CFTC Issues No-Action Relief to HBAP During Pendency of De-Registration Application (with Lofchie Comment)

The CFTC Division of Swap Dealer and Intermediary Oversight, the Division of Clearing and Risk, and the Division of Market Oversight granted no-action relief in response to a request from the Hongkong and Shanghai Banking Corporation ("HBAP") in which HBAP requested that the CFTC provide relief from the "Entity-Level and Transaction-Level Requirements . . . that may become applicable to HBAP in its capacity as a provisionally registered swap dealer" ("SD") upon the expiration of the CFTC's Exemptive Order on December 21, 2013.

HBAP submitted an application to the National Futures Association ("NFA") on December 3, 2013, to withdraw from registration as an SD, but the withdrawal from registration will not occur until January 1, 2014, a short period of time after the expiration of the CFTC's Exemptive Order. Therefore, on the same day HBAP applied to withdraw, it submitted a request for no-action relief from the "Entity-Level and Transaction-Level Requirements."

According to the CFTC, relief to HBAP is warranted, and the CFTC will not take action against HBAP for failing to comply with the Subject Swap Dealer Requirements during the period beginning December 21, 2013, and ending on the earlier of the effective date of HBAP's withdrawal of registration as an SD, or the date which the application for deregistration is withdrawn or rejected, provided that HBAP does not enter into swaps that would be counted for purposes of determining compliance with the de minimis exception under CFTC Rule 1.3(ggg)(4) ("Swap Dealer").

Lofchie Comment: The published CFTC letter does not provide any information as to why HBAP is withdrawing from the market, but one might guess that the degree and expense of CFTC regulation has made it not worthwhile for HBAP to continue participation. Assuming that to be the case, this is an example of one of the negatives of regulation: there are fewer market participants. That certainly does not prove that regulation is bad; it just demonstrates that there are costs to it. If we ignore those costs, we will end up with a market that does not function as well because, among other things, the reduced level of participants reduces liquidity and concentrates risk.

See: CFTC Letter 13-83.