The SEC endorses proposals on swap dealers; now looks for comments; US Treasury stands by.
The Securities and Exchange Commission on Friday proposed definitions of who is and who is not a swap dealer – i.e., who will face higher capital and margin requirements. The SEC’s rules are mostly similar to the CFTC’s rules on swap dealers, which it voted on earlier in the week (see related story here).
SEC commissioners were unanimous in their support for the proposals, while the CFTC voted 3-2 for its proposals. Although the two agencies are working jointly, they are responsible for different kinds of swaps: the SEC has regulatory authority over security-based swaps while the CFTC has authority over all other swaps. The public will have 60 days in which to comment.
Like the CFTC, the SEC proposed defining criteria for what constitutes a major swap participant (MSP). One of them – a person “that maintains a ‘substantial position’ in any of the major swap categories,” is considered a major swap participant – has raised some concerns about the term “substantial position.” The SEC on Friday said it would, like the CFTC, determine whether an entity is maintaining a substantial position using two tests.
The first test sets a threshold for securities-linked derivatives at $1bn in daily average uncollateralized exposure. The proposed thresholds for the second test would be $2bn in daily average current uncollateralized exposure “plus potential future exposure in the applicable major security-based swap category.”
Once again, and importantly for treasurers and FX managers, there are the exemptions for hedging commercial risk. “The first test of the major participant definition excludes positions held for ‘hedging or mitigating commercial risk’ from the substantial position analysis,” the SEC wrote. This means using “any security-based swap position that is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, where the risks arise in the ordinary course of business from a potential change in the value of:
- assets that a person owns, produces, manufactures, processes, or merchandises;
- liabilities that a person incurs; or
- services that a person provides or purchases.
The CFTC takes a similar position, saying it proposes to determine whether a swap hedges or mitigates commercial risk “by analyzing the facts and circumstances at the time the swap is entered into, and taking into account the person’s overall hedging and risk mitigation strategies.” The proposed definition would mean any swap position that:
- qualifies as bona fide hedging under CEA rules;
- qualifies for hedging treatment under Financial Accounting Standards Board Statement No. 133; or
- is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, where the risks arise in the ordinary course of business.
Treasury watches and waits
Over the course of the rule-making process, the US Treasury has been watching, waiting and listening to derivative end-users. Currently they are reviewing comments they received in November on exempting FX swaps and forwards from Dodd-Frank. As the rules stand, the Treasury Secretary will ultimately determine whether FX swaps and forwards should be regulated as swaps and not structured to get around Dodd-Frank.
Michael Barr, assistant Treasury Secretary for financial institutions, spoke last week at a Financial Times conference in New York. According to reports, he said Treasury currently was taking a look at “thoughtful” comment letters. He would not hint as to which way the Secretary would go, however. But some think the fact that they took comments at all was a step in the right direction.