The Commodity Futures Trading Commission (CFTC) is mulling whether to reverse a phase-in period now in progress that lowers the threshold over which companies trading swaps must register as swap dealers, an outcome routine swap users roundly reject.
Pursuant to statutory requirements laid out in the Dodd-Frank Act, the CFTC issued regulations requiring institutions with annual gross notional swap activity greater than $8 billion to register as swap dealers, and that de minimis threshold gradually drops to $3 billion by the end of 2017. The agency issued a preliminary report in November asking for feedback about the threshold.
“The Commissions acknowledged at the time they adopted the definition of the term ‘swap dealer’ and the attendant de minimis exception that they were relying on the limited data available at that time regarding the swap market, as it then existed, to guide their determinations,” the report says.
CFTC Chairman Timothy Massad noted in speech in early February before the Commodity Markets Council that the staff report aims to start the conversation by exploring the issue and inviting public comment on the data.
“We will now begin the process of carefully studying the feedback we’ve received, producing a final report, and making a decision on what, if any, action to take,” Mr. Massad said. The preliminary report asks for market feedback on the threshold levels. The upwards of 30 comment letters it received, typically from companies and industry groups, mostly recommended maintaining the current minimum or at least delaying the phase-in period while the regulator consider the comment-letter feedback.
“We urge the Commission to follow clear Congressional intent and promptly draft an interim final rule that makes clear that the swap dealer de minimis exception threshold shall remain at the $8 billion gross notional level or be raised,” wrote the Coalition for Derivative End-Users, which represents mainly corporates using derivatives to mitigate risk.
The Coalition’s letter says businesses ranging from manufacturing to healthcare to agriculture to energy use derivatives to improve their planning and forecasting and offer more stable economic growth and prices to consumers. Many end-users choose a diverse group of counterparties including smaller market participants, which would be impacted by the lower threshold, in order to find competitive pricing and to spread credit exposure over several counterparties, the letter says. It adds that they would have to register swap dealers or, more likely, reduce their available products and services.
“Any decrease from the current threshold would likely cause a further consolidation of swap dealing activities, reducing competitiveness and potentially increasing risk,” the letter says. “Such changes to the market would reduce liquidity to end-users, reduce counterparty selection and increase interconnectedness of counterparties—results that run contrary to the goals of the Dodd-Frank Act.”
Dropping the threshold to $3 billion could have an impact beyond the commodity realm. Western Union Business Solutions (WUBS) noted in its comment letter that it provides currency exchange and international payment services for business customers. It enters into derivative transactions with those customers to help them manage their foreign-exchange risks and bring predictability to their cross-border payment needs, a service WUBS views as a key component of its business offering.
“Establishing a lower de minimis threshold for the FX asset class would further restrict WUBS’ ability to engage in limited swap dealing activity in connection with the client services it offers,” its letter says, contrary to one of the CFTC’s stated policy objective of allowing end-users such as WUBS to continue transacting within existing business relationships.