De Minimis Exception to the Swap Dealer Definition, 83 FR
27444, 27446 (proposed June 12, 2018).
\24\ For example, registered SDs have specific requirements for
risk management programs and margin. See, e.g., 17 CFR 23.600; 17
CFR 23.150-23.161.
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Increasing counterparty protections: Providing regulatory
protections for swap counterparties who may be less experienced or
knowledgeable about the swap products offered by SDs (particularly end-
users who use swaps for hedging or investment purposes) is a
fundamental policy goal advanced by the regulation of SDs.\25\ The
Commissions recognized that a narrower or smaller de minimis exception
would increase the number of counterparties that could potentially
benefit from those regulatory protections.\26\
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\25\ For example, registered SDs are subject to external
business conduct standard regulations designed to provide
counterparty protections. See, e.g., 17 CFR 23.400-23.451.
\26\ SD Definition Adopting Release, 77 FR 30628 (``On the one
hand, a de minimis exception, by its nature, will eliminate key
counterparty protections provided by Title VII for particular users
of swaps and security-based swaps.''). See also 83 FR 27446.
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Increasing market efficiency, orderliness, and transparency:
Increasing swap market efficiency, orderliness, and transparency is
another goal of SD regulation.\27\ Regulations
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requiring SDs, for example, to keep detailed daily trading records,
report trade information, and engage in portfolio reconciliation and
compression exercises help achieve these market benefits.\28\
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\27\ 77 FR 30629 (``The statutory requirements that apply to
swap dealers . . . include requirements . . . aimed at helping to
promote effective operation and transparency of the swap . . .
markets.''). See id. at 30703 (``Those who engage in swaps with
entities that elude swap dealer or major swap participant status and
the attendant regulations could be exposed to increased counterparty
risk; customer protection and market orderliness benefits that the
regulations are intended to provide could be muted or sacrificed,
resulting in increased costs through reduced market integrity and
efficiency. . . .''). See also 83 FR 27446.
\28\ See, e.g., 17 CFR 23.200-23.205; 17 CFR parts 43 and 45; 17
CFR 23.502-23.503.
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(ii) De Minimis Exception Policy Considerations
Consistent with Congressional intent, ``an appropriately calibrated
de minimis exception has the potential to advance other interests.''
\29\ These interests include increasing efficiency, allowing limited
swap dealing in connection with other client services, encouraging new
participants to enter the market, and focusing regulatory
resources.\30\ The policy objectives underlying the de minimis
exception are designed to encourage participation and competition by
allowing persons to engage in a de minimis amount of dealing without
incurring the costs of registration and regulation.\31\
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\29\ See 77 FR 30628. See also 83 FR 27446.
\30\ See 77 FR 30628-30, 30707-08. See also 83 FR 27446-47.
\31\ In considering the appropriate de minimis threshold,
``exclud[ing] entities whose dealing activity is sufficiently modest
in light of the total size, concentration and other attributes of
the applicable markets can be useful in avoiding the imposition of
regulatory burdens on those entities for which dealer regulation
would not be expected to contribute significantly to advancing the
customer protection, market efficiency and transparency objectives
of dealer regulation.'' 77 FR 30629-30. See also 83 FR 27446-47.
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Increasing efficiency: A de minimis exception based on an objective
test with a limited degree of complexity enables entities to engage in
a lower level of swap dealing with limited concerns about whether their
activities would require registration.\32\ The de minimis exception
thereby fosters efficient application of the SD Definition.
Additionally, the Commission is of the view that the potential for
regular or periodic changes to the de minimis threshold may reduce its
efficacy by making it challenging for persons to calibrate their swap
dealing activity as appropriate for their business models. Further, the
Commission is mindful that objective, predictable standards in the de
minimis exception increase efficiency by establishing a simple test for
whether a person's swaps connected with swap dealing activity must be
included in the de minimis calculation. On the other hand, more
complexity in the de minimis calculation potentially results in less
efficiency.\33\
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\32\ 77 FR 30628-29 (``[T]he de minimis exception may further
the interest of regulatory efficiency when the amount of a person's
dealing activity is, in the context of the relevant market, limited
to an amount that does not warrant registration. . . . In addition,
the exception can provide an objective test . . . .''). See also 83
FR 27446-47.
\33\ 77 FR 30707-08 (``On the other hand, requiring market
participants to consider more variables in evaluating application of
the de minimis exception would likely increase their costs to make
this determination.''). See also 83 FR 27446-47.
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Allowing limited ancillary dealing: A de minimis exception allows
persons to accommodate existing clients that have a need for swaps (on
a limited basis) along with other services.\34\ This enables end-users
to continue transacting within existing business relationships, for
example to hedge interest rate or currency risk.
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\34\ 77 FR 30629, 30707-08. See also 83 FR 27447.
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Encouraging new participants: A de minimis exception also promotes
competition by allowing a person to engage in some swap dealing
activities without immediately incurring the regulatory costs
associated with SD registration and regulation.\35\ Without a de
minimis exception, SD regulation could become a barrier to entry that
may stifle competition. An appropriately calibrated de minimis
exception could lower the barrier to entry of becoming an SD by
allowing smaller participants to gradually expand their business until
the scope and scale of their activity warrants regulation (and the
costs involved with compliance).
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\35\ 77 FR 30629. See also 83 FR 27447.
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Focusing regulatory resources: Finally, the de minimis exception
also increases regulatory efficiency by enabling the Commission to
focus its limited resources on entities whose swap dealing activity is
sufficient in size and scope to warrant oversight.\36\
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\36\ 77 FR 30628-29. See also 83 FR 27447.
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As noted in the SD Definition Adopting Release, ``implementing the
de minimis exception requires a careful balancing that considers the
regulatory interests that could be undermined by an unduly broad
exception as well as those regulatory interests that may be promoted by
an appropriately limited exception.'' \37\ A narrower de minimis
exception would likely mean that a greater number of entities would be
required to register as SDs and become subject to the regulatory
framework applicable to registered SDs. However, a de minimis exception
that is too narrow could, for example, discourage persons from engaging
in limited swap dealing activity in order to avoid the burdens
associated with SD regulation.
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\37\ 77 FR 30628. See SD Definition Proposing Release, 75 FR
80179 (The de minimis exception ``should apply only when an entity's
dealing activity is so minimal that applying dealer regulations to
the entity would not be warranted.''). See also 83 FR 27447.
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4. De Minimis Calculation
Generally, a person must count towards its AGNA threshold all swaps
it enters into for dealing purposes over the preceding 12-month period.
In addition, each person whose own swaps do not exceed the AGNA
threshold must also include in its de minimis calculation the AGNA of
swaps of any other unregistered affiliate controlling, controlled by,
or under common control with that person (referred to as
``aggregation'').\38\
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\38\ 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A); Interpretive
Guidance and Policy Statement Regarding Compliance With Certain Swap
Regulations, 78 FR 45292, 45323 (July 26, 2013). See also 83 FR
27447.
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Pursuant to various CFTC regulations, certain swaps, subject to
specific conditions, need not be considered in determining whether a
person is an SD, including: (1) Swaps entered into by an IDI with a
customer in connection with originating a loan to that customer; \39\
(2) swaps between affiliates; \40\ (3) swaps entered into by a
cooperative with its members; \41\ (4) swaps hedging physical
positions; \42\ (5) swaps entered into by floor traders; \43\ (6)
certain foreign exchange (``FX'') swaps and FX forwards; \44\ and (7)
commodity trade options.\45\ In addition, the Commission understands
that persons have applied CFTC interpretive guidance and staff letters
so as not to count towards the AGNA threshold, subject to certain
conditions, certain cross-border swaps \46\ and swaps resulting from
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multilateral portfolio compression exercises.\47\ Further, certain
inter-governmental or quasi-governmental international financial
institutions are not included within the term ``swap dealer.'' \48\
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\39\ See 17 CFR 1.3, Swap dealer, paragraph (5); 77 FR at 30620-
24. See also 83 FR 27447.
\40\ See 17 CFR 1.3, Swap dealer, paragraph (6)(i); 77 FR at
30624-25. See also 83 FR 27447.
\41\ See 17 CFR 1.3, Swap dealer, paragraph (6)(ii); 77 FR at
30625-26. See also 83 FR 27447.
\42\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); 77 FR at
30611-14. See also 83 FR 27447.
\43\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iv); 77 FR at
30614. See also 83 FR at 27447. The floor trader exclusion was also
addressed in no-action relief. See CFTC Staff Letter No. 13-80, No-
Action Relief from Certain Conditions of the Swap Dealer Exclusion
for Registered Floor Traders (Dec. 23, 2013), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-80.pdf.
\44\ See Determination of Foreign Exchange Swaps and Foreign
Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694,
69704-05 (Nov. 20, 2012); Further Definition of ``Swap,''
``Security-Based Swap,'' and ``Security-Based Swap Agreement'';
Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR
48208, 48253 (Aug. 13, 2012).
\45\ See 17 CFR 32.3; Commodity Options, 77 FR 25320, 25326 n.39
(Apr. 27, 2012).
\46\ See 78 FR 45292; CFTC Letter No. 18-13, No-Action Position:
Relief for Certain Non-U.S. Persons from Including Swaps with
International Financial Institutions in Determining Swap Dealer and
Major Swap Participant Status (May 16, 2018), available at https://www.cftc.gov/sites/default/files/idc/groups/public/%40lrlettergeneral/documents/letter/2018-05/18-13.pdf; CFTC Staff
Letter No. 12-71, No-Action Relief: U.S. Bank Wholly Owned by
Foreign Entity May Calculate De Minimis Threshold Without Including
Activity From Its Foreign Affiliates (Dec. 31, 2012), available at
https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/12-71.pdf; CFTC Staff Letter No. 12-61, No-Action Relief:
U.S. Bank Wholly Owned by Foreign Entity May Calculate De Minimis
Threshold Without Including Activity From Its Foreign Affiliates
(Dec. 20, 2012), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/12-61.pdf.
\47\ CFTC Staff Letter No. 12-62, No-Action Relief: Request that
Certain Swaps Not Be Considered in Calculating Aggregate Gross
Notional Amount for Purposes of the Swap Dealer De Minimis Exception
for Persons Engaging in Multilateral Portfolio Compression
Activities (Dec. 21, 2012), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/12-62.pdf.
\48\ See SD Definition Adopting Release, 77 FR 30693.
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B. The Proposal
On June 12, 2018, the Commission published for public comment a
Notice of Proposed Rulemaking (``NPRM'') to amend the De Minimis
Exception by: (1) Setting the AGNA threshold for the De Minimis
Exception at $8 billion in swap dealing activity entered into by a
person over the preceding 12 months; (2) adding new factors to the De
Minimis Exception that would lead to excepting from the AGNA
calculation: (a) Certain swaps entered into with a customer by an IDI
in connection with originating a loan to that customer, (b) certain
swaps entered into to hedge financial or physical positions, and (c)
certain swaps resulting from multilateral portfolio compression
exercises; and (3) providing that the Commission may determine the
methodology to be used to calculate the notional amount for any group,
category, type, or class of swaps, and delegating to the Director of
the Division of Swap Dealer and Intermediary Oversight (``DSIO'') the
authority to make such determinations (collectively, the
``Proposal'').\49\
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\49\ 83 FR 27444.
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In addition, the Commission sought comment on the following
additional potential changes to the De Minimis Exception: (1) Adding as
a factor a minimum dealing counterparty count threshold and/or a
minimum dealing transaction count threshold; (2) adding as a factor
whether a swap is exchange-traded and/or cleared; and (3) adding as a
factor whether a swap is categorized as a non-deliverable forward
transaction.
The various aspects of the NPRM are discussed in further detail
below. The Commission received 43 letters and Commission staff
participated in four ex parte meetings \50\ concerning the NPRM.\51\
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\50\ Comments were submitted by the following entities: 360
Trading Networks Inc. (``360 Trading''); American Bankers
Association (``ABA'') (ABA also attached a report prepared by NERA
Economic Consulting); American Gas Association (``AGA''); Americans
for Financial Reform (``AFR''); Associated Foreign Exchange, Inc.
and GPS Capital Markets, Inc. (``AFEX/GPS''); Association of Global
Custodians (``AGC''); Better Markets, Inc. (``Better Markets'');
Bond Dealers of America (``BDA''); Capital One Financial Corporation
(``Capital One''); Cboe SEF, LLC (``Cboe SEF''); Citizens Financial
Group, Inc. (``Citizens''); CME Group Inc. and Intercontinental
Exchange, Inc. (``CME/ICE''); Coalition for Derivatives End-Users
(``CDEU''); Coalition of Physical Energy Companies (``COPE'');
Commercial Energy Working Group (``CEWG''); Commodity Markets
Council (``CMC'') (CMC also expressed support for the CEWG comment
letter); Covington & Burling LLP (``Covington''); Daiwa Securities
Co. Ltd. (``Daiwa''); Edison Electric Institute and Electric Power
Supply Association (``EEI/EPSA''); Foreign Exchange Professionals
Association (``FXPA''); Frost Bank; Futures Industry Association and
FIA Principal Traders Group (``FIA''); Institute for Agriculture and
Trade Policy (``IATP''); Institute of International Bankers
(``IIB''); International Energy Credit Association (``IECA'') (IECA
also expressed support for the EEI/EPSA comment letter);
International Swaps and Derivatives Association and Securities
Industry and Financial Markets Association (``ISDA/SIFMA'');
Japanese Bankers Association (``JBA''); M&T Bank (``M&T''); Managed
Funds Association (``MFA''); National Council of Farmer Cooperatives
(``NCFC''); National Rural Electric Cooperative Association and
American Public Power Association (``NRECA/APPA''); Natural Gas
Supply Association (``NGSA''); NEX Group plc (``NEX''); Northern
Trust; Optiver US LLC (``Optiver'') (Optiver also expressed support
for the FIA comment letter); Regions Financial Corp. (``Regions'');
State Street; SVB Financial Group (``SVB''); Thomson Reuters (SEF)
LLC (``TR SEF''); six U.S. Senators (``Senators''); Virtu Financial
Inc. (``Virtu''); Western Union Business Solutions (USA), LLC and
Custom House USA, LLC (``Western Union''); and XTX Markets Limited
(``XTX''). Additionally, there were three meetings with Delta
Strategy Group, DRW, Jump Trading, and Optiver, and one meeting with
Better Markets. The comment letters and notice of the ex parte
meetings are available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2885.
\51\ Additionally, in March 2017, Chairman Giancarlo initiated
an agency-wide internal review of CFTC regulations and practices to
identify those areas that could be simplified to make them less
burdensome and costly (``Project KISS''). See Remarks of then-Acting
Chairman J. Christopher Giancarlo before the 42nd Annual
International Futures Industry Conference in Boca Raton, FL (Mar.
15, 2017), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20. The Commission subsequently
published in the Federal Register a Request for Information
soliciting suggestions from the public regarding how the
Commission's existing rules, regulations, or practices could be
applied in a simpler, less burdensome, and less costly manner. A
number of responses submitted pursuant to the Project KISS Request
for Information supported modifications to the De Minimis Exception.
Project KISS, 82 FR 21494 (May 9, 2017), amended by 82 FR 23765 (May
24, 2017). The suggestion letters filed by the public are available
at https://comments.cftc.gov/KISS/KissInitiative.aspx.
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II. Final Rule--$8 Billion Threshold
Given the more complete information now available regarding certain
portions of the swap market, the data analytical capabilities developed
since the SD regulations were adopted, five years of implementation
experience, and comments received in response to the NPRM, in this
adopting release the Commission is amending the De Minimis Exception by
setting the AGNA threshold at $8 billion in swap dealing activity. The
CFTC may in the future separately propose or adopt rules addressing any
aspect of the NPRM that is not finalized in this release.\52\
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\52\ See ICI v. CFTC, 720 F.3d 370, 379 (D.C. Cir. 2013) (``[A]s
the Supreme Court has emphasized, `[n]othing prohibits federal
agencies from moving in an incremental manner.' '') (quoting FCC v.
Fox Television Stations, Inc., 556 U.S. 502, 522 (2009)).
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This change to the De Minimis Exception is being adopted pursuant
to the Commission's authority under CEA section 1a(49)(D), which
requires the Commission to exempt from designation as an SD an entity
that engages in a de minimis quantity of swap dealing in connection
with transactions with or on behalf of its customers, and to promulgate
regulations to establish factors with respect to the making of this
determination to exempt.\53\ The Commissions issued the SD Definition
Adopting Release pursuant to section 712(d)(1) of the Dodd-Frank Act,
which requires the CFTC and SEC to jointly adopt rules regarding the
definition of, among other things, the term ``swap dealer.'' The CFTC
continues to coordinate with the SEC on SD and security-based swap
dealer regulations. However, as discussed in the SD Definition Adopting
Release, a joint rulemaking is not required with respect to the De
Minimis Exception.\54\ The Commission notes that it has consulted with
the SEC and prudential regulators regarding the change to the De
Minimis Exception adopted herein.\55\
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\53\ 7 U.S.C. 1a(49)(D). See also 17 CFR 1.3, Swap dealer,
paragraph (4)(v).
\54\ 77 FR 30634 n.464 (``We do not interpret the joint
rulemaking provisions of section 712(d) of the Dodd-Frank Act to
require joint rulemaking here, because such an interpretation would
read the term ``Commission'' out of CEA section 1a(49)(D) (and
Exchange Act section 3(a)(71)(D)), which themselves were added by
the Dodd-Frank Act.'').
\55\ As required by Sec. 712(a)(1) of the Dodd-Frank Act.
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A. Proposal
The Commission proposed to amend paragraph (4)(i)(A) of the De
Minimis Exception by setting the AGNA threshold at $8 billion. For
added clarity, the Commission also proposed
[[Page 56670]]
to change the term ``swap positions'' to ``swaps'' in paragraph
(4)(i)(A). Additionally, the Commission proposed to delete a
parenthetical clause in paragraph (4)(i)(A) referring to the period
after adoption of the rule further defining the term ``swap,'' and to
remove and reserve paragraph (4)(ii) of the De Minimis Exception, which
addresses the phase-in procedure and staff report requirements of the
De Minimis Exception (discussed above in section I.A.2), since both of
those provisions would no longer be applicable.
The Commission proposed to maintain the AGNA threshold at $8
billion, and also solicited comment on whether to reduce the threshold
to $3 billion, or increase the threshold. The Commission cited as
relevant an analysis of SDR data from January 1, 2017, through December
31, 2017 (the ``review period'').\56\ Given improvements in the quality
of data being reported to SDRs since the Staff Reports were issued,
Commission staff analyzed the AGNA of swaps activity for interest rate
swaps (``IRS''), credit default swaps (``CDS''), FX swaps,\57\ and
equity swaps (whereas the analysis of AGNA data in the Staff Reports
was limited to IRS and CDS).\58\ However, given certain limitations
discussed below, AGNA data was not available for non-financial
commodity (``NFC'') swaps. In addition to now-available AGNA
information for FX swaps and equity swaps, there were also continued
improvements in the consistency of legal entity identifier (``LEI'')
and unique swap identifier reporting.\59\
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\56\ See 83 FR 27448-58. The data was sourced from data reported
to the four registered SDRs: BSDR LLC, Chicago Mercantile Exchange
Inc., DTCC Data Repository, and ICE Trade Vault. The analysis
excluded inter-affiliate and non-U.S. transactions. The total size
of the swap market that was analyzed, after excluding inter-
affiliate and non-U.S. transactions, was approximately $221.1
trillion in AGNA of swaps activity (excluding non-financial
commodity swaps), approximately 4.4 million transactions, and 39,107
counterparties. The Proposal includes additional discussion
regarding the methodology utilized to conduct the analysis. 83 FR
27449-50.
\57\ The term ``FX swaps'' is used in this release to only
describe those FX transactions that are counted towards a person's
de minimis calculation. The term ``FX swaps'' does not refer to
swaps and forwards that are not counted towards the de minimis
threshold pursuant to the exemption granted by the Secretary of the
Treasury. See 77 FR at 69704-05; 77 FR 48253.
\58\ See 83 FR 27449-50; Preliminary Staff Report, supra note
19, at 21-22; Final Staff Report, supra note 17, at 19.
\59\ As discussed in the Proposal, certain data restrictions
limited the usefulness of the SDR data to identify which swaps
should be counted towards a person's de minimis threshold, and the
ability to precisely assess the current de minimis threshold or the
impact of potential changes to the current exclusions. See 83 FR
27449-50.
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Generally employing methodologies similar to those used for
purposes of the Staff Reports, staff attempted to calculate persons'
swaps activity in terms of AGNA to assess how the swap market might be
impacted by potential changes to the current De Minimis Exception. The
reason an entity enters into a swap (e.g., dealing, hedging, investing,
proprietary trading) is not collected under the reporting requirements
in part 45 of the Commission's regulations.\60\ Accordingly, staff
applied filters to the data to exclude from the analysis certain
transactions and entities that were less likely to be connected to
potential swap dealing activity. Entities such as funds, insurance
companies, cooperatives, government-sponsored entities, most commercial
end-users, and international financial institutions were excluded as
potential SDs for the purpose of the analysis because these entities
generally use swaps for investing, hedging, or proprietary trading, or
otherwise enter into swaps that would not be included in determining
whether the entity is an SD.\61\ Further, additional filters allowed
for the exclusion of inter-affiliate \62\ and non-U.S. to non-U.S. swap
transactions.\63\
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\60\ See 17 CFR part 45 app.1.
\61\ See supra section I.A.4 (discussing the de minimis
threshold calculation). The Commission notes that the entity-based
exclusions and transaction filters are not a determinative means of
assessing whether any particular entity is engaged in swap dealing.
