Attempting to cope with the ambitious time lines demanded by the Dodd-Frank Act, the CFTC went into high gear in December by promulgating 10 new rules. That put their total to over 40 rules related to DFA in five-month time span. To put this into perspective, prior to Dodd-Frank, the CFTC’s rulemaking averaged to only a little over 5 per year. The merits and faults of the rapidity of the CFTC’s rulemaking process has been the subject of many debates, but under current law, the deadlines stand and must be met.
December Proposed Rule Highlights
I won’t go into each and every rule that was proposed in December, but rather would like to highlight a few that I would consider very important. No, I’m not trying to trivialize the others; I just believe there are a few that are really high on many watch lists.
The Players Defined
How an entity is categorized will ultimately determine their specific regulatory requirements. Although Title VII of the Dodd-Frank Act provided basic definitions for Swap Dealer, Major Swap Participant and Eligible Contract Participant, it charged the CFTC and SEC to further define these entities.
Are You a Dealer?
The Swap Dealer definition did not really stray from what the legislators proposed. The
- Swap dealers tend to accommodate demand for swaps from other parties;
- Swap dealers are generally available to enter into swaps to facilitate other parties’ interest in entering into swaps;
- Swap dealers tend not to request that other parties propose the terms of swaps; rather, they tend to enter into swaps on their own standard terms or on terms they arrange in response to other parties’ interest; and
- Swap dealers tend to be able to arrange customized terms for swaps upon request, or to create new types of swaps at their own initiative.
If you meet the criteria, you’ll be required to register as a swap dealer. The proposed rule will permit an application to be designated as a swap dealer with respect to only specified categories of swaps or activities. So, being a swap dealer in one category of swap does not mean you are considered a swap dealer in other categories.
Pertaining to the definition of a Swap Dealer, the CFTC also established a De Minimis exemption as instructed by the DFA. In order to avoid the Swap Dealer classification an entity must satisfy all the following conditions:
- The aggregate effective notional amount, measured on a gross basis, of the swaps that the person enters into over the prior 12 months in connection with dealing activities must not exceed $100 million.
- The aggregate effective notional amount of such swaps with “special entities” (like governments) over the prior 12 months must not exceed $25 million.
- The person must not enter into swaps as a dealer with more than 15 counterparties, other than security- based swap dealers, over the prior 12 months.
- The person must not enter into more than 20 swaps as a dealer over the prior 12 months.
CFTC Chairman Gary Gensler stated that it wasn’t the intent to capture end users in the definition of swap dealers and felt that was reflected in the commission’s definition. Commissioner Scott D O'Malia brought up concerns in the energy market and whether entities currently categorized as producer/merchants will fall into the swap dealer category as a result of the rulemaking. The Commission admitted to not possessing a clear understanding of the complexity of the physical energy markets. The Commission is seeking comment from the energy sector to gain an understanding of factors that could influence the swap dealer definition.
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