Concurring Statement of Commissioner Sharon Y. Bowen Regarding Order Establishing De Minimis Threshold Phase-In Termination Date Pursuant to Commission Regulation 1.3(ggg)(4)(ii)(C)(1)
October 13, 2016
While we might disagree on the details of today’s order, I think we can all agree on one thing: today’s action is very important to how the swaps industry operates and our system of financial regulation functions. If we do not accurately and appropriately set the mandatory level of trading for swap dealer registration, our entire regulatory regime for the swaps market will be weakened.
I know that a great deal has been said about the subject of the de minimis threshold, and I expect that just about everyone reviewing today’s decision to extend the current phase-in of the $3 billion threshold by one year is all-too familiar with its substance. Yet, given the amount of prior actions that the Commission has taken on this topic, I think we cannot fully consider how to view today’s action without first reviewing how we got here. Following the 2008 financial crisis, which was exacerbated by the absence of regulation of the swaps market, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among the many things in that Act were a raft of robust regulatory requirements on the swaps market, including mandatory clearing, a system of data reporting, and a mandate to trade many products on Swap Execution Facilities (SEFs).
Some of the most significant new regulatory requirements were crafted for what we now call swap dealers, those entities which had significant involvement in the swaps market.1 For instance, along with major swap participants, swap dealers were at the heart of our new regulation regarding margin for uncleared swaps and the related cross-border rulemaking. Swap dealers will similarly be substantially impacted by our upcoming rule proposal on capital.
Who has to register as a swap dealer is therefore one of the linchpins of the entire swaps regulatory regime. If the level of swap dealing activity is not sufficient to capture entities that should be registered as swap dealers, then many of our other rules, including margin and capital, will not apply to these entities, and the markets may not be adequately protected. On the other hand, if the level of swap dealing activity is too low, many entities, that do not pose a meaningful risk to the financial system, will be required to register as swap dealers, thereby unnecessarily burdening markets.
It was with this concern in mind that Congress required that we create a threshold for swap dealer registration. Dodd-Frank requires that, “The Commission shall exempt from designation as a swap dealer an entity that engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customers. The Commission shall promulgate regulations to establish factors with respect to the making of this determination to exempt.”2 We are thus required to give entities an exemption from swap dealer registration if the quantity of their swap transactions falls below a certain level.
As required, the Commission set that level in 2012. As part of a rulemaking released in May 2012, the Commission set the level of the de minimis exemption at $3 billion, with a temporary phase-in level of $8 billion during the first few years.3 The Commission also agreed to release a report within the next few years as more data from the various industry participants involved in the swaps market was reported to the CFTC.4 The Commission further committed, once nine months had passed after the report was published “and after giving due consideration to the report and any associated public comment,” to give itself three options for how to deal with the threshold.5 First, we could terminate the phase-end period and have the threshold immediately drop to $3 billion. Second, if we decided it was “necessary or appropriate in the public interest” to propose a new threshold limit, we could do so via our typical rulemaking authority.6 Third, if we failed to pursue either the first or second options before a date certain – December 31, 2017, the phase-in period would automatically and immediately end, and the threshold would simply be $3 billion.7
We have now published our final staff report on the de minimis threshold and the nine month period of considering whether to change the threshold has formally begun. I am grateful for the staff for all their hard work and appreciate that it has not been an easy undertaking. I am also grateful to market participants and the public for the comments and opinions that they have provided on the first and final drafts of the report. That said, it is clear from the report that our staff does not have sufficient data to make a fully informed decision.
Today, the Commission is augmenting our efforts to get better data on this issue by extending the phase-in period of the threshold by one year. Because of the Commission’s action, the threshold will continue to be at $8 billion until December 31, 2018. At that point, absent additional action by the Commission, the phase-in period will end and the threshold will be $3 billion.
I support this initiative to get additional data on this subject, and I do not support changing the threshold at this time. But I wish to make something clear: We need to see hard data backing up the opinions we will receive during this delay about why we should not just allow the threshold to be $3 billion as established in the rule. I know that there is a great deal of disagreement about this issue, and I do not think we will be able to reach a consensus unless we have real economic analysis and evidence to back up people’s comments. If you believe the threshold should be changed to $8 billion, or some other amount, because of market conditions, please, provide us with supporting data. Or, if you believe that the threshold should be even lower, as low as the $150 million threshold that was once contemplated, please provide us with supporting data. If we stay focused on hard, economic analysis and an objective view about the state of the market, the final determination of the threshold will be more understandable and transparent. Given the years of existing discussion and analysis and the established process the Commission has created, we would do both a disservice to the industry and to the public to change the threshold now absent strong evidence for doing so.
I am sympathetic to the concerns that there may be onerous impacts on the market just because of this threshold. We know that cleared swaps are safer than uncleared swaps, which is why we have tried to encourage increased clearing of swaps. As such, I think there is some merit to modifying the threshold in the future by exempting cleared swaps from being counted in calculations of whether a firm is above it. If market participants or observers have strong thoughts on this idea or other ways that we might help make the $3 billion threshold less arduous, I encourage you to reach out to my office and my staff.
I believe we should receive empirical data that can justify where the threshold number needs to be. I therefore expect that, near the start of 2017, we will start to collect additional data from market participants regarding those portions of the swaps market for which we still lack full and detailed information. Absent that, I will have no basis from which to change the phase-in or move the threshold to something other than $3 billion.
1 See Dodd-Frank Wall Street Reform and Consumer Protection Act [Dodd-Frank] Section 721(49)(A), available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf (“The term ‘swap dealer’ means any person who—
‘‘(i) holds itself out as a dealer in swaps;
‘‘(ii) makes a market in swaps;
‘‘(iii) regularly enters into swaps with counterparties as an ordinary course of business for its own account; or
‘‘(iv) engages in any activity causing the person to be commonly known in the trade as a dealer or market maker in swaps,
provided however, in no event shall an insured depository institution be considered to be a swap dealer to the extent it offers to enter into a swap with a customer in connection with originating a loan with that customer.”).
2 Dodd-Frank Section 721(49)(D).
3 See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant,” and “Eligible Contract Participant,” 77 Fed. Reg. 30,596 (May 23, 2012), available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2012-10562a.pdf.
4 Id. at 30,756
Last Updated: October 13, 2016