See also 83 FR 27449 n.73.
\62\ See 17 CFR 1.3, Swap dealer, paragraph (6)(i).
\63\ See generally 78 FR 45292.
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With the benefits of improved data quality and analytical tools,
staff conducted a more granular analysis (as compared to the Staff
Reports) to more accurately identify those entities that, based on
their observable business activities, were potentially engaging in swap
dealing activity (``In-Scope Entities'') \64\ versus those likely to be
engaging in other kinds of transactions (e.g., entering into swaps for
investment purposes). Further, for the purposes of the Proposal, a
minimum unique counterparty count of 10 counterparties was utilized to
better identify the entities that are likely to be engaged in
transactions that have to be considered for the SD Definition. Adding
this filter to the analysis reduced the likelihood of false positives--
i.e., reduced the potential that entities likely engaged in hedging or
other non-dealing activity would be identified as potential SDs.\65\
---------------------------------------------------------------------------
\64\ The majority of In-Scope Entities are banks, broker-
dealers, non-bank financial entities, and affiliates thereof.
\65\ See 83 FR 27449.
---------------------------------------------------------------------------
With respect to NFC swaps, Commission staff encountered a number of
challenges in calculating notional amounts, including: (1) The vast
array of underlying commodities with differing characteristics; (2) the
multiple types of swaps (e.g., fixed-float, basis, options, multi-leg,
exotic); (3) the variety of data points required to calculate notional
amounts (e.g., price, quantity, quantity units, location, grades,
exchange rate); (4) locality-specific terms; and (5) lack of industry
standards for notional amount-equivalent calculations.\66\ Given the
limitations in the AGNA data, counterparty counts and transaction
counts were used as proxies to analyze likely swap dealing activity for
participants in the NFC swap market.
---------------------------------------------------------------------------
\66\ See 83 FR 27449-50.
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The analysis conducted for the Proposal largely confirmed the
analysis conducted for the Staff Reports; \67\ however, there is
greater confidence in the results given the improved data and refined
methodology. Nonetheless, given the lack of a swap dealing indicator
for individual swaps, and the lack of an indicator to identify whether
a specific swap need not be considered in determining whether a person
is an SD or counted towards the person's AGNA threshold, staff's
analysis was based on a person's AGNA of swaps activity, as opposed to
AGNA of swap dealing activity.
---------------------------------------------------------------------------
\67\ See generally 83 FR 27449-58; Final Staff Report, supra
note 19; Preliminary Staff Report, supra note 17.
---------------------------------------------------------------------------
To assess the relative impact on the swap market of potential
changes to the De Minimis Exception, CFTC staff analyzed the extent to
which the swap market was subject to SD regulation during the review
period because at least one counterparty to a swap was a registered SD
(``2017 Regulatory Coverage''). Specifically, with regard to 2017
Regulatory Coverage, staff identified the extent to which: (1) Swaps
activity, measured in terms of AGNA or transaction count, was subject
to SD regulation during the review period because at least one
counterparty to a swap was a registered SD (``2017 AGNA Coverage'' or
``2017 Transaction Coverage,'' as applicable); and (2) counterparties
in the swap market transacted with at least one registered SD during
the review period (``2017 Counterparty Coverage'').
Additionally, staff estimated regulatory coverage by assessing the
extent to which the swap market would have been subject to SD
regulation at different AGNA thresholds because at least one
counterparty to a swap was identified as a ``Likely SD'' (``Estimated
Regulatory Coverage''). For purposes of this analysis, the term
``Likely SD''
[[Page 56671]]
refers to an In-Scope Entity that exceeded a specified AGNA threshold
level, and traded with at least 10 unique counterparties. With regard
to Estimated Regulatory Coverage, staff identified the extent to which:
(1) Swaps activity, measured in terms of AGNA or transaction count,
would have been subject to SD regulation during the review period, at a
specified AGNA threshold, because at least one counterparty to a swap
was identified as a Likely SD at that AGNA threshold (``Estimated AGNA
Coverage'' or ``Estimated Transaction Coverage,'' as applicable); and
(2) counterparties in the swap market would have transacted with at
least one Likely SD during the review period, at a specified AGNA
threshold (``Estimated Counterparty Coverage'').
B. Summary of Comments
1. Set Threshold at $8 Billion
Most commenters that addressed this aspect of the Proposal stated
that the AGNA threshold should not decrease to $3 billion, and/or
supported setting the threshold at $8 billion.\68\ Some of those
commenters also stated that the Commission could or should consider a
higher threshold, as discussed in more detail in section II.B.2
below.\69\ Commenters generally stated that the policy goals for SD
registration--reducing systemic risk, increasing counterparty
protections, and/or increasing market efficiency, orderliness, and
transparency--and the policy goals for a de minimis exception--
increasing efficiency, allowing limited ancillary dealing, encouraging
new participants, and/or focusing regulatory resources--would be better
advanced if the threshold did not decrease to $3 billion.\70\
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\68\ See ABA, AGA, AFEX/GPS, BDA, Capital One, Cboe SEF,
Citizens, CDEU, COPE, CEWG, CMC, EEI/EPSA, FXPA, Frost Bank, FIA,
IIB, IECA, ISDA/SIFMA, JBA, M&T, NCFC, NRECA/APPA, NGSA, Regions,
SVB, Virtu, Western Union, and XTX comment letters.
\69\ See ABA, AFEX/GPS, BDA, Capital One, Citizens, FIA, IIB,
IECA, JBA, Regions, and SVB comment letters.
\70\ Additionally, CDEU and CEWG referenced the Congressional
Directive stating that the Commission should establish a threshold
of $8 billion or greater within 60 days of enactment of the
Appropriations Act (i.e., by February 16, 2016), while CEWG also
cited to the recent recommendation from the U.S. Department of the
Treasury to set the threshold at $8 billion. See CDEU and CEWG
comment letters; Accompanying Statement to the Consolidated
Appropriations Act of 2016, Explanatory Statement Division A at 32
(Dec. 2015), available at http://docs.house.gov/meetings/RU/RU00/20151216/104298/HMTG-114-RU00-20151216-SD002.pdf; H. Rpt. 114-205 at
76 (July 14, 2015), available at https://www.congress.gov/114/crpt/hrpt205/CRPT-114hrpt205.pdf; U.S. Department of the Treasury, A
Financial System That Creates Economic Opportunities--Capital
Markets (available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf).
---------------------------------------------------------------------------
Specifically, commenters stated that a reduced AGNA threshold could
lead to some entities reducing or ceasing swaps activity to avoid
registration and its related costs, which could lead to negative
impacts for swap market participants. For example, fewer de minimis
dealers could mean that small and mid-sized end-users and commercial
entities who utilize swaps for hedging purposes, as well as NFC swap
market participants, would have fewer dealers available to them.\71\
The potential negative impacts could include: (1) Increased
concentration in the swap dealing market; (2) reduced availability of
potential swap counterparties; (3) reduced liquidity; (4) increased
volatility; (5) increased systemic risk; and/or (6) higher fees or
reduced competitive pricing.\72\
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\71\ See ABA, AGA, AFEX/GPS, BDA, Capital One, Citizens, CDEU,
COPE, CEWG, CMC, EEI/EPSA, Frost Bank, IIB, IECA, ISDA/SIFMA, JBA,
M&T, NCFC, NRECA/APPA, NGSA, SVB, Virtu, and Western Union comment
letters.
\72\ See id.
---------------------------------------------------------------------------
Several commenters also noted that the current $8 billion threshold
already subjects the vast majority of transactions to SD regulation, or
that a reduced threshold would not capture significant additional
dealing activity.\73\
---------------------------------------------------------------------------
\73\ See AGA, BDA, Capital One, CDEU, CMC, Frost Bank, IECA,
M&T, SVB, and Western Union comment letters.
---------------------------------------------------------------------------
Some commenters stated that the nature of the swaps activity
entered into by certain entities poses less systemic risk--e.g.,
commercial banks that have swap dealing activity below $8 billion and
may be subject to prudential banking rules, and entities that primarily
enter into NFC swaps.\74\ More specifically, Citizens noted that
prudential regulators examine the safety and soundness of middle-market
banks' swap businesses, and the swaps offered by these banks are
structured conservatively to assist customers with hedging activities.
Further, with respect to counterparty protections, Citizens stated that
many middle-market banks that would potentially have to register at a
lower threshold likely already perform, under applicable prudential
banking rules, know-your-counterparty and suitability analyses of their
counterparties prior to entering into swaps with them.\75\
---------------------------------------------------------------------------
\74\ See Citizens, IECA, NRECA/APPA, NGSA, and SVB comment
letters.
\75\ See Citizens comment letter.
---------------------------------------------------------------------------
Several commenters stated that maintaining the $8 billion threshold
provides regulatory stability or alleviates the uncertainty currently
experienced by market participants with an AGNA of swap dealing
activity between $3 billion and $8 billion.\76\
---------------------------------------------------------------------------
\76\ See AFEX/GPS, Capital One, COPE, EEI/EPSA, FXPA, FIA, IECA,
ISDA/SIFMA, JBA, M&T, NGSA, and Regions comment letters.
---------------------------------------------------------------------------
Some commenters suggested that maintaining the $8 billion threshold
would enable the Commission to focus its limited resources on entities
whose swap dealing is sufficient in size and scope to warrant
oversight.\77\ Two commenters also noted that Commission regulations
not related to SD registration (e.g., part 43 and 45 reporting
requirements, and mandatory clearing and swap execution facility
(``SEF'') trading requirements) already apply to unregistered entities,
and therefore, many of the policy goals of SD registration are already
being advanced with respect to swaps entered into by these unregistered
entities.\78\
---------------------------------------------------------------------------
\77\ See Citizens, Virtu, and Western Union comment letters.
\78\ See Citizens and Virtu comment letters.
---------------------------------------------------------------------------
With respect to NFC swaps, EEI/EPSA and NGSA expressed concern that
a lower AGNA threshold would provide less accommodation for increasing
NFC prices, which could lead to market participants reducing their swap
dealing activity to remain below the threshold.\79\ To address concerns
regarding volatility in NFC prices, EEI/EPSA also suggested that the
AGNA threshold be adjusted annually, consistent with the consumer price
index.\80\ NGSA also stated that the lower regulatory coverage for NFC
swaps is appropriate given the characteristics of that market.\81\
---------------------------------------------------------------------------
\79\ See EEI/EPSA and NGSA comment letters. As stated by EEI/
EPSA, if NFC prices increase, the same level of swaps activity will
potentially have a higher notional amount.
\80\ See EEI/EPSA comment letter.
\81\ See NGSA comment letter.
---------------------------------------------------------------------------
A few commenters addressed the compliance costs associated with SD
registration,\82\ stating that: (1) Establishing an $8 billion
threshold results in aggregate recurring compliance costs over a 10-
year period, on a net present value basis, of approximately $373
million; \83\ and (2) the cost of SD registration (e.g., systems build-
out, external advisors, National Futures Association membership dues,
compliance with margin rules) is underestimated,\84\ with one commenter
[[Page 56672]]
estimating that the initial cost would be approximately $8 to $10
million per entity, with ongoing costs to meet regulatory requirements
of $2 million per year thereafter.\85\
---------------------------------------------------------------------------
\82\ See ABA, IECA, and SVB comment letters. Although addressed
by ABA and SVB, the costs associated with SD regulatory requirements
(e.g., margin, reporting, technology, etc.) are not considered in
the cost-benefit analysis below. See infra notes 249 and 286.
\83\ See ABA comment letter.
\84\ See IECA and SVB comment letters. Although outside of the
scope of this rulemaking, IECA also asserted that the Commission
underestimates the negative impact on market development due to its
failure to provide a workable capital rule for non-bank SDs.
\85\ See SVB comment letter.
---------------------------------------------------------------------------
BDA stated that the CFTC should clarify whether changes to the De
Minimis Exception would be applicable to activity that occurred in the
preceding 12 months.\86\
---------------------------------------------------------------------------
\86\ See BDA comment letter.
---------------------------------------------------------------------------
2. Increase Threshold
Some commenters stated that the Commission should also consider a
higher AGNA threshold, maintaining generally that the policy goals for
SD registration and a de minimis exception would be better advanced if
the threshold was higher than $8 billion.\87\
---------------------------------------------------------------------------
\87\ See ABA, AFEX/GPS, BDA, Capital One, Citizens, FIA, IIB,
IECA, JBA, Regions, and SVB comment letters.
---------------------------------------------------------------------------
Specifically, several commenters stated that an increased threshold
would not lead to a significant decrease in regulatory coverage of swap
dealing activity.\88\ ABA and AFEX/GPS asserted that a $20 billion
threshold would result in a trivial or non-consequential reduction in
Estimated Regulatory Coverage,\89\ and JBA stated that at a $100
billion threshold, Estimated AGNA Coverage would be almost the
same.\90\ AFEX/GPS also asserted that the cumulative swaps activity
conducted by SDs between $8 billion and $20 billion does not pose
systemic risk, and entities would still be subject to reporting rules
and recordkeeping requirements.\91\ Additionally, AFEX/GPS and Citizens
asserted that a decrease in the number of registered SDs would focus
the Commission's resources on SDs whose dealing activity is sufficient
in size and scope to warrant greater oversight.\92\
---------------------------------------------------------------------------
\88\ See ABA, AFEX/GPS, BDA, Citizens, IIB, and SVB comment
letters.
\89\ See ABA and AFEX/GPS comment letters.
\90\ See JBA comment letter.
\91\ See AFEX/GPS comment letter.
\92\ See AFEX/GPS and Citizens comment letters.
---------------------------------------------------------------------------
Further, a few commenters stated that given the costs of SD
registration, a higher threshold would encourage new participants to
engage in swap dealing activity, which SVB noted as important given the
highly concentrated nature of the SD market, where the nation's largest
banks control the vast majority of swap market share.\93\
---------------------------------------------------------------------------
\93\ See AFEX/GPS, BDA, Citizens, and SVB comment letters.
---------------------------------------------------------------------------
Additionally, ABA indicated that an increased threshold would
result in aggregate compliance cost savings for market participants.
For example, AGNA thresholds of $15 billion and $50 billion would
result in potential aggregate savings of $81 million and $170 million,
respectively, on a net present value basis, as compared to an $8
billion threshold.\94\
---------------------------------------------------------------------------
\94\ See ABA comment letter.
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3. Allow Threshold to Decrease
Better Markets and the Senators stated that the Commission should
permit the AGNA threshold to decrease to $3 billion, contending
generally that the data insufficiently or misleadingly justifies
maintaining the threshold at $8 billion,\95\ and arguing that the
Proposal did not follow necessary administrative procedures or exceeded
statutory authority.\96\
---------------------------------------------------------------------------
\95\ See Better Markets and Senators comment letters.
\96\ See Better Markets comment letter.
---------------------------------------------------------------------------
The Senators stated that though notional amount data for NFC swaps
was not used in considering the Proposal, the data that was available
for NFC swaps shows significantly less regulatory coverage under an $8
billion threshold than in other asset classes. The Senators commented
that though the Proposal notes the ``unique characteristics'' of NFC
swaps, the analysis provided to justify the $8 billion threshold
indicates a series of assumptions and possibilities rather than
concrete data. The Senators also questioned why, given the lack of
relevant notional amount data for NFC swaps, it is necessary to
maintain the $8 billion threshold for SDs involved with energy-related
swaps.\97\
---------------------------------------------------------------------------
\97\ See Senators comment letter.
---------------------------------------------------------------------------
Better Markets claimed that the regulatory coverage statistics are
incomplete, misleading, and irrelevant to the Dodd-Frank Act's
activities-based standard for SD registration, stating that the high
AGNA and transaction coverage percentages are not indicative of the
absolute level of swap dealing activities relevant to SD registration
under CEA section 1a(49)(A). Further, in connection with the 680
additional counterparties that would potentially benefit from SD
regulations under a lower $3 billion threshold, Better Markets asserted
that expanding counterparty protections to hundreds of market
participants would have more than a ``limited'' effect on counterparty
protection once relative statistics are abandoned.\98\
---------------------------------------------------------------------------
\98\ See Better Markets comment letter.
---------------------------------------------------------------------------
Better Markets also asserted that the data filtering methodology
was flawed and inadequately explained. Better Markets explained that,
with respect to the 10 counterparty count filter, if a commodities
affiliate of a large firm held itself out as an SD or stood ready to
accommodate the demand of nine counterparties, that affiliate should
have been treated, for purposes of the analysis, as an SD on account of
its swap dealing activities, unless those activities did not exceed the
AGNA threshold or otherwise were excluded from the SD registration
analysis. Further, Better Markets argued that: (1) The CFTC should have
provided an opportunity for public comment on the assumptions that were
made in the CFTC's analysis; (2) there was some ambiguity in the terms
used in the CFTC's analysis; (3) the CFTC's reliance upon a 10 unique
counterparty filter was based on fatally flawed logic; (4) the data
limitations demonstrate the benefits of better field-level and
affiliate reporting of swaps, which would give the CFTC an informed
basis to consider changes to the $3 billion threshold; and (5) the CFTC
must first amend its swap data and chief compliance officer reporting
regulations to ensure it has sufficient data to provide an informed
basis for administrative action.\99\
---------------------------------------------------------------------------
\99\ See id.
---------------------------------------------------------------------------
Further, Better Markets commented that the de minimis threshold
framework should be revised to focus on strict, observable measures
like total notional amount or transactional activities, rather than a
subset of such activities that potential registrants are able to
interpret for themselves, and are not presently required by regulation
to monitor, report, or internally track across the firm.\100\
---------------------------------------------------------------------------
\100\ See id.
---------------------------------------------------------------------------
Better Markets also asserted that the statutory provision regarding
the de minimis exception authorizes the CFTC to issue exemptive orders
for individual or similarly-situated legal entities based upon
generally applicable factors for determining whether such entities may
be involved in a de minimis amount of swap dealing activities. Better
Markets noted that it is unreasonable to conclude that Congress
intended a wholesale exemption from registration that is divorced from
the particular circumstances of any one petitioner. Further, Better
Markets argued that the language in the exemptive mandate must be
construed in a manner that is faithful to Congress' intent that the
quantity of exempted swap dealing activities be minimal, a concept that
has boundaries that can be drawn far short of billions of dollars and
thousands of transactions by unregulated entities.\101\
---------------------------------------------------------------------------
\101\ See id.
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[[Page 56673]]
AFR stated that, though the improved data adds weight to the claim
that an $8 billion threshold is appropriate for some financial swaps,
arguments against the $8 billion threshold are particularly strong in
the case of NFC markets. Specifically, AFR asserted that the Commission
should be willing to vary the de minimis threshold based on market
characteristics, and in particular should reduce the $8 billion
threshold in NFC markets where $8 billion in notional amount represents
a different level of economic significance than in some other markets.
AFR elaborated that the Commission continues to lack data on the
notional amount for NFC swaps, making it difficult to draw definitive
conclusions on the economic significance of the activity that is not
subject to SD regulation, and stated that significant dealing activity
in the NFC market is not subject to SD regulation since roughly half of
all the entities with 10 or more NFC swap counterparties are not
registered as SDs.\102\
---------------------------------------------------------------------------
\102\ See AFR comment letter.
---------------------------------------------------------------------------
AFR also stated that the AGNA threshold analysis does not account
for the numerous other exceptions proposed, which could exclude very
large amounts of swaps activity from being considered in the de minimis
calculation.\103\
---------------------------------------------------------------------------
\103\ See id.
---------------------------------------------------------------------------
IATP stated that the data analysis does not support the idea that
more ancillary dealing would promote greater competition, and thus more
efficient and transparent price discovery. IATP asserted that the
Commission's true motivation for maintaining an $8 billion threshold is
the regulatory compliance cost and burden reduction objective of
Project KISS, rather than promoting improved price discovery. Further,
IATP claimed that the AGNA of activity in the swap market has shrunk
due to the clearing of swaps on centralized platforms and the migration
of swaps to the futures markets, not because of constraints of the de
minimis threshold or because of the lack of exemptions to the
calculation of that threshold. IATP also stated that though it did not
have a data-based argument for changing the $8 billion threshold, it
believed that maintaining the $8 billion threshold because of potential
administrative burdens involved in lowering the threshold is a poor,
Project KISS-based, rationale that does not consider the benefits of SD
registration for the financial integrity and price discovery of the
swap market.\104\
---------------------------------------------------------------------------
\104\ See IATP comment letter.
---------------------------------------------------------------------------
4. Other Comments
(i) Testing Frequency for Threshold
Some commenters addressed the testing frequency for the threshold.
Commenters stated that the AGNA threshold calculation should continue
to be based primarily on a rolling 12-month test of the AGNA of swap
dealing activity.\105\ Specifically, commenters indicated that: (1)
Resources have been spent and systems have been built to comply with
the current approach, and additional changes would add costs with no
tangible benefit; \106\ and (2) the current test is relatively simple
to administer, and the 12-month testing period helps to smooth out any
short-term aberrations in activity and allows for moderation of future
swap dealing activity to avoid inadvertently triggering an SD
registration requirement.\107\ However, BDA stated that the CFTC should
allow entities to test only at the end of every month, which would
significantly reduce the compliance testing burdens for small and mid-
sized firms.\108\
---------------------------------------------------------------------------
\105\ See ABA, CMC, Frost Bank, and IECA comment letters.
\106\ See ABA, CMC, and IECA comment letters.
\107\ See Frost Bank comment letter.
\108\ See BDA comment letter.
---------------------------------------------------------------------------
(ii) Alternatives to Single AGNA Threshold
A number of commenters addressed whether the Commission should
consider an alternative to a threshold based on the AGNA of swap
dealing activity.
