Streetwise Professor Says Swap Dealer Threshold Has "De Minimis Logic"
Commentary by Steven Lofchie
Responding to CFTC Chair Timothy Massad's recent announcement to delay the swap dealer de minimis threshold, University of Houston Finance Professor Craig Pirrong contended that the swap de minimis threshold is "a classic analysis of inefficient law."
Professor Pirrong stated that "there is a large fixed cost to become a swap dealer." Such a cost reduces competition and increases concentration in the swap market by presenting a barrier for small and medium-sized firms to become swap dealers.
Second, Mr. Pirrong stated that the rationale for the swap dealer designation is to reduce risk through the obligations to clear, to margin non-cleared swaps, and to hold more capital (the national amount). He argued that the notional amount "is a truly awful measure of risk" and "does not match up with risk in a discriminating way." He noted that "turnover doesn't measure risk very well either."
Professor Pirrong concluded that Chair Massad "has delayed implementation of a regulation that will do the opposite of some of the things it is intended to do, and merely fails to do other things it is supposed to do."
Commentary
From a systemic risk standpoint, not only is lowering the dealer threshold largely irrelevant, in fact, the regulators likely could raise the dealer threshold materially without significantly increasing the percentage of swaps dealer business that is done by unregulated firms. Lowering the dealer threshold is less likely to cause more firms to register than it is to cause more firms either to reduce their level of business or to drop out of swaps dealing entirely, thus both reducing the number of dealers in the market and depriving the smaller (mostly bank) dealers of a business opportunity.
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