CFTC Staff Releases Preliminary Report on Swap Dealer De Minimis Exception
Commentary by Steven Lofchie
The CFTC issued a preliminary report concerning the swap dealer de minimis exception. Under CFTC rules, market participants who exceed $8 billion in gross notional swap dealing activity over a twelve-month period are required to register with the CFTC as swap dealers during the phase-in period that is in effect currently. This period is scheduled to end in December 2017, when the threshold also will fall to $3 billion, unless the CFTC takes action to amend the de minimis exception.
The preliminary report is being issued pursuant to the CFTC rules that define "swap dealer," and that direct staff to publish a report that analyzes swap data in order to assess the exception. The report discusses the background of the de minimis exception and swap dealer regulation, as well as the available swap data used in developing estimates of swap dealing activity. The report also discusses the potential effects of raising or lowering the threshold and several possible alternative approaches to the de minimis exception.
Commissioner J. Christopher Giancarlo remarked that the report is important for three reasons: (i) it confirms that the current and contemplated de minimis thresholds set by the Commission in 2012 are "completely arbitrary," (ii) it "sheds very little light on the amount of swap dealing activity being conducted today in the marketplace," and (iii) it "shows that a drop in the swap dealer registration threshold from $8 billion to $3 billion would capture a significant number of market participants causing them to either register as swap dealers or reduce services to the marketplace."
Commentary
If all of the swap dealers that are registered currently do a significant amount of business that goes beyond the threshold, then lowering the threshold for dealer registration likely will result in more firms dropping out of the market than deciding to register. In this economic/political climate, very few firms are willing to take on materially greater regulatory burdens in order to do small volumes of business.