AFR and IECA noted that using AGNA as the relevant criterion for SD
registration, as compared to other options, is beneficial because: (1)
Resources have been expended to comply with the current approach, and
changing that approach would add costs for no perceived benefit; \109\
and (2) AGNA provides a stable metric of the gross size of swaps
commitments that is not reliant on either current market valuations,
model forecasts, or institutional arrangements such as bankruptcy
procedures.\110\
---------------------------------------------------------------------------
\109\ See IECA comment letter.
\110\ See AFR comment letter.
---------------------------------------------------------------------------
AFR stated that controlling operational risk, not simply market
risk, is a major reason for SD designation, and AGNA remains a good
measure of the total operational risks incurred by an entity,\111\ and
Better Markets maintained that the de minimis exception must require
consideration of the quantity of swap dealing, not net exposures or
other risk-based measures.\112\
---------------------------------------------------------------------------
\111\ See id.
\112\ See Better Markets comment letter.
---------------------------------------------------------------------------
However, IECA indicated that although using an alternative netting
option (e.g., entity-netted notional amounts) is a reasonable idea and
could be incorporated into existing analysis, in the NFC markets,
netting would need to be done as a measure of credit exposure with
physical and bilateral swaps being able to be offset against each other
in connection with perceived ``risk exposure'' to a third party.\113\
Additionally, ABA and Citizens stated that the Commission should
consider a risk-based de minimis exception.\114\ ABA asserted that a
notional amount-based threshold is not the appropriate metric for the
De Minimis Exception because it is not based on risk, and suggested
that the Commission consider initial margin as the relevant
metric.\115\
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\113\ See IECA comment letter.
\114\ See ABA and Citizens comment letters.
\115\ See ABA comment letter. ABA also suggested that the
Commission could consider other market risk metrics, such as value
at risk and sensitivities, as well as credit risk metrics, such as
total swaps current exposure net of collateral received and largest
fifteen swap counterparty current exposures net of collateral
received.
---------------------------------------------------------------------------
Commenters also stated that a tiered SD registration structure
should not be considered, noting that a tiered structure could: (1)
Create more uncertainty for situations where legal and regulatory
certainty is important; \116\ and (2) subject entities to instability
and inefficiency relative to a permanent, single AGNA de minimis
threshold.\117\ On the other hand, IATP asserted that the Commission
should propose, after further analytic work, a tiered SD registration
for SDs with a certain threshold of NFC swaps activity (e.g., via
commodity indexes).\118\
---------------------------------------------------------------------------
\116\ See IECA comment letter.
\117\ See JBA comment letter.
\118\ See IATP comment letter.
---------------------------------------------------------------------------
Several commenters also addressed whether the Commission should
consider counterparty count and transaction count as additional metrics
to be included in the de minimis threshold, as discussed in section
IV.A below.
(iii) Additional Calculation Changes
Commenters addressed other calculation changes the Commission
should consider for the de minimis threshold.
Virtu stated that the CFTC should exempt swap transactions where
one party is a registered SD or one party holds their account with a
registered SD since these transactions are already subject to the
existing reporting
[[Page 56674]]
requirements and, as such, Commission oversight.\119\
---------------------------------------------------------------------------
\119\ See Virtu comment letter.
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JBA stated that the CFTC should specify that the termination and
modification of terms and conditions of existing transactions do not
count towards the threshold, noting that termination of transactions
mitigates counterparty credit risk and reduces the outstanding AGNA of
swaps.\120\
---------------------------------------------------------------------------
\120\ See JBA comment letter.
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BDA argued that the CFTC should consider increasing the ``special
entity'' threshold to $100 million in order to provide special entities
with more access to the marketplace. BDA maintained that the $25
million threshold results in many mid-sized firms deciding not to enter
into swaps with special entities, while an increase in that threshold
could provide better market access for special entities while having no
material impact on the overall regulation of SDs.\121\
---------------------------------------------------------------------------
\121\ See BDA comment letter.
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Virtu asserted that transactions by market makers maintaining net
open positions not exceeding $1 billion (over a 12-month period) should
be exempted from the de minimis threshold calculation.\122\ Virtu
explained that certain market makers do not hold positions or carry
risk for long periods of time, but rather seek to facilitate efficient
risk transference to earn a spread and, in doing so, lower costs for
investors through increased price competition and more transparency in
the market.
---------------------------------------------------------------------------
\122\ See Virtu comment letter. Virtu noted that, while in
aggregate the number of transactions engaged in by market makers
might exceed the $8 billion threshold, the net risk of these trades
would not have the same potential impact to overall systemic risk
because exempt market makers' open net positions in otherwise non-
exempt transactions would be capped at $1 billion over a rolling 12-
month period. Additionally, certain market makers access the market
through prime brokers--who are registered SDs--and, as such, these
transactions would be included in the prime brokers' regulatory
reports and subject to CFTC oversight.
---------------------------------------------------------------------------
IIB stated that entities that have discontinued new swap dealing
activity should not have to count towards their AGNA threshold certain
transactions that modify legacy swaps entered into by those entities,
including: (1) Partial or full terminations; (2) modifications that
shorten the duration of an outstanding swap; (3) partial or full
novations of legacy swap transactions; or (4) swaps submitted for
clearing.\123\
---------------------------------------------------------------------------
\123\ See IIB comment letter.
---------------------------------------------------------------------------
(iv) Cross-Border Issues
With respect to cross-border issues, JBA stated that the market has
been divided into two groups because non-SD entities outside of the
U.S. avoid transactions with U.S. persons, thereby undermining the
diversity of U.S. markets.\124\ Additionally, Western Union suggested
that the Commission should also address the foreign consolidated
subsidiary rules in the context of the De Minimis Exception
rulemaking.\125\ Further, IIB stated that the Commission should clarify
that a swap between a non-U.S. person and a non-U.S. asset manager that
is subject to post-trade allocation and submitted for clearing, or
given up to a non-U.S. prime broker prior to being allocated, should
not count towards the AGNA threshold in certain circumstances.\126\
---------------------------------------------------------------------------
\124\ See JBA comment letter.
\125\ See Western Union comment letter (referring to Cross-
Border Application of the Registration Thresholds and External
Business Conduct Standards Applicable to Swap Dealers and Major Swap
Participants, 81 FR 71946 (proposed Oct. 18, 2016)). Western Union
also stated that the proposed application of the foreign
consolidated subsidiary definition to SD registration is
inconsistent with principles of international comity and would
create an unfair competitive disadvantage for certain market
participants.
\126\ See IIB comment letter.
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C. Final Rule and Commission Response
Upon consideration of the comments,\127\ the Commission is adopting
an amendment to paragraph (4)(i)(A) of the De Minimis Exception to set
the AGNA swap dealing threshold at $8 billion over the immediately
preceding 12 months, as proposed. The Commission is also adopting the
other conforming and clarifying changes as proposed.
---------------------------------------------------------------------------
\127\ The Commission also notes that the data analysis discussed
in this adopting release and the Proposal confirmed the analysis
conducted for the Staff Reports. See generally 83 FR 27449-58; Final
Staff Report, supra note 19; Preliminary Staff Report, supra note
17.
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1. Rationale for Not Reducing AGNA Threshold to $3 Billion
As discussed in the Proposal,\128\ as well as by most commenters
that addressed this aspect of the Proposal,\129\ the policy objectives
underlying SD regulation--reducing systemic risk, increasing
counterparty protections, and increasing market efficiency,
orderliness, and transparency--would not be significantly advanced if
the threshold decreased to $3 billion. Additionally, the policy
objectives furthered by a de minimis exception--increasing efficiency,
allowing limited ancillary dealing, encouraging new participants, and
focusing regulatory resources--would not be significantly advanced, and
may be impaired to some extent, if the threshold decreased. Generally,
as discussed in the Proposal and as agreed with by most commenters,
analysis of the data indicated that: (1) The current $8 billion
threshold subjects almost all swap transactions (as measured by AGNA or
transaction count) to SD regulations; (2) at a lower threshold of $3
billion, there would only be a small amount of additional AGNA and swap
transactions subject to SD regulation, and there would potentially be
reduced liquidity in the swap market, as compared to the $8 billion
threshold; and (3) a lower threshold could lead to reduced liquidity
for NFC swaps, negatively impacting end-users who utilize NFC swaps for
hedging purposes.\130\
---------------------------------------------------------------------------
\128\ See generally 83 FR 27450-58.
\129\ See supra section II.B.1.
\130\ See generally supra section II.B.1; 83 FR 27450-58. See
also Final Staff Report, supra note 19; Preliminary Staff Report,
supra note 17.
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(i) High Regulatory Coverage at $8 Billion Threshold
During the review period, almost all swap transactions involved at
least one registered SD as a counterparty--greater than 99 percent for
IRS, CDS, FX swaps, and equity swaps. For NFC swaps, approximately 86
percent of transactions involved at least one registered SD as a
counterparty. Overall, approximately 98 percent of transactions
involved at least one registered SD. Further, almost all AGNA of swaps
activity included at least one registered SD--greater than 99 percent
for IRS, CDS, FX swaps, and equity swaps. The Commission notes that the
2017 Counterparty Coverage was approximately 83.5 percent--i.e.,
approximately 16.5 percent of the counterparties in the swap market did
not transact with at least one registered SD on at least one swap
(6,440 counterparties out of a total of 39,107), and therefore
potentially did not benefit from the counterparty protection aspects of
SD regulations.\131\ However, given the 2017 AGNA Coverage and 2017
Transaction Coverage statistics, these 6,440 entities had limited
overall swaps activity. Accordingly, to the extent these 6,440 entities
were engaged in swap dealing activities, such activity was likely
ancillary and in connection with other client services, potentially
advancing the policy rationales behind a de minimis exception. This
data signifies that nearly all swaps already benefited from the policy
considerations discussed above (e.g., reducing systemic
[[Page 56675]]
risk, increasing counterparty protections, and increasing market
efficiency, orderliness, and transparency) at the existing $8 billion
threshold.\132\
---------------------------------------------------------------------------
\131\ The actual number of entities without a single transaction
with a registered SD was likely lower than 6,440. Of the 6,440
entities, 1,780 had invalid identifiers that staff was unable to
manually replace with a valid LEI. It is possible that these 1,780
invalid identifiers actually represented fewer than 1,780 distinct
counterparties because one counterparty may be associated with
multiple invalid identifiers. See 83 FR 27451.
\132\ This analysis is discussed in greater detail in the
Proposal, and was also addressed by commenters. See supra section
II.B.1; 83 FR 27450-52.
---------------------------------------------------------------------------
(ii) Minimal Additional Regulatory Coverage at Lower Threshold
Given the high percentage of swaps that were subject to SD
regulation at the existing $8 billion threshold during the review
period, a lower threshold of $3 billion would result in only a small
amount of additional activity being directly subjected to SD
regulation. Specifically, the Estimated AGNA Coverage would have
increased from approximately $221,020 billion (99.95 percent) to
$221,039 billion (99.96 percent)--an increase of $19 billion (a 0.01
percentage point increase). The Estimated Transaction Coverage would
have increased from 3,795,330 trades (99.77 percent) to 3,797,734
trades (99.83 percent)--an increase of 2,404 trades (a 0.06 percentage
point increase). The Estimated Counterparty Coverage would have
increased from 30,879 counterparties (88.80 percent) to 31,559
counterparties (90.75 percent)--an increase of 680 counterparties (a
1.96 percentage point increase). These small increases in Estimated
Regulatory Coverage indicate that the systemic risk mitigation,
counterparty protection, and market efficiency benefits of SD
regulation would be enhanced in only a very limited manner if the
threshold decreased from $8 billion to $3 billion. Additionally, the
limited regulatory and market benefits of a $3 billion threshold should
be considered in conjunction with the costs associated with a lower
threshold (e.g., costs of implementing policies and procedures,
technology systems, and training programs to address requirements
imposed by SD regulations).\133\
---------------------------------------------------------------------------
\133\ This analysis is discussed in greater detail in the
Proposal, and was also addressed by commenters. See supra section
II.B.1; 83 FR 27452-54.
---------------------------------------------------------------------------
Additionally, as discussed by the Commission and most commenters, a
$3 billion AGNA threshold could lead certain entities to reduce or
cease swap dealing activity to avoid registration and its related
costs.\134\ Generally, the costs associated with registering as an SD
may exceed the profits from dealing swaps for entities with limited
dealing activities. This could lead to negative impacts for swap market
participants, including, but not limited to, small and mid-sized end-
users who use swaps for hedging purposes. Reduced swap dealing activity
could lead to increased concentration in the swap dealing market,
reduced availability of potential swap counterparties, reduced
liquidity, increased volatility, increased systemic risk, and/or higher
fees or reduced competitive pricing. The end-user counterparties of
these smaller swap dealing entities may be adversely impacted by the
above consequences and could face a reduced ability to use swaps to
manage their business risks.\135\ Additionally, as noted by some
commenters, the nature of the swaps activity entered into by certain
entities poses less systemic risk--e.g., commercial banks that have
swap dealing activity below $8 billion and entities that primarily
enter into NFC swaps.\136\
---------------------------------------------------------------------------
\134\ See supra section II.B.1; 83 FR 27452-54. See also Final
Staff Report, supra note 19.
\135\ See supra section II.B.1; 83 FR 27452-54.
\136\ See supra section II.B.1; Citizens, IECA, NRECA/APPA,
NGSA, and SVB comment letters.
---------------------------------------------------------------------------
Further, although approximately 86 percent of NFC swaps involved at
least one registered SD compared to approximately 99 percent for other
asset classes, as discussed in the Proposal, the Commission is of the
view that lower SD regulatory coverage is acceptable given the special
characteristics of the NFC swap market. A reduced threshold likely
would have negative impacts on NFC swap liquidity as some entities
(e.g., small and mid-sized banks and/or non-financial entities) reduce
dealing to avoid registration and its related costs. This would be
detrimental to the end-users who do not have trading relationships with
larger, financial-entity SDs, and who rely on small to mid-sized banks
and/or non-financial entities to access liquidity in the wider swap
market. Additionally, even if the threshold decreased, the available
data leaves it unclear if or to what extent the 2017 Counterparty
Coverage statistic of 86 percent would increase for NFC swaps since
several of those entities may already have less than $3 billion in AGNA
of swap dealing activity. Further, many of the entities engaged in
limited swap dealing activity for NFC swaps appear to have a
specialized role in the market, in that their primary business is
generally non-financial in nature and the swap dealing activity is
ancillary to their primary role in the market.\137\ Finally, entities
that are active in the NFC swap market may utilize the existing
physical position hedging exemption, which is more directly applicable
to the NFC asset class than to other swaps.\138\
---------------------------------------------------------------------------
\137\ This analysis is discussed in greater detail in the
Proposal, and was also addressed by commenters. See supra section
II.B.1; 83 FR 27452-57. See also CMC, IECA, and NGSA comment
letters.
\138\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); 83 FR
27456-57.
---------------------------------------------------------------------------
(iii) Response to Commenters Advocating Lower Threshold
The Commission disagrees with the few commenters that stated that
the AGNA threshold should decrease to $3 billion.\139\
---------------------------------------------------------------------------
\139\ See supra section II.B.3.
---------------------------------------------------------------------------
Better Markets stated that the high regulatory coverage ratios are
not indicative of the absolute level of swap dealing activities
relevant to SD registration, and asserted that maintaining an $8
billion threshold would have more than a limited detrimental effect on
counterparty protections.\140\ The Commission notes that the statutory
requirements do not dictate a specific methodology for assessing the de
minimis exception, such as the focus on the absolute level of swap
dealing suggested by Better Markets. Rather, the CEA requires the
Commission to promulgate regulations to establish factors with respect
to the making of a determination to exempt from designation as an SD an
entity engaged in a de minimis quantity of swap dealing, without
stating additional requirements.\141\
---------------------------------------------------------------------------
\140\ See supra section II.B.3; Better Markets comment letter.
\141\ 7 U.S.C. 1a(49)(D).
---------------------------------------------------------------------------
Additionally, as stated in the SD Definition Proposing Release and
the SD Definition Adopting Release, the de minimis exception ``should
be interpreted to address amounts of dealing activity that are
sufficiently small that they do not warrant registration to address
concerns implicated by the regulations governing swap dealers and
security-based swap dealers. In other words, the exception should apply
only when an entity's dealing activity is so minimal that applying
dealer regulations to the entity would not be warranted.'' \142\ This
decision inherently requires judgment, and for that reason the
Commission has considered whether entities that have less than $8
billion in swap dealing activity meet this standard. Given the nature
of the swap market and the Commission's analysis of the data, requiring
an entity that has less than $8 billion in swap dealing activity to
register as an SD is not warranted because it would not appreciably
impact the systemic risk, counterparty protection, and market
efficiency considerations of SD regulation, but
[[Page 56676]]
would negatively impact the policy considerations underlying the de
minimis exception by reducing the amount of swap dealing allowed under
the exception.\143\ Thus, the Commission concludes that the $8 billion
threshold is consistent with a key rationale behind the de minimis
exception because it would permit ``amounts of dealing activity that
are sufficiently small that they do not warrant registration.'' \144\
No individual policy factor was dispositive in the Commission's
analysis. Rather, the Commission considered all of the policy factors
when assessing the regulatory coverage ratios.\145\
---------------------------------------------------------------------------
\142\ SD Definition Adopting Release, 77 FR 30626; SD Definition
Proposing Release, 75 FR 80179.
\143\ As discussed, the analysis conducted in connection with
the Proposal was consistent with the analysis conducted in
connection with the Staff Reports. See generally 83 FR 27449-58;
Final Staff Report, supra note 19; Preliminary Staff Report, supra
note 17.
\144\ 77 FR 30626. See also 75 FR 80179.
\145\ As noted in the SD Definition Adopting Release,
``implementing the de minimis exception requires a careful balancing
that considers the regulatory interests that could be undermined by
an unduly broad exception as well as those regulatory interests that
may be promoted by an appropriately limited exception.'' 77 FR
30628.
---------------------------------------------------------------------------
As noted above in section II.B.3, Better Markets also asserted that
the statutory provision regarding the de minimis exception authorizes
the CFTC to issue exemptive orders for individual or similarly-situated
legal entities based upon generally applicable factors for determining
whether such entities may be involved in de minimis swap dealing
activities. Better Markets contends that it is unreasonable to conclude
that Congress intended a wholesale exemption from registration that is
divorced from the particular circumstances of any one petitioner.\146\
As noted, however, the CEA states that the Commission shall promulgate
factors, through regulation, regarding the De Minimis Exception
determination. Nothing in the statutory language prohibits the
Commission from establishing a de minimis exception that is self-
effectuating. The Commission believes that the $8 billion threshold
appropriately excludes entities ``whose dealing activity is
sufficiently modest in light of the total size, concentration and other
attributes'' of the swap market and for which SD regulation ``would not
be expected to contribute significantly to advancing the customer
protection, market efficiency and transparency objectives of dealer
regulation.'' \147\ The Commission sees no basis in the record or
requirement in the statute to treat entities differently when they are
similarly situated in this respect.
---------------------------------------------------------------------------
\146\ See Better Markets comment letter.
\147\ 77 FR 30629-30.
---------------------------------------------------------------------------
Also as noted above, with respect to the data analysis methodology,
Better Markets and the Senators stated that the data insufficiently or
misleadingly justifies maintaining the threshold at $8 billion.\148\
Better Markets also asserted that: (1) The CFTC should have provided an
opportunity for public comment on alternative assumptions; (2) there is
some ambiguity in the terms used in the CFTC's analysis; (3) the CFTC's
reliance upon a 10 unique counterparty filter is based on fatally
flawed logic; (4) the data limitations argue for better field-level and
affiliate reporting of swaps, which would give the CFTC an informed
basis to consider changes to a $3 billion threshold; and (5) the CFTC
must first amend its swap data and chief compliance officer reporting
regulations to ensure it has sufficient data to provide an informed
basis for administrative action.\149\ Each of these comments will be
addressed in turn.
---------------------------------------------------------------------------
\148\ See supra section II.B.3; Better Markets and Senators
comment letters.
\149\ See supra section II.B.3; Better Markets comment letter.
---------------------------------------------------------------------------
First, with respect to Better Markets' comment that the Commission
should have provided an opportunity for public comment on alternative
assumptions for the data analysis, the Commission notes that the
methodology used by Commission staff to analyze data in relation to the
de minimis threshold was first laid out in the Preliminary Staff
Report, on which the public had the opportunity to comment. The Final
Staff Report updated that analysis, and then the Proposal explained how
the data related specifically to the proposal to maintain the $8
billion threshold. As discussed in the Proposal, the updated analysis
largely confirmed the analysis conducted for the Staff Reports.
However, there is greater confidence in the results given the improved
data and refined methodology. The Commission believes that the public
has had an appropriate opportunity to comment on the data, the
methodology, the assumptions about the data, and how the data relates
to the maintenance of the $8 billion threshold.
Second, the Commission cannot assess Better Markets' comment that
the analysis discussed in the Proposal contained ambiguous terms
because Better Markets does not state which terms were ambiguous.
Third, the Commission disagrees with Better Markets' comment that
``the fact that CFTC-registered swap dealers, including every major
Wall Street bank, tend to have more than 10 counterparties is
irrelevant.'' \150\ The Commission notes that staff used the minimum 10
counterparty count only for analytical purposes, as a heuristic to help
isolate those entities that appeared to be dealing. Lacking a dealing
field in the data, for the reasons set forth above, staff selected a
minimum of 10 counterparties as a conservative estimate to improve the
analysis and better identify entities likely engaged in swap
dealing.\151\
---------------------------------------------------------------------------
\150\ See Better Markets comment letter.
\151\ See supra section II.A; 83 FR 27449-50.
