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CFTC Amends De Minimis Threshold, Proposes Changes to Swaps Trading Rules

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

The CFTC voted to adopt final rules to amend the swap dealer de minimis threshold and to propose changes to swaps trading rules.

Swap Dealer De Minimis Amendments. The final rules amend the definition of "swap dealer" in CFTC Rule 1.3 in order to set the de minimis aggregate gross notional amount threshold level at $8 billion in swap dealing activity entered into by a person over the preceding 12-month period. The current rule provides for a threshold of $3 billion, subject to a "phase-in" amount of $8 billion.

Swap Trading Proposals. The CFTC voted 4-1 (with CFTC Commissioner Dan M. Berkovitz dissenting) to propose a number of changes to its swaps trading rules. These include, among other things:

  • SEF Registration. The CFTC indicated that the proposals would require swap execution facility ("SEF") registration by certain brokerage entities, including interdealer brokers and the aggregators of single-dealer platforms. Domestic broking entities would receive a six-month delay before registration is required and foreign entities would receive two years. In addition, the proposal would codify "footnote 88," and make clear that SEF registration is required regardless of whether swaps on platform have been made "available to trade."

  • Process for Making Swaps Subject to Mandatory Trading. The process for making a swap "available to trade" would change to eliminate the existing determination process and, instead, subject to exceptions, would require trading for swaps subject to a clearing requirement and listed by an SEF or designated contract market.

  • Methods of Execution. The proposal would eliminate the requirement: (i) that an SEF offer a central order book for all listed swaps and (ii) for swaps made "available to trade," that an SEF offer a central order book or "request for quote" system to at least three participants.

  • Impartial Access. The proposal would make SEF participation criteria and trading practices more flexible to allow SEFs to have rules "that align[] with the swaps market practices."

  • Straight-through Processing. The proposal would require SEFs and derivatives clearing organizations to facilitate processing in a "prompt, efficient, and accurate manner," and establish specified timeframes for the current "as quickly as technologically practicable" standard. In addition, the proposals would codify staff guidance that requires SEFs to facilitate pre-execution credit checks.

  • SEF Personnel Requirements. The proposal would establish "proficiency requirements and conduct standards" for SEF personnel who exercise discretion.

  • Post-Trade Name Give-up. The CFTC also will publish a request for public comment as to the utility of post-trade name give-up practices where swaps are anonymously executed and intended to be cleared.

CFTC Chair J. Christopher Giancarlo stressed that the final de minimis rule is "without prejudice to all other items" in the initial proposal, and that he would direct CFTC staff to continue to analyze issues raised therein. Mr. Giancarlo gave a lengthier discussion of, and expressed support for, the swaps trading rules. In particular, he cited his own 2015 white paper making suggestions for reforms of the swaps trading rules.

As he has done before, CFTC Commissioner Brian Quintenz expressed hope that the final de minimis rule is "just the first of many necessary steps toward correcting . . . a flawed swap dealer registration policy." Similarly, Commissioner Dawn D. Stump noted "unresolved questions" to be answered regarding the de minimis threshold. Commissioners Dan Berkovitz and Rostin Behnam both supported the de minimis final rule, but expressed concerns about broader rulemaking to change the de minimis threshold. Specifically, both commissioners voiced process concerns, suggesting that the CFTC needs to further consider its statutory authority and whether it must act in concert with the SEC.

Mr. Berkovitz issued a lengthy dissent from the swaps trading proposal. He said that the proposals "would reduce competition and diminish price transparency in the swaps market." Mr. Behnam expressed a number of similar and related concerns, but voted to support the proposal in order to hear from market participants as to how to improve the CFTC SEF framework. Mr. Quintenz and Ms. Stump offered more telescoped support for the SEF proposals, with Mr. Quintenz praising Mr. Giancarlo's "thought leadership and transparency in consistently and fully articulating his vision for swaps trading rules that would create a more cohesive, liquid swap marketplace."

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