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Market Participants Comment on CFTC-Proposed Amendments to Swap Dealer De Minimis Exception

nihal.patel@cwt.com's picture
Commentary by Nihal Patel

SIFMA, ISDA and FIA, among others, submitted comments regarding CFTC-proposed amendments to the de minimis exception within the swap dealer definition of the regulations. The comment period closed on Monday, August 13, 2018. The proposal (summarized here) would leave the notional threshold at $8 billion in swap dealing activity, and add certain exceptions to the types of transactions required to be counted toward the threshold.

In a joint comment letter, SIFMA and ISDA supported the maintenance of the $8 billion threshold and argued that proposed tests looking at the amounts of transactions and counterparties "would be detrimental to swap dealers that transact with smaller firms." SIFMA and ISDA recommended: (1) as to the proposed insured depository institution loan exception, removing the 90-day restriction and syndicated loan requirement; (2) as to the hedging exception, removing the requirements that users hedge "specific" risks and demonstrate that they are the "price maker" for the swap; (3) an additional exception for mandatory swap execution facility ("SEF") traded swaps resulting from portfolio compression exercises and codification of CFTC No-Action Letter 13-01 (exempting certain compression swaps from the clearing mandate); and (4) an exclusion for non-deliverable foreign exchange forwards ("NDFs") and "window" forwards for de minimis counting purposes. SIFMA and ISDA also opposed the delegation to CFTC staff to determine the methodology for the calculation of notional amounts.

Like SIFMA and ISDA, FIA also opposed the proposed delegation to CFTC staff and supported maintenance of the $8 billion threshold, eliminating the "price maker" requirement for hedging, and adding an exception for NDFs. FIA went further than SIFMA and ISDA as to cleared/exchange-traded swaps, suggesting that all cleared and/or SEF- and designated contract market-traded swaps should be excluded for de minimis purposes. The Managed Funds Association also took a similar view to FIA, arguing that all cleared swaps should be excluded from the de minimis calculation, and that such a change would be consistent with the central clearing mandate in Dodd-Frank.

A number of other trade groups also submitted comment letters urging the CFTC to maintain the de minimis threshold of at least $8 billion, including the Institute of International Bankers, the American Bankers Association, the Coalition for Derivatives End-Users, the International Energy Credit Association and the Bond Dealers of America.

Commentary

As previously noted, the CFTC rule containing an automated step-down of the de minimis threshold was a foreseeable regulatory error. It is unsurprising that the majority of commenters support leaving the threshold at $8 billion (or raising it). Commenters also largely supported the CFTC-proposed exceptions for hedging swaps and for banks entering into swaps in connection with loans (subject to modifications).

Perhaps the most interesting aspect of the comment letters is the widespread support as to two other exceptions that were not formally proposed by the CFTC. In particular, commenters generally supported adding additional de minimis exclusions for non-deliverable foreign exchange forwards and for excluding cleared and/or SEF-traded swaps. However, neither of these suggestions was formally proposed by the CFTC, and so any action on these suggestions will likely require additional notice-and-comment rulemaking (and potentially could require coordinated action with the SEC).

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