---------------------------------------------------------------------------
The Commission also believes that the 10 counterparty filter is
appropriate for purposes of this analysis based on its observations of
registered SDs and unregistered entities active in the swap market. As
noted in the Proposal, data analysis showed that 83 percent of
registered SDs had 10 or more counterparties, without weighting the
results.\152\ In other words, since the analysis was performed using a
non-weighted ranking, SDs with thousands of counterparties did not bias
the results.
---------------------------------------------------------------------------
\152\ See 83 FR 27449.
---------------------------------------------------------------------------
Fourth, the Commission does not believe that the data limitations
warrant a delay in setting the threshold at $8 billion. As discussed,
the data has improved since the analysis in the Staff Reports. Further,
the Commission believes its analysis was appropriately conservative,
particularly given that the volume of activity it analyzed was over-
inclusive (since hedging and other non-dealing activity could not be
excluded), and given that its entity-level exclusions were based on an
informed assessment of the likely activity of swap market participants.
In the SD Definition Adopting Release, the Commission noted that
``comprehensive information regarding the total size of the domestic
swap market is incomplete, with more information available with respect
to certain asset classes than others.'' \153\ In 2012, the Commission
evaluated the appropriateness of the initial $3 billion AGNA threshold
using three primary sources of data: (1) Index CDS; (2) the Quarterly
Report on Bank Trading and Derivatives Activities issued by the Office
of the Comptroller of the Currency (``OCC''); and (3) public comments
to the 2010 SD Definition Proposing Release.\154\ At the time,
granular, transaction-level swaps data across all swap asset classes
was not yet available for review by the Commission. The data now
available is significantly more detailed than what was available
[[Page 56677]]
to the Commission when the $3 billion threshold was originally
established. The data now includes details such as counterparty pairs,
product identifiers, transaction-level data for those market
participants active in more asset classes than only index CDS, and
transaction-level data (not just quarterly position data) involving
market participants beyond banks subject to OCC reporting. In light of
the additional, more detailed data, the Commission believes that the $8
billion threshold continues to be appropriately calibrated to the
policy goals of SD registration and the de minimis exception.\155\
---------------------------------------------------------------------------
\153\ 77 FR 30632.
\154\ Id. at 30632-33.
\155\ Additionally, Commission staff attempted to accurately
identify those entities that, based on their observable business
activities, are potentially engaged in swap dealing activity versus
those likely engaged in other kinds of transactions. See supra
section II.A; 83 FR 27449.
---------------------------------------------------------------------------
Fifth, for similar reasons, the Commission does not believe it
should wait to amend its swap data and chief compliance officer
reporting regulations before setting the threshold at $8 billion. As
noted above, the Commission believes that it does have sufficient data
to support this action, so it is not necessary to wait for future
changes to the data reporting regime.\156\
---------------------------------------------------------------------------
\156\ The Commission also notes that it recently adopted
amendments to its chief compliance officer requirements. See Chief
Compliance Officer Duties and Annual Report Requirements for Futures
Commission Merchants, Swap Dealers, and Major Swap Participants, 83
FR 43519 (Aug. 27, 2018).
---------------------------------------------------------------------------
As noted above, Better Markets also commented that the de minimis
threshold framework should be revised to focus on strict, observable
measures like total notional amount or transactional activities, rather
than a subset of such activities that potential registrants are able to
interpret for themselves, and are not presently required by regulation
to monitor, report, or internally track across the firm.\157\ However,
the Commission notes that the statutory definition of ``swap dealer''
itself limits the scope to swap dealing activity, and therefore, using
total notional amount would not be appropriate.
---------------------------------------------------------------------------
\157\ See supra section II.B.3; Better Markets comment letter.
---------------------------------------------------------------------------
As noted, the Senators stated that the data that was available for
NFC swaps shows significantly less coverage for that asset class under
an $8 billion threshold compared to other asset classes.\158\ In
justifying the $8 billion proposal, the Senators commented that though
the Proposal noted the ``unique characteristics'' of NFC swaps, the
analysis provided indicated a series of assumptions and possibilities
rather than concrete data. The Senators also questioned whether, given
the lack of relevant data for NFC swaps, it is necessary to reduce the
threshold for SDs involved with energy-related swaps. However, as
discussed in section II.C.1.ii, the Commission believes that a reduced
threshold would have a negative impact on NFC swap market liquidity as
some entities may reduce dealing to avoid registration and its related
costs. Additionally, as noted, entities active in the NFC swap market
may utilize the existing physical position hedging exemption, which is
more directly applicable to the NFC asset class than other swaps.\159\
---------------------------------------------------------------------------
\158\ See supra section II.B.3; Senators comment letter. As
noted above, for NFC swaps, approximately 86 percent of transactions
involved at least one registered SD as a counterparty, compared to
greater than 99 percent for IRS, CDS, FX swaps, and equity swaps.
See supra section II.C.1.i.
\159\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); supra
section II.C.1.ii; 83 FR 27456-57.
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Further, AFR stated that, though the improved data adds weight to
the claim that an $8 billion threshold is appropriate for some
financial swaps, arguments against the $8 billion threshold are
particularly strong in the case of NFC swaps.\160\ The Commission does
not believe a lower threshold for NFC swaps would advance the policy
goals of SD registration or the de minimis exception. As noted by the
Commission and several commenters, the nature of the NFC swap market
poses less systemic risk than financial swaps.\161\ Additionally, the
Commission notes the concerns of reduced liquidity if the threshold is
reduced for NFC swaps, including an increased concentration in the
market, which could adversely affect end-users who rely on small and
mid-sized SDs that do not have to register at an $8 billion threshold.
---------------------------------------------------------------------------
\160\ See supra section II.B.3; AFR comment letter.
\161\ See supra section II.B.1. See, e.g., IECA and NGSA comment
letters. See also 83 FR 27456-57; Final Staff Report, supra note 19,
at 12 (citing comment letters submitted in response to Preliminary
Staff Report, supra note 17).
---------------------------------------------------------------------------
Lastly, the Commission disagrees with IATP's assertion that
promoting improved price discovery is not the true rationale for
maintaining an $8 billion threshold, and that rather, the motivation is
the regulatory compliance cost and burden reduction objective of
Project KISS.\162\ The Commission has laid out above the various
policy-related considerations that justify maintaining an $8 billion
threshold; these relate to the regulatory goals of both SD registration
in general and of the de minimis exception in particular. Additionally,
these goals were discussed in the Staff Reports, well in advance of any
comments submitted in response to Project KISS.\163\
---------------------------------------------------------------------------
\162\ See supra section II.B.3; IATP comment letter.
\163\ See Final Staff Report, supra note 19; Preliminary Staff
Report, supra note 17.
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2. Rationale for Not Increasing AGNA Threshold
Although several commenters suggested a higher threshold, the
Commission is declining to increase the AGNA threshold from the current
$8 billion level. As discussed in the Proposal,\164\ at a $100 billion
threshold: (1) The Estimated AGNA Coverage would have decreased from
approximately $221,020 billion (99.95 percent) to $220,877 billion
(99.88 percent)--a decrease of $143 billion (a 0.06 percentage point
decrease); \165\ (2) the Estimated Transaction Coverage would have
decreased from 3,795,330 trades (99.77 percent) to 3,773,440 trades
(99.20 percent)--a decrease of 21,890 trades (a 0.58 percentage point
decrease); \166\ and (3) the Estimated Counterparty Coverage would have
decreased from 30,879 counterparties (88.80 percent) to 28,234
counterparties (81.19 percent)--a decrease of 2,645 counterparties (a
7.61 percentage point decrease).\167\
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\164\ See 83 FR 27454-56.
\165\ The decrease would be lower at thresholds of $20 billion
and $50 billion, at 0.01 percentage points and 0.04 percentage
points, respectively.
\166\ The decrease would be lower at thresholds of $20 billion
and $50 billion, at 0.05 percentage points and 0.42 percentage
points, respectively.
\167\ The decrease would be lower at thresholds of $20 billion
and $50 billion, at 2.80 percentage points and 5.71 percentage
points, respectively.
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As the Commission and commenters have stated, the small decrease in
Estimated AGNA Coverage and Estimated Transaction Coverage at higher
thresholds potentially indicates that increasing the threshold to up to
$100 billion may have a limited adverse effect on the systemic risk and
market efficiency policy considerations of SD regulation.\168\
Additionally, a higher threshold could enhance the benefits associated
with a de minimis exception, for example by allowing entities to
increase ancillary dealing activity. However, the Commission is of the
view that the decrease in Estimated Counterparty Coverage indicates
that fewer entities would be transacting with registered SDs, reducing
the counterparty protection benefits of SD regulation if the AGNA
threshold increased from $8 billion to $20 billion, $50 billion, or
$100 billion.\169\ The
[[Page 56678]]
Commission also notes that increasing the threshold could result in
changes in market behavior that could lead to the regulatory coverage
decreasing more than the analysis indicated.
---------------------------------------------------------------------------
\168\ See supra section II.B.2; 83 FR 27455.
\169\ As noted, the decrease in Estimated Counterparty Coverage
would be 2.80 percentage points, 5.71 percentage points, 7.61
percentage points, at thresholds of $20 billion, $50 billion, and
$100 billion, respectively.
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Further, maintaining the status quo signals long-term stability of
the de minimis threshold, and should provide for the efficient
application of the SD Definition, as it allows for long-term planning
based on the current AGNA threshold.\170\
---------------------------------------------------------------------------
\170\ See 83 FR 27456-57.
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3. Response to Other Comments
With respect to BDA's comment regarding permitting month-end only
testing for the de minimis threshold, the Commission notes that several
commenters indicated that the market has adapted to the current
requirements and that changes would not be beneficial.\171\ In
particular, the Commission agrees with commenters that the current test
is relatively simple to administer, and the 12-month testing period
helps to smooth out any short-term variations in activity. The
Commission does not believe that allowing month-end only testing would
reduce burdens since persons should already have systems in place to
regularly track the level of their swap dealing activity. Therefore,
the Commission is not adopting this alternative. Additionally, in
response to BDA, the Commission notes that for purposes of the $8
billion threshold calculation, an entity must count activity that took
place in the immediately preceding 12 months.
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\171\ See supra section II.B.4.i. Potentially, month-end only
testing could marginally encourage competition because newly-
established swap dealing businesses (as contrasted to the existing
businesses that have adapted to current requirements) could set up
only month-end testing as opposed to regular testing. However, the
Commission believes that maintaining the current requirements is
appropriate even in view of any marginal encouragement of
competition that could result from the suggested change.
---------------------------------------------------------------------------
Similarly, in response to the commenters that recommended
alternatives to the single AGNA threshold or other calculation
changes,\172\ the Commission points out that systems and processes have
been established for the current requirements,\173\ and therefore the
Commission is not adopting the proposed adjustments at this time. The
Commission may take subsequent action or conduct further study with
respect to alternative approaches to the single AGNA threshold,
including moving toward a risk-based SD registration metric in the
future. The Commission would expect that a change could entail costs as
market participants adjust their de minimis threshold calculation
processes.
---------------------------------------------------------------------------
\172\ See supra sections II.B.4.ii and II.B.4.iii.
\173\ See, e.g., supra sections II.B.4.i and II.B.4.ii.
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Additionally, any modification to the special entity threshold is
outside of the scope of the Proposal,\174\ but as with other
suggestions, the Commission may consider this in the future. Lastly,
with respect to comments asking that the Commission address cross-
border issues,\175\ this issue is also outside of the scope of this
rulemaking.
---------------------------------------------------------------------------
\174\ See supra section II.B.4.iii; supra note 12; 83 FR 27445
n.14.
\175\ See supra section II.B.4.iv.
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III. Proposed Rule Amendments Not Adopted
A. Swaps Entered Into by Insured Depository Institutions in Connection
With Loans to Customers
1. Proposal
The Commission proposed adding an IDI loan-related factor in the De
Minimis Exception (the ``IDI De Minimis Provision'') to address
concerns that there are circumstances where swaps not covered by the
IDI loan-related swap exclusion in paragraph (5) of the SD Definition
(the ``IDI Swap Dealing Exclusion'') should be excluded from the de
minimis calculation. Specifically, the Commission proposed to add
specific characteristics that an IDI can consider when assessing
whether swaps entered into with customers in connection with loans to
those customers must be counted towards the IDI's de minimis
calculation. The proposed IDI De Minimis Provision would have
encompassed a broader scope of loan-related swaps than the IDI Swap
Dealing Exclusion. The proposed IDI De Minimis Provision included: (1)
A lengthier timing requirement for when the swap must be entered into;
(2) an expansion of the types of swaps that are eligible; (3) a reduced
syndication percentage requirement; and (4) an elimination of the
notional amount cap. The IDI could exclude qualifying swaps from the de
minimis calculation pursuant to the IDI De Minimis Provision regardless
of whether the swaps would qualify for the IDI Swap Dealing Exclusion.
2. Summary of Comments
Almost all commenters that addressed the IDI De Minimis Provision
expressed general support for the proposed amendment.\176\ Commenters
often compared the IDI De Minimis Provision to the IDI Swap Dealing
Exclusion. In that regard, commenters generally stated that the IDI De
Minimis Provision better aligns the regulatory framework with the risk
mitigation demands of bank customers.\177\
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\176\ See ABA, BDA, Capital One, CDEU, Citizens, Frost Bank,
IIB, ISDA/SIFMA, JBA, M&T, and Regions comment letters.
\177\ See Capital One, Frost Bank, M&T, Regions comment letters.
---------------------------------------------------------------------------
Commenters generally supported proposed new paragraph
(4)(i)(C)(1),\178\ which provided that a swap must be entered into no
earlier than 90 days before execution of the loan agreement, or before
transfer of principal to the customer, unless an executed commitment or
forward agreement for the applicable loan exists. In that event, the
90-day restriction does not apply. In comparison, the IDI Swap Dealing
Exclusion in paragraph (5) of the SD Definition requires that a swap
must be entered into no more than 90 days before or 180 days after the
date of execution of the loan agreement (or date of transfer of
principal to the customer).\179\ On the other hand, three commenters
recommended removing the 90-day restriction because it would be
detrimental to the IDIs and/or borrowers.\180\ Additionally, two
commenters suggested revisions to the ``executed commitment'' or
``forward agreement'' exception to the 90-day restriction.\181\
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\178\ See Capital One, Citizens, Frost Bank, M&T, and Regions
comment letters.
\179\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(A).
\180\ See BDA, CDEU, and ISDA/SFIMA comment letters.
\181\ See Capital One and Frost Bank comment letters.
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Proposed new paragraph (4)(i)(C)(2) stated that for purposes of the
IDI De Minimis Provision, a swap is ``in connection with'' a loan if:
(1) The rate, asset, liability or other term underlying such swap is,
or is related to, a financial term of such loan; or (2) if such swap is
required as a condition of the loan, either under the IDI's loan
underwriting criteria or as is commercially appropriate, in order to
hedge risks incidental to the borrower's business (other than for risks
associated with an excluded commodity) that may affect the borrower's
ability to repay the loan. Two commenters requested clarification
regarding the proposed ``condition of the loan'' language.\182\
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\182\ See ABA and Regions comment letters.
---------------------------------------------------------------------------
Proposed new paragraph (4)(i)(C)(3) stated that the termination
date of the swap cannot extend beyond termination of the loan. A few
commenters stated that circumstances can be anticipated at the time of
loan origination that would support permitting the termination date of
the swap to extend beyond
[[Page 56679]]
termination of the loan.\183\ Additionally, in response to a question
in the Proposal, a few commenters stated that in order to qualify for
the IDI De Minimis Provision, IDIs should not be required to terminate
loan-related swaps if a loan is called, put, accelerated, or goes into
default before scheduled termination.\184\
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\183\ See ABA, BDA, CDEU, Citizens, and M&T comment letters.
\184\ See ABA, BDA, Capital One, CDEU, IIB, and ISDA/SIFMA
comment letters.
---------------------------------------------------------------------------
Proposed new paragraph (4)(i)(C)(4)(i) required an IDI to be, under
the terms of the agreements related to the loan, the source of at least
five percent of the maximum principal amount under the loan for a
related swap not to be counted towards its de minimis calculation, and
proposed new paragraph (4)(i)(C)(4)(ii) stated that if an IDI is a
source of less than a five percent of the maximum principal amount of
the loan, the notional amount of all swaps the IDI enters into in
connection with the financial terms of the loan cannot exceed the
principal amount of the IDI's loan in order to qualify for the IDI De
Minimis Provision. A few commenters stated that the five percent
participation requirement should be eliminated from the IDI De Minimis
Provision,\185\ while two commenters generally supported the five
percent requirement.\186\
---------------------------------------------------------------------------
\185\ See ABA, BDA, Citizens, and ISDA/SIFMA comment letters.
\186\ See Capital One and M&T comment letters.
---------------------------------------------------------------------------
The proposed IDI De Minimis Provision did not include the
requirement in the IDI Swap Dealing Exclusion that the AGNA of swaps
entered into in connection with the loan not exceed the principal
amount outstanding,\187\ and two commenters agreed that there are
circumstances where the AGNA of loan-related swaps can exceed the
outstanding principal amount of the loan.\188\
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\187\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(E). However, as
discussed, pursuant to proposed paragraph (4)(i)(C)(4)(ii), if an
IDI is a source of less than a five percent of the maximum principal
amount of the loan, the notional amount of all swaps the IDI enters
into in connection with the financial terms of the loan cannot
exceed the principal amount of the IDI's loan. See also 83 FR 27461.
\188\ See Capital One and M&T comment letters.
---------------------------------------------------------------------------
In response to a question in the Proposal, three commenters stated
that the CFTC should not impose any prior notice requirement or other
conditions on the ability of IDIs to rely on the proposed IDI De
Minimis Provision.\189\ In response to another question in the
Proposal, three commenters stated that there should not be a
requirement that swap confirmations reference a specific loan because
doing so would add operational complexity for little or no
benefit.\190\
---------------------------------------------------------------------------
\189\ See ABA, Capital One, and M&T comment letters.
\190\ See ABA, BDA, and Capital One comment letters.
---------------------------------------------------------------------------
Two commenters discussed whether the IDI De Minimis Provision could
be promulgated without a joint rulemaking.\191\ ABA stated that the
Commission is not required to promulgate the IDI De Minimis Provision
through joint rulemaking with the SEC.\192\ However, Better Markets
asserted that the CFTC's position that a ``joint rulemaking is not
required with respect to changes to the de minimis exception-related
factors'' is invalid and ``would impermissibly enable the CFTC to
conduct an end-run around the statutory joint rulemaking requirement.''
In particular, Better Markets stated that language potentially
permitting unilateral action on the de minimis threshold itself does
not permit unilateral regulatory actions affecting core definitional
issues that must be accomplished through joint rulemaking.\193\
---------------------------------------------------------------------------
\191\ See ABA and Better Markets comment letter.
\192\ See ABA comment letter.
\193\ See Better Markets comment letter.
---------------------------------------------------------------------------
3. Commission Response
The Commission has determined not to adopt the IDI De Minimis
Provision at this time. The Commission continues to consider the issues
raised by commenters. For example, the various contexts in which IDIs
enter into swaps with their loan customers, and the relation between
those swaps and the larger swap market, may merit further
consideration.
B. Swaps Entered Into to Hedge Financial or Physical Positions
1. Proposal
The Commission proposed adding a provision in new paragraph
(4)(i)(D) of the De Minimis Exception, to include as a factor whether a
swap was entered into primarily for the purpose of hedging and met
certain related conditions (the ``Hedging De Minimis Provision'').\194\
As proposed, to qualify for the Hedging De Minimis Provision, the
primary purpose for the swap would need to be to reduce or otherwise
mitigate one or more specific risks to which the person is subject.
Proposed paragraph (4)(i)(D)(2) provided that the person entering into
the hedging swap could not be the price maker of the hedging swap and
receive or collect a bid/ask spread, fee, or other commission for
entering into the hedging swap (the ``price maker condition''). In
addition, the proposed Hedging De Minimis Provision included in
paragraphs (D)(3) through (D)(5) the following conditions that are
similar to conditions in the physical hedging exclusion in paragraph
(6)(iii) of the SD Definition: (1) The swap must be economically
appropriate to the reduction of risks that may arise in the conduct and
management of an enterprise engaged in the type of business in which
the person is engaged; (2) the swap must be entered into in accordance
with sound business practices; and (3) the swap must not be entered
into in connection with activity structured to evade designation as an
SD.
---------------------------------------------------------------------------
\194\ See 83 FR 27462-63.
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2. Summary of Comments
Most commenters supported including an express hedging exception
that would clarify which physical and financial hedging swaps do not
need to be included in the AGNA threshold calculation.\195\ These
commenters agreed with the Commission that there is currently some
uncertainty and confusion among market participants regarding this
determination. However, many of these commenters raised issues with the
particular conditions identified in the proposed Hedging De Minimis
Provision, and two other commenters objected to inclusion of the
Hedging De Minimis Provision.\196\ Among other issues, the two
commenters viewed the Hedging De Minimis Provision as a major expansion
of the De Minimis Exception.
---------------------------------------------------------------------------
\195\ See ABA, AGA, AFEX/GPS, BDA, Capital One, CDEU, COPE, CMC,
EEI/EPSA, Frost Bank, FIA, IIB, IECA, ISDA/SIFMA, JBA, NRECA/APPA,
NGSA, Virtu, and Western Union comment letters.
\196\ See AFR and Better Markets comment letters.
