The CFTC voted to (i) propose amendments to the swap dealer de minimis exception ("De Minimis Proposal"), (ii) propose amendments to the "Volcker Rule" regulations and (iii) adopt amendments to an indemnification provision relating to swap data repository data ("SDR") data. (The text of the rulemakings has yet to be made available on the CFTC website.)

De Minimis Proposal

According to statements made by the CFTC commissioners and staff at an open meeting of the Commission, the proposed amendments to the definition of "swap dealer" in CFTC Regulation 1.3 (f/k/a Regulation 1.3(ggg)) will:

  • leave the threshold at $8 billion (removing the automatic drop to $3 billion);
  • add exceptions for (1) swaps entered into by banks in connection with loans to customers; (2) hedging swaps; and (3) swaps resulting from compression exercises (consistent with CFTC Letter 12-62); and
  • delegate to the director of the CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") the authority to determine the methodology for calculating notional amounts.

In addition, the agency will solicit public comment on potential future proposals to (i) add exclusions from registration for persons who deal in fewer than a specified number of transactions or with a specified number of counterparties, (ii) exclude exchange-traded and/or cleared swaps from the de minimis calculation and (iii) exclude non-deliverable foreign exchange forwards from the de minimis calculation.

CFTC Commissioner Brian Quintenz (who has, on multiple occasions, strongly supported amendments to the de minimis exception) indicated his disappointment that the proposal does not move to a more risk-based measure of activity, but stressed the need for public comment on potential future proposals highlighted in the proposal. Commissioner Rostin Behnam dissented from the proposal, criticizing in particular, (i) the delegation of authority to DSIO and (ii) new exceptions for certain transactions as beyond the scope of CFTC authority to act without coordination with the SEC.

Indemnification Rule

The indemnification rule addresses issues in the CFTC regulations relating to the sharing of information with foreign counterparts. The Dodd-Frank Act contained a provision that required the relevant foreign regulator to indemnify the SDR and the CFTC as to expenses associated with the shared information. In late 2015, the FAST Act amended CEA Sections 5b(k)(5) and 21(c) to remove this requirement. The CFTC final rules follow on a proposal from January 2017 that implements the statutory changes and creates a process for other regulators receiving the shared information to satisfy the "written agreement" requirement in the amended statute.

Volcker Rule

The CFTC-proposed amendments to the Volcker Rule regulations are substantially identical to amendments recently proposed by the Board of Governors of the Federal Reserve System (as previously covered here). The vote was 2-1, with CFTC Commissioner Rostin Behnam dissenting. In particular, Mr. Behnam criticized (i) the complexity of creating different categories of institutions subject to the rules; (ii) the expansion of what constitutes hedging; and (iii) the "presumption of compliance" for certain smaller institutions. Mr. Behnam also criticized the rulemaking process, stating that he received a draft days before the vote and did not have the opportunity to provide input.

Commentary / Nihal Patel

With the de minimis proposal, the CFTC seems to be taking a generally conservative path. Rather than changing the method of calculation, the Commission is seeking to amend the regulations to keep the phase-in threshold of $8 billion. (The phase-in itself was a somewhat foreseeable regulatory error, as the automatic "phase-in" to $3 billion was in contrast to the SEC rules which require SEC action for the phase-in period to terminate.) The CFTC is also proposing a series of other changes that appear to be a mixed bag in terms of significance. The CFTC is including what is likely to be a clarifying "hedging" exception (few true "hedging" transactions are likely to be considered "dealing" under existing law), and a "compression exception" which codifies existing CFTC staff guidance. An expanded bank-loan exception would be reasonable policy, although Mr. Behnam's questions as to the statutory/process authority relating to such an exception are important.

Despite signals that it was ready to take bold action, the CFTC does not appear to be moving in a meaningful way towards a more risk-based measure of swap dealing activity. The proposal sticks with the current "pure" notional amount, notwithstanding (i) a recent CFTC study regarding "entity-netted notionals," (ii) previous comments from Commissioner Quintenz, (iii) comments from Commissioner Behnam that he is "intrigued" by the idea, and (iv) support from industry for examining alternative measures. Instead, the open meeting suggests the CFTC will grant significant authority to the staff to "interpret" notional amounts without (at least not yet) moving forward with formal changes to the methodology.

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