CFTC commissioner Christopher Giancarlo has criticised the regulator for failing to take steps to eliminate an automatic drop in the threshold used to calculate swap dealer registration requirements due to take effect in December 2017, or at least to extend the existing arrangements.
Under current rules, participants with outstanding swaps notional exposures below US$8bn are exempt from swap dealer registration, but the “de minimis” threshold is set to fall to just US$3bn at the end of next year, potentially bringing swathes of non-financial counterparties under the regulatory microscope.
Giancarlo slammed a CFTC staff report on the topic published this month, expressing disappointment that the Commission had not acted to eliminate or extend the automatic phase-in.
“Given that the Commission has provided no clarity to the marketplace of its intention with respect to the de minimis threshold, market participants have no practical choice but to prepare for the threshold lowering to US$3bn,” Giancarlo said. “Their efforts would be a waste of time and energy if the commission ultimately decides a difference outcome.”
According to the report, the number of entities caught in the net is set to increase by 84 to 229 as a result of the threshold change. The total notional amount of interest rate and credit default swaps captured, however, rises by just US$365bn, or 0.25%.
With a 12-month look-back for determining the threshold, counterparties require clarification on the CFTC’s intention by the end of this year, when the clock starts ticking on the calculation of exposures. That could be a tall order given November’s presidential election and a fast-closing rule-making window.
“The rule-making agenda tends to slow before a new administration and the Commission typically doesn’t try to tackle something controversial or new. We’ve recently seen a flurry of activity, but it has mainly been extensions to no-action relief or codifying of existing relief,” said Julian Hammar, derivatives lawyer at law firm Morrison & Foerster.
“There are only a few months left to tackle something more significant and issues like position limits, capital rules and the de minimis threshold are major topics.”
Cross-border priority
CFTC chairman Timothy Massad has already emphasised the cross-border reach of Dodd Frank rules as a primary goal for the remainder of his office.
Earlier this month, the Commission extended no-action relief for non-US counterparties that arrange, negotiate or execute swaps transactions on US soil, exempting them from certain transaction-level requirements for another 12 months.
While the protection against enforcement action expires in September 2017, the US swaps regulator intends to present final proposals for new rules in the coming months.
“This fall I intend to ask the Commission to consider a rule to begin to address the ‘arrange, negotiate, or execute’ issues raised by the no-action relief that we have extended,” Massad said in a recent statement on the overseas application of swaps rules.
The fact that a well-supported blueprint already exists in the form of SEC cross-border rules for security-based swaps may help the passage of corresponding CFTC rules. With just over two months until the election, the CFTC has already reduced the public comment period from 60 days to just 30 days for some proposals.
Industry participants are hoping the CFTC will take a lead from the SEC, which has taken a more measured approach to extraterritorial rules for security-based swaps.
“When it comes to swaps versus security-based swaps, people want to see the regimes as close as they can possibly be, but that’s not currently the case,” said Hammar. “People like consistency; they want to run one system rather than two systems, so the industry may want the CFTC to follow the SEC’s lead.”
The SEC subjects overseas entities trading swaps on US soil to business conduct and reporting rules and where foreign regulatory regimes are deemed similar, substituted compliance can be used. Under the original proposals, the CFTC determines substituted compliance on a rule-by-rule basis.