---------------------------------------------------------------------------
Generally, commenters supported adding the Hedging De Minimis
Provision to the De Minimis Exception to provide more certainty and/or
clarity regarding the treatment of hedging activity.\197\ On the other
hand, AFR and Better Markets stated that excepting hedges of swap
dealing positions from the de minimis threshold could exclude swaps
that appear to be hedges, but are actually dealing swaps.\198\
Furthermore, Better Markets asserted that a hedge of client facing swap
is ``inextricably'' tied to accommodating customer demands.\199\
---------------------------------------------------------------------------
\197\ See ABA, AGA, BDA, Capital One, Citizens, CDEU, EEI/EPSA,
Frost Bank, FIA, NGSA, NRECA/APPA, Virtu, and Western Union comment
letters.
\198\ See AFR and Better Markets comment letters.
\199\ See Better Markets comment letter.
---------------------------------------------------------------------------
Several commenters noted that the price maker condition included in
the proposed Hedging De Minimis Provision could be viewed as more
[[Page 56680]]
limiting than the existing physical swap hedging exclusion.\200\ Many
commenters expressed concern that the proposed condition would be
overly prescriptive, ambiguous, and/or could inadvertently require
certain hedging activity to be treated as swap dealing activity.\201\
In particular, commenters asked that the bid/ask spread limitation be
deleted or clarified.\202\ Conversely, two commenters expressed some
support for this condition as proposed.\203\
---------------------------------------------------------------------------
\200\ See CEWG, CMC, FIA, and IECA comment letters.
\201\ See CDEU, EEI/EPSA, IECA, and Western Union comment
letters.
\202\ See ABA, BDA, EEI/EPSA, IECA, IIB, NRECA/APPA, and Western
Union comment letters.
\203\ See COPE and NRECA/APPA comment letters.
---------------------------------------------------------------------------
ISDA/SIFMA was of the view that the requirement that the primary
purpose for entering into the swap must be to reduce or otherwise
mitigate one or more ``specific'' risks is unreasonably
restrictive.\204\ ISDA/SIFMA suggested that the Commission should
remove the term ``specific'' from the regulatory text to better achieve
the Commission's policy objective of encouraging greater use of swaps
to hedge risks. On the other hand, NRECA/APPA noted that the specific,
but non-exclusive, risks identified in paragraph (4)(i)(D)(1) are
consistent with the types of commercial risks that an end-user would
hedge.\205\
---------------------------------------------------------------------------
\204\ See ISDA/SIFMA comment letter.
\205\ See NRECA/APPA comment letter.
---------------------------------------------------------------------------
AFR and Better Markets objected to the Hedging De Minimis
Provision, stating that it could allow even large dealers to escape
registration, and that the exclusion of anticipatory hedges allows too
much discretion to institutional judgment.\206\
---------------------------------------------------------------------------
\206\ See AFR and Better Markets comment letters.
---------------------------------------------------------------------------
Better Markets expressed concern that the Hedging De Minimis
Provision promotes unregulated swap dealing and is therefore ``not a
valid statutory objective.'' Furthermore, Better Markets stated that
the Commission does not need to provide clarity for the existing
hedging exemption because the existing standard of using facts and
circumstances to distinguish dealing swaps is a ``well-settled
framework.'' \207\ Better Markets also asserted that the Commission
misinterpreted its prior statements about the use of swaps to hedge
dealing positions. However, in doing so, Better Markets cited to
language in the joint SD Definition Adopting Release that addressed the
definition of ``security-based swap dealer,'' not ``swap dealer.''
\208\
---------------------------------------------------------------------------
\207\ See Better Markets comment letter. Better Markets noted
that, in October 2012, DSIO addressed whether hedging activity is
included in calculating the de minimis amount when it stated that
``a person must consider the swap in light of all other relevant
facts and circumstances to determine whether such hedging activity
is swap dealing activity. . . .'' See Frequently Asked Questions
(FAQ)--[DSIO] Responds to FAQs About Swap Entities (Oct. 12, 2012)
(``DSIO FAQ Guidance''), available at https://www.cftc.gov/idc/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf.
\208\ 77 FR 30619 n.280 (stating that security-based swaps
activity for hedging purposes ``unrelated to activities that
constitute dealing'' would not be expected to lead the person to be
a security-based swap dealer).
---------------------------------------------------------------------------
AFR and Better Markets also asserted that the Hedging De Minimis
Provision should not be included in the De Minimis Exception because
enforcement of the conditions would be impractical.\209\
---------------------------------------------------------------------------
\209\ See AFR and Better Markets comment letters. AFR described
the potential need for a swap-by-swap analysis and the potential for
disputes regarding the proposed anti-evasion provision.
---------------------------------------------------------------------------
3. Commission Response
The comments generally confirmed that nuanced facts and
circumstances may be relevant to determining whether a swap that hedges
financial risk, but also has dealing characteristics or is connected to
dealing activities, should be counted toward the AGNA threshold.
However, the comments also raised specific implementation and
compliance issues. For these reasons, the Commission has determined not
to adopt the Hedging De Minimis Provision at this time.
The Commission confirms that the ``relevant facts and
circumstances'' test established in the SD Definition Adopting Release
and further discussed in the DSIO FAQ Guidance \210\ continues to be in
effect. In doing so, the Commission emphasizes that market participants
should continue to evaluate such swaps without consideration of the
proposed Hedging De Minimis Provision.
---------------------------------------------------------------------------
\210\ See supra note 207.
---------------------------------------------------------------------------
C. Swaps Resulting From Multilateral Portfolio Compression Exercises
1. Proposal
The Commission proposed new paragraph (4)(i)(E) of the De Minimis
Exception, which would add as a factor in the de minimis calculation
whether a swap results from multilateral portfolio compression
exercises (``MPCE De Minimis Provision''). Specifically, the Proposal
stated that for purposes of determining whether a person has exceeded
the AGNA threshold set forth in paragraph (4)(i)(A), the person may
exclude swaps that result from multilateral portfolio compression
exercises, as defined in Sec. 23.500 of Commission regulations, to the
extent the person does not enter into the multilateral portfolio
compression exercise in connection with activity structured to evade
designation as an SD. The Proposal was consistent with DSIO no-action
relief issued on December 21, 2012 (``Staff Letter 12-62'').\211\
---------------------------------------------------------------------------
\211\ CFTC Staff Letter No. 12-62, supra note 47.
---------------------------------------------------------------------------
2. Summary of Comments
Most commenters addressing this aspect of the Proposal supported
excepting from the de minimis threshold swaps that result from
multilateral portfolio compression exercises,\212\ stating that
multilateral portfolio compression: (1) Advances the Commission's
policy goals of reducing counterparty credit risks by allowing swap
market participants with large portfolios to net down the size and
number of swaps among them, thus lowering the AGNA of outstanding
swaps; \213\ and (2) does not involve dealing activity, but rather
allows market participants to reduce their risk without implicating any
of the other considerations related to SD regulation.\214\
---------------------------------------------------------------------------
\212\ See ABA, IIB, ISDA/SIFMA, JBA, and NEX comment letters.
\213\ See ABA, ISDA/SIFMA, and NEX comment letters.
\214\ See IIB comment letter.
---------------------------------------------------------------------------
Several commenters also stated that, given the policy-related
similarities between bilateral and multilateral portfolio compression,
the Commission should also exclude from counting towards the De Minimis
Exception swaps that result from bilateral portfolio compression
exercises.\215\ One commenter asserted that reliance on the
``multilateral portfolio compression exercise'' definition in Sec.
23.500(h) of Commission regulations may be too limiting.\216\
---------------------------------------------------------------------------
\215\ See ABA, IIB, ISDA/SIFMA, and JBA comment letters.
\216\ See IIB comment letter.
---------------------------------------------------------------------------
On the other hand, AFR and IATP expressed concerns with the MPCE De
Minimis Provision.\217\ AFR stated that the definition of portfolio
compression appears overbroad since it goes beyond the termination of
fully offsetting swaps to include any exercise which would result in
the reduction of current market risks for a set of swaps, even if the
exercise might actually increase credit exposure or market risk under
stressed market conditions.\218\ IATP noted that entities should be
required to document and report the results of multilateral compression
exercises to qualify for the exception. Additionally, IATP stated
[[Page 56681]]
that any de minimis exception-related exemption must be in the public
interest, and asked questions regarding the legal authority for the
Commission to propose the amendments included in the NPRM.\219\
---------------------------------------------------------------------------
\217\ See AFR and IATP comment letters.
\218\ See AFR comment letter.
\219\ See IATP comment letter.
---------------------------------------------------------------------------
3. Commission Response
The Commission has determined not to adopt the MPCE De Minimis
Provision at this time. The Commission believes that further action on
this provision may require additional consideration of the various
relevant issues.\220\
---------------------------------------------------------------------------
\220\ The Commission notes that Staff Letter 12-62 is not
affected by the Commission's determination not to adopt the MPCE De
Minimis Provision at this time.
---------------------------------------------------------------------------
D. Methodology for Calculating Notional Amounts
1. Proposal
Given the variety of potential methods that could be used to
calculate the notional amount for certain swaps, particularly for swaps
where notional amount is not a contractual term of the transaction
(e.g., certain NFC swaps), the Commission proposed new paragraph
(4)(vii) of the De Minimis Exception, which sets out a mechanism for
the Commission, on its own or upon written request by a person, to
determine the methodology to be used to calculate the notional amount
for any group, category, type, or class of swaps for purposes of
whether a person exceeds the AGNA threshold. The proposed rule required
that such methodology be economically reasonable and analytically
supported, and that any such determination be posted on the CFTC
website. Further, to ensure timely clarity to market participants, the
Commission proposed to delegate to the Director of DSIO the authority
to make such determinations.
2. Summary of Comments
Several commenters generally supported Commission efforts to
provide certainty and clarity regarding calculation of notional
amounts.\221\ Some of these commenters supported providing the
Commission with the explicit authority to approve or establish
methodologies for calculating notional amount.\222\ Citizens
specifically noted that the lack of clarity regarding notional amount
interpretations has persisted for too long, and what little guidance
that exists does not provide the certainty that market participants
need in order to run their businesses efficiently.\223\ Further, FIA
stated that the DSIO FAQ left open a multitude of questions for market
participants attempting to calculate notional amount.\224\
Additionally, NGSA requested that the CFTC provide a safe harbor for
reliance on a notional amount calculation methodology that is based on
standard industry practice unless and until CFTC publishes notice that
invalidates such a methodology or prescribes a different
methodology.\225\
---------------------------------------------------------------------------
\221\ See ABA, Citizens, CEWG, CMC, EEI/EPSA, FIA, Frost Bank,
IIB, NGSA, and Western Union comment letters.
\222\ See Citizens, EEI/EPSA, FIA, Frost Bank, and Western Union
comment letters.
\223\ See Citizens comment letter.
\224\ See FIA comment letter.
\225\ See NGSA comment letter.
---------------------------------------------------------------------------
NRECA/APPA suggested that the Commission should not determine the
methodology for calculating notional amounts, stating that the word
``determine'' in proposed new paragraph (4)(vii) of the De Minimis
Exception should be changed to ``provide guidance with respect to.''
\226\
---------------------------------------------------------------------------
\226\ See NRECA/APPA comment letter.
---------------------------------------------------------------------------
Several commenters did not support the proposal to delegate to the
Director of DSIO the authority to make notional calculation
determinations.\227\ Specifically, some commenters stated that the
Commission, rather than the Director of DSIO, should determine the
methodology for calculating notional amounts because the methodology
used to determine the AGNA is a critical component of the de minimis
threshold, as it impacts which entities will be designated as SDs.\228\
Commenters also noted that the delegation, as proposed, would permit
Commission staff to make substantive, and potentially critical, policy
determinations in an informal process,\229\ and that Commissioners
should not remove themselves from that decision-making process,
particularly given that one of the challenges related to NFC swaps was
lack of a standard for calculation of notional amount.\230\
---------------------------------------------------------------------------
\227\ See AGA, AFR, COPE, EEI/EPSA, FIA, IATP, ISDA/SIFMA, JBA,
NRECA/APPA, and Senators comment letters.
\228\ See AFR, AGA, and FIA comment letters.
\229\ See COPE comment letter.
\230\ See Senators comment letter.
---------------------------------------------------------------------------
On the other hand, several commenters supported the proposal to
delegate to the Director of DSIO the authority to make notional
calculation determinations.\231\ However, many of these commenters
supported delegation only if determinations were subject to a public
notice and comment process.\232\ A few commenters noted that if the
Commission believes that delegation is proper, it should add
safeguards, such as an appeal to the Commission, coupled with a stay of
any contested staff determination, pending Commission action.\233\ One
commenter suggested that DSIO should be granted authority to respond to
individual dealer requests for guidance on how the notional amount
would be calculated for a given transaction, and dealers should be able
to rely on any response from DSIO.\234\
---------------------------------------------------------------------------
\231\ See Citizens, CDEU, CEWG, CMC, Frost Bank, IIB, NGSA, and
Western Union comment letters.
\232\ See CDEU, CEWG, CMC, IIB, and NGSA comment letters.
\233\ See COPE, EEI/EPSA, and IECA comment letters.
\234\ See BDA comment letter.
---------------------------------------------------------------------------
Several commenters stated that notional calculation methodologies
should be subject to a formal public notice and comment process.\235\ A
few commenters also noted that notional calculation methodologies
should be evaluated pursuant to a cost-benefit analysis.\236\ A few
commenters suggested that notional calculations be guided by
international standards, industry group comment letters, and the DSIO
FAQ Guidance.\237\
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\235\ See ABA, AGA, BDA, CDEU, CMC, EEI/EPSA, FIA, IECA, IIB,
ISDA/SIFMA, NRECA/APPA, and NGSA comment letters.
\236\ See AGA, FIA, and ISDA/SIFMA comment letters.
\237\ See ABA, EEI/EPSA, NRECA/APPA, and NGSA comment letters.
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Commenters also provided feedback regarding specific notional
amount calculation methodologies.\238\
---------------------------------------------------------------------------
\238\ See BDA, CEWG, CMC, EEI/EPSA, and IECA comment letters.
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3. Commission Response
The comments raised a number of issues with the proposed authority
and delegation regarding the methodology for calculating notional
amounts. Given the nature and significance of these issues, the
Commission has determined to not adopt this provision at this time.
IV. Other Matters Discussed in NPRM
In the NPRM, the Commission did not propose, but sought comment on
the following additional potential changes to the De Minimis Exception:
(1) Adding a minimum dealing counterparty count threshold and/or a
minimum dealing transaction count threshold; (2) establishing as a
factor in the de minimis determination whether a given swap was
exchange-traded and/or cleared; and (3) establishing as a factor in the
de minimis determination whether a given swap is a non-deliverable
forward transaction. The Commission did not propose rule text for any
of these topics.
At this time, the Commission is not adopting final rules regarding
any of these three potential changes. The Commission may take
subsequent action
[[Page 56682]]
or conduct further study with respect to any of these issues. The
Commission recognizes the public interest in moving forward with the
aspects of the NPRM that it is adopting in this release, rather than
delaying action on the NPRM as a whole in order to further consider any
of these additional topics.
A. Dealing Counterparty Count and Dealing Transaction Count Thresholds
The Commission sought comment on whether an entity should be able
to qualify for the de minimis exception if its level of swap dealing
activity is below any of the following three criteria: (1) An AGNA
threshold, (2) a proposed dealing counterparty count threshold, or (3)
a proposed dealing transaction count threshold. Although a few
commenters expressed general support for adding a dealing counterparty
or dealing transaction count threshold to the De Minimis
Exception,\239\ most commenters did not support the idea.\240\
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\239\ See generally BDA, IIB, and JBA comment letters.
\240\ See generally Citizens, CEWG, EEI/EPSA, IATP, IECA, ISDA/
SIFMA, and NGSA comment letters.
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B. Exception for Exchange-Traded and/or Cleared Swaps
The Commission sought comment on whether an exception from the de
minimis calculation for swaps that are executed on an exchange (e.g., a
SEF or designated contract market (``DCM'')) and/or cleared by a
derivatives clearing organization is appropriate. Most commenters
supported including an exception for exchange-traded and/or cleared
trades,\241\ though two commenters were opposed to the idea.\242\
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\241\ See generally 360 Trading, ABA, BDA, Daiwa, Cboe SEF,
Citizens, CME/ICE, EEI/EPSA, FXPA, Frost Bank, FIA, IIB, IECA, JBA,
MFA, Optiver, TR SEF, Virtu, and XTX comment letters.
\242\ See generally AFR and Better Markets comment letters.
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C. Exception for Non-Deliverable Forwards
The Commission sought comment on whether an exception from the de
minimis calculation for non-deliverable forwards is appropriate. Most
commenters generally supported including an exception for NDFs,\243\
though one commenter was opposed to the idea.\244\
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\243\ See generally 360 Trading, ABA, AFEX/GPS, AGC, BDA,
Capital One, Cboe SEF, Citizens, CDEU, CMC, Covington, FXPA, FIA,
IIB, IECA, ISDA/SIFMA, JBA, Northern Trust, Optiver, Regions, State
Street, SVB, TR SEF, Virtu, Western Union, and XTX comment letters.
\244\ See Better Markets comment letter.
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V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities.\245\ As
noted in the Proposal, the regulations adopted herein only affect
certain entities that are close to the AGNA threshold in the De Minimis
Exception. For example, the regulations would affect entities with a
relevant AGNA of swap dealing activity between $3 billion and $8
billion. Moreover, they would affect IDIs that enter into loan-related
swaps. That is, the regulations are relevant to entities that engage in
swap dealing activity with a relevant AGNA measured in the billions of
dollars. The Commission does not believe that these entities would be
small entities for purposes of the RFA. Additionally, the Commission
received no comments on the Proposal's RFA discussion. Therefore, the
regulations being adopted herein will not have a significant economic
impact on a substantial number of small entities, as defined in the
RFA.
---------------------------------------------------------------------------
\245\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that these regulations will not
have a significant economic impact on a substantial number of small
entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1955 (``PRA'') \246\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget (``OMB'') control number. As discussed in the Proposal, the
final regulations will not impose any new recordkeeping or information
collection requirements, or other collections of information that
require approval of OMB under the PRA.
---------------------------------------------------------------------------
\246\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The Commission notes that all reporting and recordkeeping
requirements applicable to SDs result from other rulemakings, for which
the CFTC has sought OMB approval, and are outside the scope of
rulemakings related to the De Minimis Exception.\247\
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\247\ Parties wishing to review the CFTC's information
collections on a global basis may do so at www.reginfo.gov, at which
OMB maintains an inventory aggregating each of the CFTC's currently
approved information collections, as well as the information
collections that presently are under review.
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C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\248\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. In this section, the Commission considers the costs and
benefits resulting from its determinations with respect to the Section
15(a) factors.
---------------------------------------------------------------------------
\248\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
In this adopting release, the Commission is amending the De Minimis
Exception by setting the AGNA threshold at $8 billion in swap dealing
activity. The Proposal requested public comment on the costs and
benefits of the proposed regulations, and specifically invited comments
on: (1) The costs and benefits to market participants associated with
each change; (2) the direct costs associated with SD registration and
compliance; (3) the indirect benefits to registering as an SD; (4) the
indirect costs to becoming a registered SD; (5) whether entities with
dealing activity between $3 billion and $8 billion incur similar
registration and compliance costs as compared to entities with dealing
activity above $8 billion; (6) the costs and benefits to the public
associated with each proposed change; (7) how each proposed change
affects each of the Section 15(a) factors; (8) whether the Commission
identified all of the relevant categories of costs and benefits in its
preliminary consideration of the costs and benefits; and (9) whether
the costs and benefits of the proposed changes, as applied in cross-
border contexts, differ from those costs and benefits resulting from
their domestic application, and, if so, in what ways and to what
extent.
As part of this cost-benefit consideration, the Commission will
discuss the costs and benefits of the adopted change and analyze the
amendment as it relates to each of the
[[Page 56683]]
15(a) factors. The Commission notes that this consideration of costs
and benefits is based on the understanding that the swap market
functions internationally, with many transactions involving U.S. firms
occurring across different international jurisdictions, with some
prospective Commission registrants organized outside the U.S., and
other entities operating both within and outside the U.S., and commonly
following substantially similar business practices wherever located.
Where the Commission does not specifically refer to matters of
location, the discussion below of the costs and benefits of the
regulations being adopted refers to their effects on all subject swaps
activity, whether by virtue of the activity's physical location in the
United States or by virtue of the activity's connection with or effect
on U.S. commerce under CEA section 2(i).
As discussed above, the De Minimis Exception provides an exception
from the SD Definition for persons who engage in a de minimis amount of
swap dealing activity. Currently, a person shall not be deemed to be an
SD unless swaps entered into in connection with swap dealing activity
exceed an AGNA threshold of $3 billion (measured over the prior 12-
month period), subject to a phase-in period that is currently in
effect, during which the AGNA threshold is set at $8 billion. The
Commission is amending the De Minimis Exception to set the AGNA
threshold at the current $8 billion phase-in level.
There are market-wide costs and benefits associated with setting
the AGNA threshold at $8 billion. In addition, setting the threshold at
$8 billion would have specific monetary costs and benefits as compared
to a lower or higher threshold. The current $8 billion phase-in level
threshold, along with the prospect that the threshold would decrease to
$3 billion after December 31, 2019, in the absence of further
Commission action, sets the baseline for the Commission's consideration
of the costs and benefits of the proposed alternatives. Accordingly,
the Commission considers the costs and benefits that would result from
maintaining the current $8 billion phase-in level threshold, or
alternatively, a threshold level below or above the current $8 billion
threshold. The status quo baseline also includes other aspects of
existing rules related to the De Minimis Exception. The analysis also
takes into account any relevant no-action relief, to the extent such
relief is being relied upon. As the Commission is of the belief that
existing no-action relief related to the De Minimis Exception is being
fully relied upon by market participants, the cost-benefit discussion
that follows also considers the effects of that relief.
