Why dealers agree on swap dealer registration threshold

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WASHINGTON — Dealer groups want the Commodity Futures Trading Commission to set the threshold at which a firm would have to register as a swap dealer at $8 billion of swap activity in order to avoid crowding out some participants.

The CFTC is proposing to permanently set the de minimis threshold at $8 billion of activity over the prior 12 months, a recommendation supported by the commission staff as well as the industry.

The issue is important because any firm doing more swap business than the de minimis amount must register with the CFTC as a swap dealer and become subject to a whole additional regulatory regime on top of the one governing securities dealers.
Absent permanent rulemaking proposed in June, the threshold is set to drop to $3 billion on Dec. 31, 2019. Both the Bond Dealers of America and the Securities Industry and Financial Markets Association made known in comment letters that they want the threshold set at $8 billion.

The proposal would leave unchanged the $25 million de minimis registration threshold for swaps with special entities, which include state and local governments, but could still impact firms that work in the muni space.

BDA Chief Executive Officer Mike Nicholas told the CFTC that the commission’s own analysis pointed out that dropping the threshold wouldn’t meaningfully increase the percentage of swap activity covered by regulation. Instead, Nicholas wrote, it would just hurt mid-size firms and drive them out of the swap business entirely.

“The de minimis threshold level acts like a cap on activity because the cost of becoming a swap dealer is too high to warrant a firm that has dealing activity with swaps between $3 and $8 billion (a ‘mid-sized firm’) to become a registered swap dealer,” Nicholas wrote. “A mid-sized firm’s costs increase significantly when registration is required, however its marginal revenue only increases slightly. When faced with the choice of registering as a swap dealer or reducing the size of business to stay under the de minimis threshold level, we believe all mid-sized firms will choose to cap their business.”

Though it has been around since 1974, the CFTC like many other regulatory agencies was tasked with creating new regulations following the passage of the Dodd-Frank Act in 2010. At that time, the commission became responsible for creating a new regulatory regime for swaps.

While the Securities and Exchange Commission regulates security-based swaps, the CFTC regulates the derivatives most common in the municipal market.

The Municipal Securities Rulemaking Board released an “issue brief” in April explaining the regulation of muni swaps, but market participants questioned why the board was spending its time on the CFTC’s turf.

The swaps market has drawn renewed interest in recent months due to speculation that swap activity in the muni market could increase due to tax reform legislation that eliminated the ability of municipal issuers to advance refund their outstanding bonds.

SIFMA authored a joint letter with the International Swaps and Derivatives Association, also urging the CFTC to make permanent the $8 billion threshold.

“Maintaining the de minimis threshold is the right outcome to ensure that banks and dealers can continue meeting their clients' risk management needs,” SIFMA and ISDA wrote.

The two groups also urged the CFTC not to adopt any possible alternate thresholds based on the number of swap transactions or the number of counterparties the firm entered into deals with. Such concepts were analyzed, but not endorsed, in a previous CFTC report.

“Smaller firms tend to enter into more transactions (but in smaller notional amounts per transactions) or tend to do business with a large number of counterparties in smaller notional amounts per transaction,” wrote SIFMA and ISDA.

The CFTC indicated that it hopes to finalize new rulemaking before the end of the year.

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Securities law Dodd-Frank SEC regulations Financial regulations BDA SIFMA CFTC SEC MSRB Washington DC