The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") granted time-limited, conditional no-action relief to a bank and its affiliates – allowing them to exclude certain swaps, entered into in connection with the origination of a loan, from counting towards the swap dealer registration de minimis threshold. The relief would cover all of the entities within the group for purposes of determining compliance with the de minimis registration relief, but only swaps entered into by the bank subsidiaries would be eligible for the relief.

In CFTC Letter 18-20, the DSIO required that the swaps meet the following conditions for relief:

  • the swaps are with existing loan clients of the bank;
  • each swap counterparty must be a small or medium-sized commercial entity with annual revenues of under $750 million;
  • the swaps must meet the terms of the exclusion for certain loan-related swaps of banks in paragraph 5 of the definition of "swap dealer" in CFTC Rule 1.3, except that the swap may be entered more than 180 days following origination of the related loan; and
  • the total notional of swaps excluded from the de minimis calculation may not exceed $1.5 billion during the period of the relief.

The relief runs from the date of the letter to the end of this year.

CFTC Commissioner Brian Quintenz asserted, in a related statement, that the need for the relief demonstrated that "notional value" was a "poor measure of [swap] activity and a meaningless measure of risk," and should not be used to determine whether swap dealer registration should be required. He went on to say that the relief granted was "necessary so that a Main Street bank could continue to serve the needs of its small and medium-sized commercial clients" by helping those clients alter their interest rate hedging position. He predicted that if the CFTC continues to use notional value as the swap dealer registration standard, there will be future instances of firms seeking similar types of no-action relief.

Commentary / Nihal Patel

As he has previously, Mr. Quintenz asked a good question about the CFTC approach to the de minimis threshold – that is, is it sufficiently correlated to risk? The CFTC and other market participants seem uncertain as to what would be a better risk measure than the notional amount, even if they might agree that the answer to Mr. Quintenz's question is "no." In the recent proposal to amend the de minimis threshold, the CFTC did not propose any changes to the approach of using notional amounts, although it raised questions. And as to suggested changes to instead use a number of transactions or a number of counterparties, two of the largest industry trade associations pushed back in their comments on the proposal.

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