1. General Costs and Benefits
There are several policy objectives underlying SD regulation and
the de minimis exception to SD registration, which have associated with
them general costs and benefits depending on the level of the AGNA
threshold. As discussed above in section I.A.3, costs and benefits may
be associated with the primary policy objectives of SD regulation,
which include reducing systemic risk, increasing counterparty
protections, and increasing market efficiency, orderliness, and
transparency.\249\ The Commission also considers the costs and benefits
associated with the policy objectives furthered by a de minimis
exception, which include increasing efficiency, allowing limited
ancillary dealing, encouraging new participants to enter the swap
dealing market, and focusing regulatory resources.\250\
---------------------------------------------------------------------------
\249\ See also SD Definition Adopting Release, 77 FR 30628-30,
30707-08. To achieve these policy objectives, registered SDs are
subject to a broad range of requirements which may carry their own
costs and benefits. These requirements include, among other things,
registration, internal and external business conduct standards,
reporting, recordkeeping, risk management, posting and collecting
margin on uncleared swaps, and chief compliance officer designation
and responsibilities. However, costs associated with regulatory
requirements applicable to SDs result from other rulemakings and are
outside the scope of rulemakings related to the De Minimis
Exception.
\250\ See id.
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As noted by the Commission and a few commenters, generally, the
lower the threshold, the greater the number of entities that are
subject to the SD-related regulatory requirements, which could decrease
systemic risk, increase counterparty protections, and promote swap
market efficiency, orderliness, and transparency.\251\ However, the
Commission and most commenters recognize that a lower threshold could
have offsetting costs for the market. For example, it is likely that a
lower threshold would discourage new participants from entering into
the swap market, and reduce the amount of dealing activity in which
swap market participants engage in connection with their other
businesses.\252\
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\251\ See supra sections I.A.3 and II.B.3; 83 FR 27471-72; 77 FR
30628-30, 30703, 30707.
\252\ See supra sections I.A.3, II.B.1, and II.C.1; 83 FR 27448-
58, 27471-72; 77 FR 30628-30, 30703, 30707.
---------------------------------------------------------------------------
On the other hand, and as discussed further below, the higher the
threshold, the greater the number of entities that are able to engage
in dealing activity without being required to register, which could
increase competition and liquidity in the swap market. However, a
higher AGNA threshold could potentially decrease the number of
registered SDs, which could have a negative impact on achieving the
general benefits associated with the policy objectives of SD
regulation. This might adversely affect the swap market to some
extent.\253\
---------------------------------------------------------------------------
\253\ See supra sections II.B.2 and II.C.2; 83 FR at 27454-56.
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(i) Maintaining the $8 Billion Threshold
The comments received for this proposed amendment were generally
supportive.\254\ As discussed in section II.C.1.i, at the $8 billion
threshold the 2017 Transaction Coverage and 2017 AGNA Coverage ratios
indicate that nearly all swaps were covered by SD regulation, generally
giving rise to the benefits of SD regulation discussed above. Almost
all swap transactions involved at least one registered SD as a
counterparty, approximately 99 percent or greater for IRS, CDS, FX
swaps, and equity swaps. For NFC swaps, approximately 86 percent of
transactions involved at least one registered SD as a counterparty.
Overall, approximately 98 percent of all swap transactions involved at
least one registered SD. Further, almost all AGNA of swaps activity
included at least one registered SD, approximately 99 percent or
greater for IRS, CDS, FX swaps, and equity swaps. Further, the
Commission notes that the 6,440 entities that did not enter into any
transactions with a registered SD had limited activity overall. As
discussed in the Proposal, the 6,440 entities entered into 77,333
transactions, representing approximately 1.7 percent of the overall
number of transactions during the review period.\255\ Additionally,
collectively, the 6,440 entities had $68 billion in AGNA of swaps
activity, representing approximately 0.03 percent of the overall AGNA
of swaps activity during the review period.
---------------------------------------------------------------------------
\254\ See supra section II.B.1. See also ABA, AGA, AFEX/GPS,
BDA, Capital One, Cboe SEF, Citizens, CDEU, COPE, CEWG, CMC, EEI/
EPSA, FXPA, Frost Bank, FIA, IIB, IECA, ISDA/SIFMA, JBA, M&T, NCFC,
NRECA/APPA, NGSA, Regions, SVB, Virtu, Western Union, and XTX
comment letters.
\255\ 83 FR 27451.
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The Commission believes that this limited activity indicates that
to the extent these entities are engaging in swap dealing activities,
such activity is likely ancillary and in connection with other client
services, potentially indicating that the benefits associated with the
policy objectives of SD registration and the de minimis
[[Page 56684]]
exception are being advanced at the current $8 billion threshold.
Additionally, setting the AGNA at $8 billion would foster efficiency
and potentially reduce costs by allowing persons to continue to use
existing calculation procedures and business processes that are geared
towards the $8 billion threshold.
Commenters generally agreed with the Commission's position. For
example, many commenters noted that the current $8 billion threshold
already subjects the vast majority of transactions to SD regulation, or
that a reduced threshold would not capture significant additional
dealing activity.\256\ Some commenters stated that the nature of the
swaps activity entered into by certain entities poses less systemic
risk (e.g., commercial banks that have swap dealing activity below $8
billion, and entities that primarily enter into NFC swaps).\257\
---------------------------------------------------------------------------
\256\ See supra section II.B.1. See also AGA, BDA, Capital One,
CDEU, CMC, Frost Bank, IECA, M&T, SVB, and Western Union comment
letters.
\257\ See supra section II.B.1. See also Citizens, IECA, NRECA/
APPA, NGSA, and SVB comment letters.
---------------------------------------------------------------------------
However, as discussed above, Better Markets stated that the high
regulatory coverage ratios are not indicative of the absolute level of
swap dealing activities relevant to SD registration, and noted that
maintaining an $8 billion threshold would have more than a limited
effect on counterparty protections.\258\ The Commission believes that
while either percentage of the market or absolute level of swaps
activity are valid considerations, it is more relevant in this context
of achieving a desirable balance of policy goals to consider the level
of activity as a percentage of the whole.
---------------------------------------------------------------------------
\258\ See supra section II.B.3.
---------------------------------------------------------------------------
Additionally, the Senators stated that though notional amount data
for NFC swaps was not used in considering the Proposal, the data that
was available for NFC swaps shows significantly less coverage for NFC
swaps under an $8 billion threshold than in other asset classes.\259\
The Commission notes that with respect to NFC swaps, registered SDs
still entered into the significant majority (86 percent) of the overall
market's total transactions and, as noted in the Proposal, faced 83
percent of counterparties in at least one transaction, indicating that
the existing $8 billion threshold has helped extend the benefits of SD
registration to much of the NFC swap market.\260\ The trading activity
of the 42 unregistered entities with 10 or more NFC swap counterparties
represents approximately 13 percent of the overall NFC swap market by
transaction count. However, as compared to the existing 44 registered
SDs with at least 10 counterparties, these 42 In-Scope Entities have
significantly lower mean transaction and counterparty counts,
indicating that they may only be providing ancillary dealing services
to accommodate commercial end-user clients, also potentially indicating
that the benefits associated with the policy objectives of the de
minimis exception are being advanced at the current $8 billion
threshold.\261\ The Commission believes these market-wide benefits
demonstrate that maintaining an $8 billion threshold is also
appropriate with respect to the NFC swap asset class.
---------------------------------------------------------------------------
\259\ See supra section II.B.3; Senators comment letter.
\260\ 83 FR 27456.
\261\ Id.
---------------------------------------------------------------------------
(ii) $3 Billion Threshold
The Commission is of the view that the systemic risk mitigation,
counterparty protection, and market efficiency benefits of SD
regulation would be enhanced in only a very limited manner if the AGNA
threshold decreased from $8 billion to $3 billion, as would be the case
if the current regulation and the existing Commission order
establishing an end to the phase-in period on December 31, 2019 were
left unchanged. As discussed, Estimated AGNA Coverage would increase
from approximately $221,020 billion (99.95 percent) to $221,039 billion
(99.96 percent), an increase of $19 billion (a 0.01 percentage point
increase); Estimated Transaction Coverage would increase from 3,795,330
trades (99.77 percent) to 3,797,734 trades (99.83 percent), an increase
of 2,404 trades (a 0.06 percentage point increase); and Estimated
Counterparty Coverage would increase from 30,879 counterparties (88.80
percent) to 31,559 counterparties (90.75 percent), an increase of 680
counterparties (a 1.96 percentage point increase).\262\ The effect of
these limited increases is further mitigated by the fact that at the
current $8 billion phase-in threshold, the substantial majority of
transactions are already covered by SD regulation--and related
counterparty protection requirements--because they include at least one
registered SD as a counterparty. For NFC swaps, as discussed in the
Proposal, without notional-equivalent data, it is unclear how many of
the 42 In-Scope Entities with 10 or more counterparties that are not
registered SDs would actually be subject to SD registration at a $3
billion threshold.\263\ It is possible that a portion of the swaps
activity for some or all of these entities qualifies for the physical
hedging exclusion in paragraph (6)(iii) of the SD Definition, and
therefore would not be considered swap dealing activity, regardless of
the AGNA threshold level.\264\
---------------------------------------------------------------------------
\262\ See supra section II.C.1.ii; 83 FR 27452-54.
\263\ See 83 FR 27456. Hypothetically, if all 42 entities
registered, the percentage of all NFC swaps facing at least one
registered SD would rise from approximately 86 percent to 98
percent.
\264\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); supra
section II.C.1.ii; 83 FR 27456-57.
---------------------------------------------------------------------------
As discussed, a lower AGNA threshold could lead to certain entities
reducing or ceasing swaps activity to avoid registration and its
related costs.\265\ Although the magnitude of this effect is unclear,
reduced swap dealing activity could lead to increased concentration in
the swap dealing market, reduced availability of potential swap
counterparties, reduced liquidity, increased volatility, higher fees,
wider bid/ask spreads, or reduced competitive pricing. Systemic risk
could actually increase as a result. The end-user counterparties of
these smaller swap dealing entities may be adversely impacted by the
above consequences and could face a reduced ability to use swaps to
manage their business risks.
---------------------------------------------------------------------------
\265\ See supra sections II.B.1 and II.C.1.ii; 83 FR 27452-54.
---------------------------------------------------------------------------
Most commenters generally agreed with the Commission's position.
For example, commenters indicated that there would be a market-wide
costs associated with a lower threshold given that if entities reduced
or ceased swaps activity to avoid registration and its related costs,
the small and mid-sized end-users and commercial entities who utilize
swaps for hedging purposes and NFC swap market participants would have
fewer dealers available to them.\266\ Two commenters indicated that the
market-wide benefit of a lower threshold would be limited because
Commission regulations not related to SD registration already apply to
unregistered entities, and therefore, many of the policy goals of SD
registration are already being advanced with respect to swaps entered
into by these unregistered entities.\267\
---------------------------------------------------------------------------
\266\ See supra section II.B.1. See also ABA, AGA, AFEX/GPS,
BDA, Capital One, Citizens, CDEU, COPE, CEWG, CMC, EEI/EPSA, Frost
Bank, IIB, IECA, ISDA/SIFMA, JBA, M&T, NCFC, NRECA/APPA, NGSA, SVB,
Virtu, and Western Union comment letters.
\267\ See Citizens and Virtu comment letters.
---------------------------------------------------------------------------
IATP suggested that contrary to the assumption that small banks may
avoid the swap market due to the costs of SD registration at a $3
billion threshold, the costs and obligations of SD registration would
not discourage swap dealing
[[Page 56685]]
when there is strong market demand for innovative swap market risk
management products. IATP stated that the lack of participation in the
swap market by smaller banks may be due to the smaller banks preferring
the price transparency of the futures and options markets as compared
to the swap market.\268\ However, as discussed, the Commission
believes, and most commenters agree, that a lower threshold could lead
to certain entities reducing or ceasing swaps activity.
---------------------------------------------------------------------------
\268\ See IATP comment letter.
---------------------------------------------------------------------------
However, the Senators questioned why, given the lack of relevant
data for NFC swaps, it is necessary to remove the phase-in reduction of
the AGNA threshold for energy-related SDs.\269\ The Commission
believes, and commenters generally agreed, that a reduced threshold
would have a cost in terms of a decrease in NFC swap market liquidity
because some entities may reduce dealing to avoid registration.\270\
For example, with respect to NFC swaps, EEI/EPSA and NGSA expressed
concern that a lower AGNA threshold would provide less accommodation
for increasing NFC prices, which could lead to market participants
reducing their swap dealing activity to remain below the
threshold.\271\ Further, NGSA stated that a lower threshold may reduce
ancillary swap dealing in commodity markets and reduce counterparty
diversity for end-users.\272\
---------------------------------------------------------------------------
\269\ See supra section II.B.3; Senators comment letter.
\270\ See supra sections II.B.1 and II.C.1.ii.
\271\ See supra section II.B.1; EEI/EPSA and NGSA comment
letters. As stated by EEI/EPSA, if NFC prices increase, the same
level of swaps activity would potentially have a higher notional
amount.
\272\ See NGSA comment letter.
---------------------------------------------------------------------------
The Commission notes that although AGNA data was not available for
NFC swaps, the OCC publishes the Quarterly Report on Bank Derivatives
Activities, including end-of-quarter gross notional amount position
data from call reports filed by insured U.S. commercial banks and
savings associations. Although point-in-time position data is not
directly comparable to the transaction volume calculations that are
required for evaluating AGNA threshold calculations, the report does
provide outstanding commodity notional amount position totals in
comparison with IRS, CDS, FX swaps, and equity swaps. According to the
OCC, as of the end of 2017, NFC swaps represented $1,373 billion out of
the $171,964 billion total notional amount reported outstanding, or
approximately 0.8 percent of the total.\273\ Although the number of
transactions involving at least one registered SD is lower in the NFC
swap market than other asset classes (86 percent compared to over 99
percent for the other four asset classes), the Commission believes it
would be inappropriate to lower the AGNA threshold to $3 billion only
to potentially increase the registered SD coverage rate (as measured by
transaction count) for the smallest of the five asset classes as
measured by outstanding notional amount per the OCC Quarterly Report on
Bank Derivatives Activities.
---------------------------------------------------------------------------
\273\ See OCC, Quarterly Report on Bank Trading and Derivatives
Activities (Fourth Quarter 2017), available at https://www.occ.gov/topics/capital-markets/financial-markets/derivatives/dq318.pdf.
---------------------------------------------------------------------------
(iii) Higher Threshold
Conversely, a higher AGNA threshold would potentially decrease the
number of registered SDs, which could have a negative impact on
achieving the general benefits associated with the policy objectives of
SD regulation. For example, a higher threshold would allow a greater
amount of swap dealing to be undertaken without certain counterparty
protections.\274\ This might impact the integrity of the swap market to
some extent. However, the Commission is unable to quantify how the
integrity of swap market might be harmed. On the other hand, as noted
by the Commission and commenters, the higher the AGNA threshold, the
greater the number of entities that are able to engage in dealing
activity without being required to register, which could increase
competition and liquidity in the swap market.\275\ A higher threshold
could also allow the Commission to expend its resources on entities
with larger swap dealing activities that warrant more oversight.
---------------------------------------------------------------------------
\274\ See supra section II.C.2; 83 FR 27454-56.
\275\ See supra sections II.B.2 and II.C.2; 83 FR 27454-56.
---------------------------------------------------------------------------
Some commenters agreed that the small decrease in Estimated AGNA
Coverage and Estimated Transaction Coverage at higher thresholds
potentially indicates that increasing the threshold to up to $100
billion may have a limited effect on the systemic risk and market
efficiency-related benefits of SD regulation.\276\ Additionally, a
higher threshold could enhance the benefits associated with a de
minimis exception, for example by allowing entities to increase
ancillary dealing activity.\277\ However, the decrease in Estimated
Counterparty Coverage indicates that fewer entities would be
transacting with registered SDs, reducing the counterparty protection
benefits of SD regulation if the threshold increased from $8 billion to
$20 billion, $50 billion, or $100 billion.\278\ The Commission also
notes that increasing the threshold could result in changes in market
behavior that could lead to the regulatory coverage decreasing more
than the analysis indicated.
---------------------------------------------------------------------------
\276\ See supra section II.B.2. As discussed, in comparison to
an $8 billion threshold, a $100 billion threshold would reduce the
Estimated AGNA Coverage from approximately $221,020 billion (99.95
percent) to $220,877 billion (99.88 percent), a decrease of $143
billion (a 0.06 percentage point decrease). In comparison to an $8
billion threshold, a $100 billion threshold would reduce the
Estimated Transaction Coverage from 3,795,330 trades (99.77 percent)
to 3,773,440 trades (99.20 percent), a decrease of 21,890 trades (a
0.58 percentage point decrease). The decreases would be more limited
at higher thresholds of $20 billion or $50 billion. See supra
section II.C.2; 83 FR 27455.
\277\ See supra sections II.B.2 and II.C.2; 83 FR 27455.
\278\ As discussed, the data also indicates that at higher
thresholds, there is a more pronounced decrease in Estimated
Counterparty Coverage. The Estimated Counterparty Coverage would
decrease from 30,879 counterparties (88.80 percent) to 28,234
counterparties (81.19 percent), a decrease of 2,645 counterparties
(a 7.61 percentage point decrease). The decrease would be lower at
thresholds of $20 billion and $50 billion, at 2.80 percentage points
and 5.71 percentage points, respectively. See supra section II.C.2;
83 FR 27455.
---------------------------------------------------------------------------
Additionally, though it did not conduct an analysis of AGNA
activity for NFC swaps, the Commission is of the view that increasing
the AGNA threshold could potentially lead to fewer registered SDs
participating in in the NFC swap market, similar to its observations
with respect to IRS, CDS, FX swaps, and equity swaps discussed above in
section II.C.2. This could reduce the number of entities transacting
with registered SDs.
The cost of reduced protections for counterparties would be
realized to the extent that a higher threshold would result in fewer
swaps involving at least one registered SD. Additionally, depending on
how the swap market adapts to a higher threshold, it is also possible
that the reduction in Estimated Regulatory Coverage would be greater
than the data indicates to the extent that a higher threshold leads to
an increased amount of swap dealing activity between entities that are
not registered SDs. In such a scenario, Estimated Regulatory Coverage
could potentially decrease more than the data indicates, increasing the
general costs associated with the De Minimis Exception.
2. Direct Cost and Benefits
As discussed in the Proposal, for any AGNA threshold, some firms
will have AGNA of swap dealing activity sufficiently close to the
threshold so as to require analysis to determine whether their activity
qualifies as de minimis. Hence, (1) with a $3 billion threshold,
[[Page 56686]]
some set of entities would likely have to incur the direct costs of
analyzing whether they would exceed the threshold, (2) with an $8
billion threshold, a (mostly) different set of entities would have to
continue to incur costs of analyzing their activity, and (3) with a
higher threshold, some entities would no longer need to conduct an
ongoing analysis of whether they would be above the new threshold,
while other entities may begin conducting such an analysis.
Based on the available data, the Commission estimates that if the
AGNA threshold were set at $3 billion, approximately 22 currently
unregistered entities would need to conduct an initial analysis of
whether they would be above the threshold.\279\ The Commission
estimates that the potential total direct cost of conducting the
initial analysis for the 22 entities would average approximately
$79,000 per entity, or approximately $1.7 million in the
aggregate.\280\
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\279\ Commission staff analyzed the swaps activity of market
participants over a one-year period to develop this estimate. The
estimate includes 22 In-Scope Entities that had 10 or more
counterparties and between $1 billion and $5 billion in AGNA of
swaps activity in IRS, CDS, FX swaps, and equity swaps. Entities
that were already registered SDs were excluded. The estimate does
not account for entities that primarily are entering into NFC swaps
because notional amount information was not available for that asset
class. See 83 FR 27474 n.191.
\280\ This estimate is based on the following staff requirements
for this determination: 25 hours for an OTC principal trader at
$695/hour, 40 hours for a compliance attorney at $335/hour, 35 hours
for a chief compliance officer at $556/hour, 80 hours for an
operations manager at $290/hour, and 20 hours for a business analyst
at $273/hour. These individuals would be responsible for
identifying, analyzing, and aggregating the swap dealing activity of
a firm and its affiliates. The estimates of the number of personnel
hours required have been updated from the SD Definition Adopting
Release in light of the Commission's experience in implementing the
SD Definition.
The estimates of the hourly costs for these personnel are from
SIFMA's Management & Professional Earnings in the Securities
Industry 2013 survey, modified to account for an 1800-hour work-year
and multiplied by 5.35 to account for firm size, employee benefits,
and overhead, which is the same multiplier that was used when the SD
Definition was adopted. See 77 FR 30712 n.1347.
The Commission recognizes that particular entities may, based on
their circumstances, incur costs substantially greater or less than
the estimated averages. See 83 FR 27474 n.192.
---------------------------------------------------------------------------
Certain of those entities with ongoing swap dealing activity that
is near a $3 billion threshold may also need to conduct periodic de
minimis calculation analyses to assess whether they qualify for the
exception. The Commission estimates that approximately 11 entities may
need to conduct such analyses.\281\ Further, the Commission estimates
that the potential annual direct cost of conducting these ongoing
analyses for those 11 entities would be approximately $40,000 per
entity, or $440,000 in the aggregate.\282\ The projected 11 entities
that may conduct periodic de minimis calculations represents a net
figure, as some entities may need to conduct a periodic de minimis
calculation, while on the other hand, some entities with AGNA near $8
billion might be able to avoid periodic de minimis calculation costs
because they will be certain that their AGNA exceeds the $3 billion
threshold.
