CFTC Commissioner Quintenz Urges Reconsideration of De Minimis Threshold Metrics
CFTC Commissioner Brian D. Quintenz highlighted the swap dealer de minimis rules as an example of an area that demands more nuanced regulatory consideration.
In remarks before the Smart Regulation Roundtable in Washington, DC, Commissioner Quintenz argued against a "one-size-fits-all" approach to regulation by reducing the threshold in the de minimis rule (CFTC Rule 1.3(ggg)(4)) to $3 billion (from $8 billion). Mr. Quintenz stated that such a change would create a "black hole" by encompassing entities that do not pose substantial systemic risk to the financial system (see also Commissioner Quintenz's previous remarks). He expressed concern for the high compliance costs associated with registration, citing research indicating that compliance costs for non-financial energy firms are estimated at $390 million per firm over a ten-year period. Bearing these costs, he suggested, is not feasible for smaller firms.
In terms of the de minimis amount itself, Mr. Quintenz contended that the CFTC should add further nuance in order to properly address the policy goals of dealer registration. First, he said that using swap notionals as a measurement was flawed and an "almost meaningless measure of risk." He cited as examples of potential measurements: (i) the economic exposure of a firm's swaps book, (ii) "some measure" of a firm's uncleared swap transactions, and (iii) if notionals are to continue to be used, the number of transactions and counterparties for the measuring firm.
In addition, Mr. Quintenz explained that the de minimis rules should be modified by (i) broadening the exception for insured depository institutions under CFTC Rule 1.3(ggg)(5) (in particular, removing the "artificial" time constraints as to when the swap occurs in relation to the loan), (ii) excluding cleared swaps, and (iii) treating all hedging swaps "consistently" and excluding them.
Mr. Quintenz also denounced other aspects of the CFTC approach to regulation, including the high number of no-action letters, the complicated nature of determining who is an excepted end-user, and the "nauseating web" of cross-border policies.
Commentary
It is interesting that Mr. Quintenz cites the de minimis threshold as "Exhibit A" of the problems with the CFTC approach to regulation. Unlike so many other aspects of CFTC rulemaking, the de minimis threshold is an example of a CFTC Title VII rulemaking that was accomplished with bipartisan support at the CFTC and the SEC. (Even the one CFTC commissioner who dissented from that rulemaking, Scott O'Malia, referred to the de minimis threshold as "important" and "successful" in his dissent.)
Setting aside the politics of the rules, Mr. Quintenz asks some good questions about what the rules should be. If Title VII and the dealer-registration requirement are primarily aimed at risk regulation, it does not make sense to use measurements and definitions that are not directed at risk. The treatment of cleared swaps is a particularly good example from a policy perspective. If swap dealer registration were focused on sales practices and conduct, treating cleared swaps the same as uncleared swaps might make some sense. However, if registration is primarily a risk regulation measure, the CFTC should not treat cleared swaps the same as uncleared swaps, particularly when Title VII and the CFTC have otherwise emphasized the risk-reducing benefits of central clearing.
Mr. Quintenz suggests a few directions the CFTC could go on the use of notional amounts. There are certainly better measures of risk. However, this is also a place where the CFTC might try to balance precision and simplicity. The notional measure has the benefit of being easy to calculate. Given that the de minimis threshold will be most relevant for smaller firms, any new measure should be one that does not require sophisticated measurements and compliance monitoring.
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