On November 5, 2018, the US Commodity Futures Trading Commission (“CFTC”) finalized an amendment to the de minimis exception within the swap dealer (“SD”) definition (“SD Threshold Amendment”),1 which permanently sets the de minimis threshold at its current, phase-in level2 of $8 billion in aggregate gross notional amount of swap positions connected with dealing activities. The de minimis threshold for swaps with “special entities” (such as federal or state agencies, municipalities and certain employee benefit plans) remains unchanged at $25 million.
In explaining its rationale for maintaining the $8 billion threshold, the CFTC cited the high degree of regulatory coverage obtained at the $8 billion level, the potential for reduced swap market liquidity at a lower threshold (in particular for non-financial commodity swaps) and the benefits of signaling long-term stability of the de minimis threshold in order to allow for long-term planning by market participants.
The SD Threshold Amendment became effective on November 13, 2018, when it was published in the Federal Register.
Proposed Amendments Not Adopted
The CFTC decided not to adopt at this time additional amendments to the de minimis exception that it had proposed in a June 2018 notice of proposed rulemaking.3 These proposed amendments would have excluded from the de minimis count (i) certain loan-related swaps entered into by insured depository institutions (“IDIs”), (ii) certain swaps entered into to hedge financial or physical positions and (iii) swaps resulting from multilateral portfolio compression exercises (“MPCEs”).4
In the preamble of the SD Threshold Amendment, the CFTC states that it is continuing to consider issues raised by commenters with regard to the proposed amendment for loan-related swaps of IDIs. With regard to the treatment of hedging swaps, the CFTC confirmed that the “relevant facts and circumstances” test for distinguishing hedging swaps from dealing swaps, as established in the 2012 SD definition adopting release and further discussed in staff FAQ guidance,5 remains in effect, and the CFTC emphasized that market participants should continue to evaluate such swaps without consideration of the 2018 proposed hedging swap amendment to the de minimis exception. The CFTC noted that its determination not to adopt the amendment for swaps resulting from MPCEs does not affect Staff Letter 12-62, which provides no-action relief for an entity to exclude compression exercise swaps (as defined in the letter) from its de minimis count.6
The June 2018 proposal requested comment on a number of other possible changes to the de minimis exception for which it did not propose rule text.7 The CFTC did not adopt final rules or propose rule text in the SD Threshold Amendment with regard to any of these topics.
In a statement that was released at the same time as the SD Threshold Amendment,8 CFTC Chairman Giancarlo indicated that he will direct CFTC staff to continue to analyze the items raised in the June 2018 proposal and corresponding public comments. In particular, the requested staff analysis will address the feasibility of (i) removing cleared swaps from the current de minimis calculation, (ii) haircutting cleared swaps included in the current de minimis calculation, (iii) adopting a new, bifurcated de minimis calculation that uses initial margin amounts for cleared swaps and entity-netted notional amounts9 for uncleared swaps and (iv) applying other risk-based approaches that the staff may recommend. In the statement, Chairman Giancarlo reported that CFTC staff have informed him that they will consider issuing no-action relief to IDIs pending formal CFTC action, should they receive a meritorious request.
(The firm would like to thank Olivia Volpe, a summer law clerk, who assisted in drafting this Legal Update.)
1 83 Fed. Reg. 56,666 (Nov. 13, 2018); see also Press Release, CFTC Voted on Open Meeting Agenda Items (Nov. 5, 2018), https://www.cftc.gov/PressRoom/PressReleases/7835-18.
2 The de minimis exception threshold was initially set at $8 billion subject to a phase-in period, after which the threshold was intended to drop to $3 billion. Without the SD Threshold Amendment, the phase-in period would have ended on December 31, 2019, and, due to the 12-month look-back period used to calculate the aggregate gross notional amount, persons relying on the de minimis exception would have needed to begin monitoring their swap dealing activity against the $3 billion threshold from January 1, 2019.
3 See 83 Fed. Reg. 27,444 (proposed June 12, 2018).
4 The CFTC also determined it would not adopt a proposal providing that the CFTC may determine the methodology to be used to calculate the notional amount for any group, category, type or class of swaps in the de minimis test and delegating that authority to the director of the Division of Swap Dealer and Intermediary Oversight.
5 77 Fed. Reg. 30,596 (May 23, 2012); Frequently Asked Questions (FAQ)—[DSIO] Responds to FAQs About Swap Entities (Oct. 12, 2012), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf.
6 CFTC No-Action Ltr. No. 12-62 (Dec. 21, 2012).
7 These possible changes included (i) adding a minimum dealing counterparty count threshold and/or a minimum dealing transaction count threshold, (ii) establishing as a factor in the de minimis determination whether a given swap was exchange-traded and/or cleared and (iii) establishing as a factor in the de minimis determination whether a given swap is a non-deliverable forward transaction.
8 Statement of Chairman J. Christopher Giancarlo Regarding the Final Rule on Swap Dealer De Minimis Calculation (Nov. 5, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement110518.
9 See Remarks of Chairman J. Christopher Giancarlo before Derivcon 2018, New York City, New York (Feb 1, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo35, (introducing “entity-netted notionals” as a “new paradigm … designed as a means of accurate measurement of risk transfer in swaps markets”).