---------------------------------------------------------------------------
\281\ The estimate of 11 entities is approximately 50 percent of
the 22 entities that would need to undertake an initial analysis.
This estimate assumes that many entities would, following the
initial analysis, determine that they would either need to register
or choose not to engage in enough dealing activity to require
ongoing monitoring. See 83 FR 27474 n.193.
\282\ The Commission estimates that the ongoing analysis would
be streamlined as a result of the initial analysis, and therefore
would be less costly. For purposes of this calculation, the
Commission estimates that the cost of the ongoing analysis would be
approximately 50 percent of the cost of the initial analysis. See 83
FR 27474 n.194.
---------------------------------------------------------------------------
Conversely, the Commission assumes that a higher threshold would
permit certain entities to no longer incur ongoing costs of assessing
whether they are above the threshold. The Commission estimates the
savings that would result from a higher AGNA threshold of $20 billion.
Based on the available data, the Commission estimates that if the
threshold were set at $20 billion, approximately 29 entities would no
longer need to conduct an ongoing analysis of whether they would be
above the new threshold, while 4 entities may begin conducting such an
analysis.\283\ The Commission estimates that the ongoing cost savings
for the net 25 entities that would no longer be conducting periodic de
minimis threshold analyses would average approximately $40,000 per
entity, or $1 million in the aggregate per year.\284\
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\283\ Commission staff analyzed the swaps activity of market
participants over a one-year period to develop this estimate. The
estimate includes 29 In-Scope Entities that had between $3 billion
and $15 billion, and 4 In-Scope Entities that had between $15
billion and $25 billion, in AGNA of swaps activity in IRS, CDS, FX
swaps, and equity swaps, and at least 10 counterparties. The
estimate does not account for entities that primarily are entering
into NFC swaps because notional amount information was not available
for that asset class. See 83 FR 27474 n.195.
\284\ See supra note 282.
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The Commission notes that ABA submitted a study that evaluated the
costs and benefits of SD registration for member banks at various AGNA
thresholds, prepared by NERA Economic Consulting (``NERA'').\285\
NERA's study provided cost estimates for initial and ongoing testing of
whether a bank holding company has exceeded the AGNA threshold, under
various scenarios.\286\ To arrive at aggregate estimates, NERA
estimated the per entity costs of initial and ongoing SD registration
determination analyses, and also provided its estimates of the number
of registrants at various AGNA thresholds, which Commission staff used
to estimate the additional costs or cost savings at different AGNA
thresholds, as compared to an $8 billion threshold.
---------------------------------------------------------------------------
\285\ See ABA comment letter (attaching NERA study).
\286\ Although addressed by the NERA study, the costs associated
with SD regulatory requirements (e.g., margin, reporting,
technology, etc.) are not considered in this analysis. Costs
associated with regulatory requirements applicable to SDs result
from other rulemakings and are outside the scope of rulemakings
related to the De Minimis Exception.
---------------------------------------------------------------------------
First, to estimate initial and ongoing SD registration
determination costs, NERA sent a survey to 22 bank holding companies
that participate in the swap market and received eight responses.\287\
Based on these responses, NERA estimated average, one-time, upfront SD
determination costs of $657,696 per entity \288\ (as compared to the
Commission's estimate of approximately $79,000 per entity on average).
Further, NERA estimated average, ongoing, SD determination costs of
$89,209 per entity \289\ (as compared to the Commission's estimate of
approximately $40,000 per entity on average).\290\
---------------------------------------------------------------------------
\287\ See ABA comment letter (attaching NERA study). To estimate
activity, NERA applied a 1.5 assumed turnover ratio to swap position
data from the Federal Reserve Bank of Chicago's ``Holding Company
Data'' for bank holding companies with greater than $10 billion in
assets on a consolidated basis. The 1.5 adjustment factor was based
on NERA's estimate of the typical turnover/notional holdings ratio
to convert periodic position data into an annualized estimate of
AGNA transaction volume.
\288\ NERA estimated median, one-time, upfront SD determination
costs of $188,095 per entity, significantly lower than the average
cost of $657,696. NERA noted that initial SD determination costs
were distributed widely, but the variation did not appear related to
institution size or magnitude of annual swaps activity.
\289\ NERA estimated median, ongoing, SD determination costs of
$83,430 per entity.
\290\ NERA also calculated a 10 year net present value estimate
of the ongoing monitoring costs. NERA estimated the present value of
ongoing determination costs to be $723,562 per bank holding company
using the average estimate. Additionally, NERA's analysis included
10 year net present value estimates of business conduct and margin
costs, which was outside of the scope of the CFTC's analysis.
---------------------------------------------------------------------------
NERA's survey of banking entities indicates significantly higher
initial and ongoing SD determination monitoring costs than the
Commission's cost estimates on a per entity annualized basis. NERA's
per entity cost estimates were based on the eight responses to their
survey, while the Commission's estimates were based on: (1) Estimates
[[Page 56687]]
of the number of personnel hours required in light of the Commission's
experience in implementing the SD Definition; and (2) modified costs
from SIFMA's Management & Professional Earnings in the Securities
Industry 2013 survey.\291\ Additionally, NERA's analysis evaluated bank
holding companies on a consolidated basis, while the Commission's
analysis included subsidiaries of banks prior to consolidation and
firms unrelated to banks.
---------------------------------------------------------------------------
\291\ See supra note 280.
---------------------------------------------------------------------------
Second, to estimate the number of entities that would be required
to register at different AGNA thresholds, NERA evaluated four different
scenarios, including various combinations of an AGNA threshold, a risk-
based threshold, and amendments to date restrictions related to the IDI
Swap Dealing Exclusion. At various AGNA thresholds--including $3
billion, $8 billion, and $15 billion--NERA estimated the number of bank
holding companies expected to register as SDs for each scenario it
evaluated. To allow for a more direct comparison with the Commission's
estimates, the Commission made an assumption that the difference in the
number of entities required to register at $3 billion and $15 billion
thresholds, as compared to an $8 billion threshold, would also be the
number of entities that would incur ongoing costs or cost savings
related to assessing whether they would be required to register as SDs.
Depending on the scenario evaluated, the Commission believes that NERA
estimated that 13 to 17 additional bank holding companies would conduct
ongoing SD registration-related analyses at the $3 billion threshold as
compared to the $8 billion threshold.\292\ Conversely, depending on the
scenario, the Commission believes that NERA estimated that 7 to 10 bank
holding companies would no longer incur ongoing monitoring costs at a
$15 billion threshold compared to an $8 billion threshold.\293\
---------------------------------------------------------------------------
\292\ This is based on NERA's ``Number of Banks Required To
Register As Swap Dealer'' estimates at $3 billion compared to $8
billion under the various scenarios. NERA did not explicitly
calculate the number of entities that may yet incur initial
determination costs, but instead estimated the number of entities
that would be required to register at various thresholds.
\293\ This is based on NERA's ``Number of Banks Required To
Register As Swap Dealer'' estimates at $15 billion compared to $8
billion under the various scenarios. Note that NERA did not provide
estimates at a $20 billion threshold, and its estimates at the $15
billion threshold are the closest for relevant comparison with
Commission estimates at $20 billion.
---------------------------------------------------------------------------
In general, the Commission believes that its per entity estimated
costs reflect the broader nature of the types of entities that would
need to conduct such an analysis. For example, NERA's analysis focused
on survey responses from consolidated bank holding companies, whereas
the Commission's estimates also account for smaller financial
institutions and non-financial entities that may have less operational
complexity and therefore may incur lower costs in making
determinations. Additionally, the Commission's estimates of the number
of entities that would incur costs related to SD registration analyses
are based on non-public SDR data on AGNA activity, while NERA's implied
estimates are based on publicly available swap position data from the
Federal Reserve Bank of Chicago's ``Holding Company Data'' for bank
holding companies with greater than $10 billion in assets on a
consolidated basis.
However, given the different methods and sources of information
utilized, the Commission is providing a range of estimated costs or
cost savings that combine the per entity costs and the counts of the
number of entities required to conduct SD registration analyses, as
estimated by the Commission and NERA. The tables below summarize the
estimates for initial and ongoing SD determination costs. Since NERA
conducted estimates using four different scenarios, the tables below
include information based on the highest and lowest number of entities
estimated by NERA at given thresholds.
---------------------------------------------------------------------------
\294\ For Tables 1 through 3, aggregate cost or cost savings
estimates are calculated using a given scenario's per entity average
cost estimate multiplied by the relevant entity count. For example,
in Table 1, $79,000 multiplied by 22 entities equals $1,738,000.
\295\ As discussed, the Commission considered a higher threshold
of $20 billion, while NERA considered a higher threshold of $15
billion.
Table 1--Estimate of Additional Costs Incurred for Initial SD Determination Analyses
[$3 Billion threshold] \294\
----------------------------------------------------------------------------------------------------------------
NERA high
Per entity average cost estimate CFTC (22 NERA low estimate estimate (17
entities) (13 entities) entities)
----------------------------------------------------------------------------------------------------------------
CFTC--$79,000.......................................... $1,738,000 $1,027,000 $1,343,000
NERA--$657,696......................................... 14,469,312 8,550,048 11,180,832
----------------------------------------------------------------------------------------------------------------
Table 2--Estimate of Additional Costs Incurred for Ongoing SD Determination Analyses
[$3 Billion threshold]
----------------------------------------------------------------------------------------------------------------
NERA high
Per entity average cost estimate CFTC (11 NERA low estimate estimate (17
entities) (13 entities) entities)
----------------------------------------------------------------------------------------------------------------
CFTC--$40,000.......................................... $440,000 $520,000 $680,000
NERA--89,209........................................... 981,299 1,159,717 1,516,553
----------------------------------------------------------------------------------------------------------------
Table 3--Estimate of Cost Savings for Not Conducting Ongoing SD Determination Analyses
[$15 Billion or $20 billion threshold] \295\
----------------------------------------------------------------------------------------------------------------
NERA high
CFTC ($20 NERA low estimate estimate ($15
Per entity average cost estimate billion) (25 ($15 billion) (7 billion) (10
entities) entities) entities)
----------------------------------------------------------------------------------------------------------------
CFTC--$40,000.......................................... $1,000,000 $280,000 $400,000
[[Page 56688]]
NERA--89,209........................................... 2,230,225 624,463 892,090
----------------------------------------------------------------------------------------------------------------
Based on its analysis, and incorporating information provided by
NERA, the Commission estimates that for the 13 to 22 entities at a $3
billion AGNA threshold that may need to conduct an initial SD
registration analyses, at per entity average costs of $79,000 to
$657,696, the estimated aggregate initial determination cost ranges
from $1,027,000 to $14,469,312, as indicated in Table 1.\296\
---------------------------------------------------------------------------
\296\ Using a different methodology, NERA estimated $2,623,925
(median estimate) to $9,174,855 (average estimate) in remaining
aggregate initial determination costs. The Commission notes that
this estimate is within the $1,027,000 to $14,469,312 range
calculated above.
---------------------------------------------------------------------------
Additionally, for the 11 to 17 entities at a $3 billion AGNA
threshold that may need to conduct ongoing SD registration analyses, at
per entity average costs of $40,000 to $89,209, the estimated aggregate
annual ongoing monitoring cost ranges from $440,000 to $1,516,553, as
indicated in Table 2.
Lastly, for the 7 to 25 entities at a $15 billion or $20 billion
AGNA threshold that would no longer need to conduct ongoing SD
registration analyses, at per entity average cost savings of $40,000 to
$89,209, the estimated aggregate annual ongoing monitoring cost savings
ranges from $280,000 to $2,230,225, as indicated in Table 3.
The Commission notes that the aggregate estimates of initial and
ongoing SD determination and monitoring costs, based on either the
Commission or NERA's per entity cost estimates or marginal entity count
estimates, buttress the Commission's decision to adopt an $8 billion
threshold and not let it decrease to $3 billion. Additionally, the
Commission is of the view that the cost savings at $15 billion or $20
billion thresholds would not sway its decision to maintain the
threshold at $8 billion given the general costs and benefits discussed
above. Lastly, in light of all the considerations, the Commission would
come to the same conclusion, regardless of where the most accurate cost
falls in the range of potential initial and ongoing costs.
3. Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
(i) Protection of Market Participants and the Public
Providing regulatory protections for swap counterparties who may be
less experienced or knowledgeable about the swap products offered by
SDs (particularly end-users who use swaps for hedging or investment
purposes) is a fundamental benefit advanced by registration of SDs. For
example, registered SDs are required to provide mid-mark quotes and
perform scenario analyses. However, these requirements are not in
standard ISDA agreements and are not required of entities that deal a
de minimis amount of swaps.
The Commission is maintaining the current de minimis phase-in
threshold of $8 billion in AGNA of swap dealing activity. As discussed
above, the Commission recognizes that a $3 billion threshold may result
in more entities being required to register as SDs compared to the
proposed (and currently in-effect) $8 billion threshold, thereby
extending counterparty protections to a greater number of market
participants. However, this benefit is relatively small because, at the
current $8 billion phase-in threshold, the substantial majority of
transactions are already covered by SD regulation--and related
counterparty protection requirements--since they include at least one
registered SD as a counterparty.\297\
---------------------------------------------------------------------------
\297\ As discussed in section II.C.1.i, the 2017 Transaction
Coverage ratio was approximately 98 percent.
---------------------------------------------------------------------------
On the other hand, as noted above, a threshold above $8 billion may
result in fewer entities being required to register as SDs, thus
extending counterparty protections to a fewer number of market
participants. Although the Estimated Transaction Coverage and Estimated
AGNA Coverage would not decrease much at higher thresholds of up to
$100 billion, the decrease in Estimated Counterparty Coverage is more
pronounced at higher AGNA thresholds, potentially indicating that the
benefit of SD counterparty protections requirements could be reduced at
higher thresholds.
SD registration is also intended to reduce systemic risk in the
swap market. Pursuant to the Dodd-Frank Act, the Commission has
proposed or adopted regulations for SDs, including margin and risk
management requirements, designed to mitigate the potential systemic
risk inherent in the swap market. Therefore, the Commission recognizes
that a lower threshold may result in more entities being required to
register as SDs, thereby potentially further reducing systemic risk.
Conversely, a higher threshold may result in fewer entities being
required to register an SD and, thus, possibly increase systemic risk.
However, the data appears to indicate that the additional entities
that would need to register at the $3 billion threshold are engaged in
a comparatively smaller amount of swap dealing activity. Many of these
entities might be expected to have fewer counterparties and smaller
overall risk exposures as compared to the SDs that engage in swap
dealing in excess of the $8 billion level. Accordingly, the Commission
believes that that the incremental reduction in systemic risk that may
be achieved by registering dealers that engage in dealing between the
$3 billion and $8 billion thresholds is limited.
The data also indicates that at higher thresholds of $20 billion,
$50 billion, or $100 billion, fewer entities would be required to
register as SDs, though the change in regulatory coverage as measured
by Estimated AGNA Coverage and Estimated Transaction Coverage would be
small. Thus, the Commission believes that the increase in systemic risk
that may occur due to a higher threshold would not be significant.
However, depending on how the market adapts to a higher threshold, the
level of regulatory coverage could potentially decrease more than the
data indicates.
The Commission believes that setting the AGNA threshold at $8
billion will not substantially diminish the protection of market
participants and the public as compared to a $3 billion threshold.
Further, as discussed, the Commission does not expect that an increase
in the threshold would
[[Page 56689]]
substantially increase the protection of market participants and the
public.
(ii) Efficiency, Competitiveness, and Financial Integrity of Markets
Another goal of SD registration is swap market efficiency,
orderliness, and transparency. These market benefits are achieved
through regulations regarding, for example, recordkeeping, reporting,
disclosure, and risk management.
As compared to a $3 billion threshold, an $8 billion threshold may
have a negative effect on the efficiency and integrity of the markets
as fewer entities are required to register as SDs and fewer
transactions become subject to SD-related regulations. However, the
Commission also recognizes that the efficiency and competitiveness of
the swap market may be negatively impacted if the AGNA threshold is set
too low, by potentially increasing barriers to entry that may stifle
competition and reduce swap market efficiency. For example, if entities
choose to reduce or cease their swap dealing activities in response to
the $3 billion threshold, the number or availability of market makers
for swaps may be reduced, which could lead to increased costs for
potential counterparties and end-users. Conversely, a higher threshold
may increase market liquidity, efficiency, and competition as more
entities engage in swap dealing without SD registration as a barrier to
entry. However, a higher threshold may also result in fewer swaps being
subject to SD-related regulations, potentially reducing the financial
integrity of markets.
Considering these countervailing factors, the Commission believes
that setting the AGNA threshold at $8 billion will not significantly
diminish the efficiency, competitiveness, and financial integrity of
markets as compared to a $3 billion threshold. Further, as discussed,
an increase in the threshold would potentially have both positive and
negative effects to the efficiency, competitiveness, and financial
integrity of the markets.
(iii) Price Discovery
All else being equal, the Commission believes that price discovery
will not be harmed and might be improved if there are more entities
engaging in ancillary dealing due to increased competitiveness among
swap counterparties. The Commission is of the view that, as compared to
a $3 billion threshold, an $8 billion threshold would encourage
participation of new swap dealing businesses and promote ancillary
dealing because those entities engaged in swap dealing activities below
the threshold would not need to incur the direct costs of registration
until they exceeded a higher threshold.
Similarly, raising the threshold above $8 billion could lead to
even more entities engaging in ancillary dealing.
The Commission notes that some counterparties might be more likely
to transact at off-market prices if they trade with an entity that does
not provide mid-market quotes or scenario analyses, as would be
required if the entity were a registered SD. If so, such transactions
might harm post-trade price discovery since these transactions would
occur at off-market prices.
(iv) Sound Risk Management
The Commission notes that a higher AGNA threshold could lead to
impaired risk management practices because a lower number of entities
would be required by regulation to: (1) Develop and implement detailed
risk management programs; (2) adhere to business conduct standards that
reduce operational and other risks; and (3) satisfy margin requirements
for uncleared swaps. For the same reason, a lower threshold could
positively impact risk management since more entities would be required
to comply with the above mentioned risk-related SD regulations. The
Commission also notes that to the extent an entity that is not required
to register as an SD at a higher threshold is a prudentially regulated
bank, that entity would be subject to the risk management requirements
of its prudential regulator.
(v) Other Public Interest Considerations
The Commission has not identified any other public interest
considerations with respect to setting the AGNA threshold at $8 billion
in swap dealing activity.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of the CEA.\298\ The Commission believes that
the public interest to be protected by the antitrust laws is generally
to protect competition.
---------------------------------------------------------------------------
\298\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission has considered this final rule to determine whether
it is anti-competitive and has identified no anti-competitive effects.
Because the Commission has determined that the final rulemaking is not
anti-competitive and has no anti-competitive effects, the Commission
has not identified any less anti-competitive means of achieving the
purposes of the CEA.
List of Subjects in 17 CFR Part 1
Commodity futures, Definitions, De minimis exception, Insured
depository institutions, Swaps, Swap dealers.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 1 as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9,
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).
0
2. In Sec. 1.3, amend the definition of the term ``Swap dealer'' by
revising paragraph (4)(i)(A) and removing and reserving paragraph
(4)(ii).
The revision reads as follows:
Sec. 1.3 Definitions.
* * * * *
Swap Dealer. * * *
(4) De minimis exception--(i)(A) In general. Except as provided in
paragraph (4)(vi) of this definition, a person that is not currently
registered as a swap dealer shall be deemed not to be a swap dealer as
a result of its swap dealing activity involving counterparties, so long
as the swaps connected with those dealing activities into which the
person--or any other entity controlling, controlled by or under common
control with the person--enters over the course of the immediately
preceding 12 months have an aggregate gross notional amount of no more
than $8 billion, and an aggregate gross notional amount of no more than
$25 million with regard to swaps in which the counterparty is a
``special entity'' (as that term is defined in section 4s(h)(2)(C) of
the Act, 7 U.S.C. 6s(h)(2)(C), and Sec. 23.401(c) of this chapter),
except as provided in paragraph (4)(i)(B) of this definition. For
purposes of this definition, if the stated notional amount of a swap is
leveraged or enhanced by the structure of the
[[Page 56690]]
swap, the calculation shall be based on the effective notional amount
of the swap rather than on the stated notional amount.
* * * * *
Issued in Washington, DC, on November 6, 2018, by the
Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendicies will not appear in the Code of
Federal Regulations.
Appendicies to De Minimis Exception to the Swap Dealer Definition--
Commission Voting Summary, Chairman's Statement, and Commissioners'
Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo, and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
Today's final rule on the numeric threshold for swap dealer de
minimis will provide the market with certainty that the threshold
will not fall from $8 billion to $3 billion. I fully support the
proposed final rule.
The action before us is without prejudice to all other items in
the Commission's June 2018 NPRM. That includes various proposed rule
amendments and other topics for consideration. Those proposals and
considerations are clearly of wide ranging interest as evidenced by
the public comments received. They remain under staff consideration
pending further Commission action.
Indeed, I will direct CFTC staff to continue their analysis of
the range of matters raised in the June 2018 NPRM and comments
submitted by the public.
I will specifically ask staff to conduct a study on possible
alternative metrics for the calculation of the swap dealer de
minimis threshold drawing upon proposals in the June 2018 NPRM,
including the feasibility of: (i) Removing cleared swaps from the
current de minimis calculation; (ii) haircutting cleared swaps
included in the current de minimis calculation; (iii) adopting a
new, bifurcated de minimis calculation that uses initial margin
amounts for cleared swaps and entity-netted notional amounts for
uncleared swaps; and (iv) applying other risk-based approaches that
the staff may recommend. I will be asking the staff for specific
deadlines and deliverables for this work. Once staff has reviewed
and analyzed the data, I expect that the study will be made public
for further discussion and possible Commission consideration.
