CFTC Commissioner O’Malia raises concerns on who is, who isn’t a swap dealer; the “scarlet” SD.
The rules need to be clearer on who is and who isn’t a swap dealer. That’s the message from Commissioner Scott O’Malia of the Commodity Futures Trading Commission (CFTC), who spoke at the agency’s “Sixth Series of Proposed Rulemakings” Wednesday. He feared that the rules as they stand could sweep many more end users than intended into the category, giving them the swap dealer label — the initials of which he called “scarlet letters.”
Earlier the CFTC had released rules “further defining” swap dealers. The proposed rules are almost an exact match of those contained in the Dodd-Frank Act. The rules from the CFTC define the term “swap dealer” as any person who:
- holds itself out as a dealer in swaps,
- makes a market in swaps,
- regularly enters into swaps with counterparties as an ordinary course of business for its own account, or
- engages in activity causing itself to be commonly known in the trade as a dealer or market- maker in swaps.
But Mr. O’Malia felt these were too broad. “I have concerns that many end users will be unintentionally swept up in the dealer definition and be subject to significantly higher costs to hedge their commercial risk,” he said in his remarks.
Mr. O’Malia went on to commend CFTC staff for their attempts to define dealers “based on the limited statutory direction.” Nonetheless, he said he would have like to see a more thorough discussion of the rules so that end users have a clear understanding of them. “They need to know whether or not their bilateral swaps activities will cross the line and earn them the dreaded scarlet letters ‘SD’ for swap dealer.”
To make sure this doesn’t happen, he encourages market participants to comment on the proposal “establishing what I perceive as a very limited de minimis standard for swap dealing conduct that will result in few exemptions.”
After reviewing the public comments, Mr. O’Malia said he hoped the final swap dealer rule would be “significantly improved” by providing end users “greater specificity to the dealer definition, and considerably narrowing the definition to focus only on those entities that perform traditional dealer roles.”
This public comment period would effectively delay this particular set of rulemakings, which the CFTC was willing to do (although they are still required to be finished with all rules by July 2011). But the delay in this case was necessary, Mr. O’Malia said. “I believe, at the end of the day, the draft proposal will be better informed after receiving public input prior to publication of the draft proposal.”