I deliberately decline at this time to express any view on the
appropriateness of whether any of the proposals in the June 2018
NPRM not before us today should be addressed by CFTC unilateral
rulemaking or joint consideration with the U.S. Securities and
Exchange Commission (SEC).
Be assured that SEC Chairman Clayton and I--and our fellow CFTC
and SEC Commissioners--are committed to working together on robust
harmonization where appropriate and working jointly where necessary
on these and other matters.
With respect to IDIs, staff has informed me that they would
consider no-action relief for IDIs pending formal Commission action
should they receive a meritorious request.
In sum, I am hopeful that we will today provide market certainty
that the de minimis threshold will not fall below its current level.
Surely, it has taken a while to reach this point. Yet, I am
hopeful that we may achieve it with a good degree of consensus
across the full Commission. Assuming so, then we have increased
market certainty--a very good thing in trading markets.
Sometimes it's worth the wait.
Appendix 3--Statement of Commissioner Brian D. Quintenz
I support today's final rule to rescind the de minimis
threshold's scheduled reduction to $3 billion of gross notional swap
dealing activity. Every iteration of data analysis completed by CFTC
staff on this issue, from the 2015 Preliminary Report,\1\ to the
2016 Final Report,\2\ to the updated data and analysis in the 2018
June proposed rule, and to the data presented in this final rule,
clearly and unequivocally supported eliminating this ill-conceived
reduction. I am pleased that today's action will remove a large
source of negative regulatory uncertainty for market participants in
managing their swaps business and serving their customers.
---------------------------------------------------------------------------
\1\ See Swap Dealer De Minimis Exception Preliminary Report
(``Preliminary Report''), http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis_1115.pdf.
\2\ See Swap Dealer De Minimis Exception Final Report (``Final
Report''), https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/dfreport_sddeminis081516.pdf.
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However, this is just the first of many necessary steps toward
correcting what I believe is a flawed swap dealer registration
policy. Therefore, it is my hope that today's final rule should be
viewed with finality only in this one regard.
The Dodd-Frank Act advanced three main and substantial policy
objectives for swap dealer registration: Systemic risk reduction,
counterparty protection, and enhanced swap market transparency and
efficiency. As I have emphasized on many prior occasions, given the
significant costs of swap dealer regulation, it is critical that the
de minimis exception be appropriately calibrated to ensure that the
correct market group--those best situated to realize the
corresponding policy goals of registration--shoulders the burdens of
swap dealer regulations.
As I have also said repeatedly in the past, notional value is a
poor measure of activity, and it is a meaningless measure of risk.
Therefore, by itself, notional value is an incredibly deficient
metric by which to impose large costs and achieve substantial policy
objectives. A one-size-fits-all notional value test for swap dealer
registration captures entities that engage in low volume, low risk
activity with high notional amounts, and places those firms under
the same regulatory regime as the world's largest, most complex
financial institutions that deal in trillions of dollars' worth of
swaps.\3\ The end result is that smaller firms are disincentivized
from engaging in lower risk activity when faced with justifying the
cost of swap dealer registration.
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\3\ See Office of the Comptroller of the Currency, ``Quarterly
Report on Bank Trading and Derivatives Activities, Second Quarter
2018,'' available at: https://www.occ.gov/topics/capital-markets/financial-markets/derivatives/dq218.pdf.
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I have heard anecdotally from certain small to mid-sized players
in the swap markets that the breakeven point of the costs of swap
dealer registration as measured by a level of notional swap dealing
activity is much higher than the $8 billion level in this rule. If
that is the case, the current $8 billion notional threshold
effectively forces these smaller players to curtail their swap
dealing business, thereby limiting competition and further
concentrating swaps activity with their larger competitors.\4\
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\4\ For further discussion, see comment letter to CFTC from
Financial Services Roundtable dated January 19, 2016 (``We do not
see a benefit to requiring an entity that enters into a small number
of swaps with a large notional amount but little exposure to choose
between exiting the market or registering as a swap dealer, nor
should entities that are taking on very large exposures without
crossing a notional threshold, or a trade or counterparty count
metric, be unregulated because they have concentrated risk in a
small number of trades.'').
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In my view, an appropriately calibrated de minimis exception
would better align the criteria of the de minimisthreshold with the
costs of swap dealer regulation, particularly the largest costs tied
to mitigating systemic risk, like capital and margin. A de minimis
threshold based on metrics more closely correlated with the risk of
the products traded, as opposed to the current risk-insensitive
notional value metric, would better measure dealing activity and
more appropriately capture the entities warranting Commission
oversight.
I am pleased the Chairman continues to recognize this and has
directed staff to study many of the alternative risk-based
registration metrics that were suggested in the proposed rule. The
staff report will provide the Commission with additional data and
insights into the impact that alternative approaches may have on
swap dealer registration. For example, staff's analysis should show
how removing or haircutting cleared swaps from the de minimis
calculation would impact the number and composition of firms
required to register as swap dealers. The report will also provide
staff with an opportunity to consider, for the first time, how a
registration threshold tied to initial margin for cleared swaps
could better represent a de minimis quantity of swap dealing
activity. For uncleared products, staff can examine the impact of
using entity-netted notional amounts, a more accurate measure of a
firm's risk and market size, as a metric of swap dealing activity.
The results of the staff report will be critical to any future
Commission consideration of a
[[Page 56691]]
more risk-sensitive swap dealer registration threshold.
In addition, many of the policy recommendations discussed in the
proposed rule, such as better allowing insured depository
institutions to assist their customers in hedging loan-related risks
and excluding non-deliverable forwards from an entity's de minimis
count--would advance the policy goals of the de minimis exception by
encouraging greater participation and competition in the swap
markets. I would eagerly anticipate the Commission's action on these
important reforms. As the Commission's recent no-action letter to a
Main Street bank this past August shows, the deficiencies of the
current de minimis exception are beginning to squeeze firms'
activity and constrain their ability to serve clients.\5\
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\5\ CFTC No-Action Letter 18-20 (August 28, 2018), https://www.cftc.gov/PressRoom/PressReleases/7775-18.
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Any de minimis threshold must always be put into context of the
broader swaps market regulatory regime. The Commission is not
establishing the de minimis exception in a vacuum. Since the swap
dealer definition was adopted in 2012, a broad range of rigorous
regulatory requirements have gone into effect which also advance the
goals of swap dealer registration, such as mandatory clearing, SEF
trading, swap data reporting, and margin requirements for uncleared
swaps.
The Commission's regulatory framework for the swap market has
greatly evolved from its state six years ago; it is only common
sense that the swap dealer registration threshold should evolve as
well. It will be a great day when financial regulators, including
the CFTC, finally move away from gross notional value as any sort of
metric or test of derivatives exposure, activity, or risk. I look
forward to that day, and I am committed to working with the
Chairman, my fellow Commissioners, and our staff to make sure we get
the swap dealer de minimis exception policy right.
Appendix 4--Concurring Statement of Commissioner Rostin Behnam
Today, the Commission acts decisively to set the aggregate gross
notional amount (``AGNA'') threshold for the de minimis exception at
$8 billion in swap dealing activity entered into by a person over
the preceding 12 months. I am comfortable supporting today's final
rule because it is limited to establishing a clear and certain de
minimis threshold. While I was unable to support the proposed rule--
which moved the Commission far beyond the task before it towards
unilaterally redefining swap dealing activity absent meaningful,
congressionally-required collaboration with the Securities and
Exchange Commission (``SEC'')--I am gratified that the Commission is
not moving forward with aspects of the Proposal which would have
further complicated the distinction between dealing and non-dealing
activities.\1\ Such action would have been detrimental to market
participants. To the extent the Commission continues to consider
addressing long standing concerns with the IDI Swap Dealing
Exclusion,\2\ ambiguity regarding the treatment of swaps used for
hedging, or relief applicable to swaps that result from multilateral
portfolio compression exercises, it should do so jointly with the
SEC.
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\1\ De Minimis Exception to the Swap Dealer Definition, 83 FR
27444, 27481-2 (proposed June 12, 2018).
\2\ If the proposed IDI Minimis Provision truly better aligns
the swap dealer regulatory framework with the risk mitigation
demands of bank customers, as commenters suggested, then it would
seem that there should be few hurdles in the way of the CFTC and SEC
engaging to reconsider the parameters of the IDI Swap Dealing
Exclusion.
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NFC Swap Data
Today's decision to maintain the AGNA threshold at $8 billion
follows a period of prolonged uncertainty during which Commission
staff conducted more complete data analysis regarding the de minimis
exception.\3\ While swap data repository (``SDR'') data quality has
improved, AGNA data was unavailable for non-financial commodity
(``NFC'') swaps.\4\ Nevertheless, Commission staff used counterparty
and transaction counts and a series of assumptions to analyze likely
swap dealing activity in the NFC swap market and concluded that
reducing the $8 billion AGNA threshold could lead to reduced
liquidity in NFC swaps, negatively impacting end-users and
commercial entities who utilize NFC swaps for hedging.\5\ The
Commission further relied upon findings and comments that the unique
characteristics of the NFC swap market pose less systemic risk than
financial swaps.\6\
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\3\ 83 FR 27445-6.
\4\ 83 FR 27445.
\5\ 83 FR 27450, 27456-7.
\6\ 83 FR 27457; Final Rule, De Minimis Exception to the Swap
Dealer Definition, section II.C.1.ii (to be codified at 17 CFR pt.
1).
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It is my hope that Commission staff will continue to examine and
monitor data and activities in the NFC swap market to ensure that
concentrated activity by unregistered NFC counterparties in segments
of that swap market, such as in energy-related swaps, do not present
outsized risk or harm to end-users, and most importantly, the
general public.
Appendix 5--Statement of Commissioner Dan M. Berkovitz
I support amending the swap dealer de minimis exception to set
the threshold at $8 billion. This limited amendment relies on
extensive data analysis to achieve a balance between the policy
objectives of the de minimis exception and the registration of swap
dealers.
At the outset, I would like to acknowledge the leadership of
Chairman Giancarlo and the efforts of my fellow Commissioners to
achieve consensus on this rulemaking. I look forward to working
together to continue to find areas of agreement where it makes sense
for our markets and the American people.
Data-Driven Rulemaking
Title VII of the Dodd-Frank Act directed the Commodity Futures
Trading Commission (``Commission'') and the U.S. Securities and
Exchange Commission (``SEC'') to jointly further define, among other
things, the term ``swap dealer.'' \1\ At the same time, Congress
enacted Section 1a(49)(D) of the Commodity Exchange Act (``CEA''),
which directed the Commission to exempt from designation as a swap
dealer entities that engage in a de minimis quantity of swap
dealing.
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
section 712(d)(1), Public Law 111-203, 124 Stat. 1376 (2010) (the
``Dodd-Frank Act'').
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In 2012, the Commission--jointly with the SEC--adopted the
further definition of the term swap dealer. In this rulemaking, the
de minimis swap dealing threshold was set at $3 billion. However,
recognizing that a lack of swap trading data made it difficult to
set an appropriate threshold, the Commission implemented a long
phase-in period during which the threshold was set at $8 billion.\2\
The regulation directed Commission staff to study the data on swap
dealing activity that would be collected through swap data
repositories (``SDRs'') and publish a report for public comment,
enabling the Commission at a later time to make a data-based
judgment regarding the de minimis quantity threshold.\3\
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\2\ See 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A); see also
Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' 77 FR 30596,
30633-34 (May 23, 2012) (``SD Adopting Release'').
\3\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(B).
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To this end, the staff built a comprehensive database to
aggregate data from all four SDRs. Over several years, the staff
developed and refined new techniques to sort and evaluate the data,
published two reports on the de minimis exception, and continued to
revise its analysis in response to public comments. This process was
not without considerable challenges, but the staff worked diligently
to produce meaningful, data-driven information to guide the
Commission's decision-making regarding the appropriate de minimis
threshold.
This effort provided a highly significant data point:
Approximately 98 percent of all swap transactions involved at least
one registered swap dealer. We now know that at the $8 billion
threshold, nearly all swap transactions benefit from swap dealer
regulation.
The staff's analysis also showed that reducing the threshold to
$3 billion would have a minimal impact on the amount of swaps
activity that would be subject to swap dealer regulation. Indeed,
based on the analysis, reducing the threshold to $3 billion would
only add swap dealer coverage to less than one-tenth of one percent
of reported swaps. By the same token, the analysis demonstrated that
increasing the threshold quantity above $8 billion would have almost
no impact on the amount of swaps subject to dealer regulation until
that threshold reaches a significantly higher level. At those
levels, the effect on specific categories of swaps--notably non-
financial commodity swaps (``NFC'')--becomes much more significant.
When considering amending a rule, the Commission should consider
both the
[[Page 56692]]
benefits and costs from those rule changes. Here, data analysis has
shown that the benefits of changing the current $8 billion threshold
are relatively small because nearly all swap activity is already
covered by dealer regulation.
On the other hand, decreasing the threshold from its current
level would impose tangible costs on market participants. If the
threshold were lowered to $3 billion, unregistered dealers that are
currently under the $8 billion level, but that could exceed the $3
billion threshold, would have to re-evaluate whether swap dealing in
excess of $3 billion would continue to make business sense. The de
minimis rulemaking proposal \4\ noted that this issue is
particularly important in the NFC swap market. The staff's data
analysis showed that many of the smaller swap dealers for physical
commodities are physical commodity producers, distributors,
consumers, or merchandizers. Swap dealing is an ancillary business
for them. Where the costs of registering as a swap dealer exceed
anticipated benefits, it is likely that many of these entities would
withdraw from providing swap dealing services to their customers.
That would leave many end users looking to hedge their risks with
either no dealers available, or very few dealers to provide
competitive pricing.
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\4\ Notice of proposed rulemaking, De Minimis Exception to the
Swap Dealer Definition, 83 FR 27444 (June 12, 2018).
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The Commission should seek to preserve and foster competition
for swap dealer services. One of the fundamental purposes of the CEA
is to ``promote . . . fair competition among boards of trade, other
markets and market participants.'' \5\ American businesses
throughout the country that need to use swaps to hedge their risks
should not be forced to rely solely on large Wall Street banks.
Retaining the de minimis threshold at $8 billion will help preserve
competition and choice for American businesses for these swap
dealing services.
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\5\ 7 U.S.C. 5(b).
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It is important to note that this rulemaking represents one of
the first times in which the Commission has relied on SDR data to
set policy, and the staff that undertook this principled and
thorough analysis should be commended for their efforts. Given the
technological advancements in data collection and analysis,
effective use of data to inform policy making is critical for the
Commission to meet its policy objectives of fostering open,
transparent, competitive, and financially sound markets.
In sum, the data demonstrates that the current de minimis
threshold level is largely accomplishing its intended purposes.
Where the current regulations are working, regulatory stability also
is an important objective. Accordingly, after considering the
results of the swap data analysis, relevant policy implications, and
limited benefits and potential costs of altering the de minimis
threshold quantity, I believe that maintaining the threshold at $8
billion is appropriate and sound public policy.
Physical Commodity Swaps
The proposal noted that Commission staff encountered challenges
in measuring the aggregate gross notional amount of NFC swaps.
Instead, the staff used counterparty and transaction counts to
approximate swap dealing activity for NFC swaps. The staff's
analysis indicated that fewer NFC swap transactions--86 percent--
involved at least one registered swap dealer, as opposed to 99
percent for other swap categories.
The market participants who use physical commodity swaps to
hedge their risks typically include farmers, ranchers, farm product
processors, energy producers and consumers, manufacturers, and other
end users. These consumer-facing businesses need a properly
functioning physical commodity derivatives marketplace to maintain
consistent prices for their customers. Ultimately, the American
people benefit from stable prices on the products that these
businesses produce and distribute.
I am therefore calling on the Commission to continue to focus on
improving our data collection and analysis for NFC swaps. More
robust data collection will help us improve regulation in this
space, including considering ways to balance the benefits of de
minimis swap dealing in physical commodities with the need for
customer protections and the other benefits of swap dealer
registration.
Joint Rulemaking Required for Swap Dealer Definition
I am voting today solely in favor of setting the de minimis
exception threshold quantity at $8 billion because it is within the
Commission's authority to do so. Looking forward, however, I will
not support other amendments to the swap dealer definition without a
joint rulemaking with the SEC, as required by the Dodd-Frank Act.
In addition to setting the threshold level, the proposal sought
to alter the swap dealer definition by excluding from counting
toward that de minimis threshold: (1) Swaps entered into by an
insured depository institution (``IDI'') in connection with
originating loans; (2) swaps hedging financial or physical
positions; and (3) swaps resulting from multilateral portfolio
compression exercises. The proposal also asked questions about
excluding from the threshold calculation swaps that are cleared and/
or exchange traded and non-deliverable forwards.
Although the Commission is not adopting these provisions today,
my view is that any such changes would effectively amount to an
amendment of the swap dealer definition, not the de minimis
exception. Doing so unilaterally and not as a joint rulemaking with
the SEC would be contrary to the statutory language and inconsistent
with Congressional intent.
When Congress enacted Title VII of the Dodd-Frank Act, its
intent was clear: ``[T]he [Commission] and the [SEC], in
consultation with the Board of Governors, shall further define the
term[] . . . `swap dealer,' '' among other terms.\6\ Congress
clarified that the Commission must use the joint rulemaking process
to make any other rules regarding these definitions that it and the
SEC determine are necessary for the protection of investors.\7\ To
underscore this point, Congress noted that rules prescribed jointly
by the Commission and the SEC under Title VII must be ``comparable
to the maximum extent possible,'' and that any interpretation of, or
guidance regarding, a provision of the Dodd-Frank Act would be
effective only if issued jointly by the Commission and the SEC.\8\
Pursuant to this statutory directive, the agencies adopted a joint
rulemaking to define ``swap dealer'' and ``security-based swap
dealer.''
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\6\ Dodd-Frank Act, section 712(d)(1).
\7\ Dodd-Frank Act, section 712(d)(2)(A).
\8\ Dodd-Frank Act, section 712(d)(2)(D).
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Congress created one exception to the joint rulemaking
requirement. CEA subsection 1a(49)(D) authorizes ``the Commission''
to exempt from designation as a swap dealer ``an entity that engages
in a de minimis quantity of swap dealing'' and ``to establish
factors with respect to the making of this determination to
exempt.'' \9\ The Commission included this de minimis exception in
paragraph 4 of the swap dealer definition, notably separate from
other provisions in the definition addressing the IDI exclusion
(paragraph 5) and the physical hedging exclusion (paragraph 6).
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\9\ 7 U.S.C. 1a(49)(D) (emphasis added).
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By its terms, the de minimis exception relates solely to
exempting a numerical quantity of swap dealing activity. Under the
statutory structure, the Commission and the SEC must jointly
determine which activities are dealing activities and therefore must
be counted toward the threshold; the Commission itself may set a
numerical quantity of such dealing as a threshold for registration.
Put simply, deciding ``which'' activity gets counted must be done
jointly; deciding ``how much'' of that activity triggers the
registration requirement may be done singly.
The proposal framed these additional proposed changes to the
swap dealer definition as ``factors'' in the de minimis threshold
determination. In doing so, the proposal sought to use the
Commission's unilateral authority to ``establish factors'' as
provided in the second sentence in CEA subsection 1a(49)(D).
However, that interpretation is a misreading of the statutory
provision. The second sentence in CEA subsection 1a(49)(D)
authorizes the Commission to promulgate regulations to ``establish
factors with respect to the making of this determination to
exempt.'' \10\ The words ``this determination'' clearly refer to the
quantity determination in the first sentence of the subsection:
``[t]he Commission shall exempt from designation as a swap dealer an
entity that engages in a de minimis quantity of swap dealing in
connection with transactions with or on behalf of its customers.''
\11\ In other words, the ``factors'' referred to in the second
sentence relate to the numerical quantity determination in the first
sentence; this sentence does not create a distinct directive
authorizing the Commission to independently determine what
constitutes swap dealing.\12\
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\10\ Id.
\11\ Id. (emphasis added).
\12\ In the preamble of the SD Adopting Release, the Commission
discussed the factors envisioned by Section 1a(49)(D). For example,
the preamble provided that the Commission could consider whether the
de minimis exception would ``lead[] to an undue amount of dealing
activity to fall outside the ambit of Title VII regulatory
framework, or lead[] to inappropriate reductions in counterparty
protections (including protections for special entities).'' SD
Adopting Release, 77 FR 30635.
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[[Page 56693]]
This point is clear when we examine what would happen if each of
the five categories of swap dealing activity identified in the
proposal as ``factors'' (i.e., IDI, physical hedging, multilateral
portfolio compression exercises, cleared and/or exchange traded, and
non-deliverable forwards) were removed from the definition of swap
dealing through this interpretation of the de minimis exception.
Combined, these five categories of swaps likely total more than half
of the notional amount traded. There would appear to be no limit to
what dealing activity could be excluded from dealer regulation
through the de minimis exception by framing whole categories of
swaps to be excluded as ``factors.'' The Commission could
effectively determine unilaterally what constitutes swap dealing.
The de minimis exception would swallow the swap dealer definition.
This result cannot be reconciled with the Dodd-Frank Act's joint
rulemaking requirement.
For these reasons, while I am amenable to considering further
refinements to the swap dealer definition and what gets counted as
dealing, I am of the view that this cannot be accomplished without
joint rulemaking with the SEC.
[FR Doc. 2018-24579 Filed 11-9-18; 8:45 am]
BILLING CODE 6351-01-P