Dissenting Statement of Commissioner Rostin Behnam on De Minimis Exception to the Swap Dealer Definition - Swaps Entered into by Insured Depository Institutions in Connection with Loans to Customers
March 25, 2019
I respectfully dissent from the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) decision today regarding the application of the swap dealer definition to insured depository institutions (“IDIs”). The Commission’s eagerness to bypass clear Congressional intent in order to address longstanding concerns with the original implementation of the statutory exclusion from the swap dealer definition for IDIs, only to the extent they offer to enter swaps transactions in connection with originating customer loans (the “IDI Swap Dealing Exclusion”), creates risks and uncertainties that may harm the very financial institutions that the new rule purports to help. By exercising its De Minimis Exception Authority to create as a “factor” whether a given swap has specified characteristics of swaps entered into by IDIs in connection with customer loans, the Commission is creating a new regulatory exemption that intentionally and entirely subsumes the IDI Swap Dealing Exclusion in defiance of conferred regulatory authority. Moreover, not only does this novel exercise in agency discretion undermine the swap dealer definition, but it exemplifies the current Commission’s rush to implement sweeping changes to the regulation of swap dealers without regard for the long term consequences of its capricious interpretation of the law and arbitrary analysis of risk.
During the proposal for today’s final rule,  I expressed grave concerns with the Commission’s use of its De Minimis Exception Authority to redefine swap dealing activity absent a meaningful collaboration and joint rulemaking with the Securities and Exchange Commission (“SEC”), as required by the Dodd-Frank Act. I was concerned that the Commission’s decision put it at risk of challenge, and concerned that the introduction of an IDI De Minimis Provision that de facto defines the universe of swap dealing activity for all IDIs and then wholly exempts such activity from counting towards only one of two applicable aggregate gross notional registration thresholds was neither efficient nor fair when compared to the absolute protections that could be provided by an appropriately amended IDI Swap Dealing Exclusion.
During the Notice of Proposed Rulemaking and through the finalization of the rule setting the de minimis exception at an aggregate gross notional amount (AGNA) threshold of $8 billion in swap dealing activity, I urged the Commission to act within our delegated authority and work with the SEC to amend the IDI Swap Dealing Exclusion.  Instead, under the guise of harmonization efforts, in December 2018, the Chairmen of our two independent agencies independently and irrespectively of their fellow Commissioners’ views issued a joint statement regarding the “IDI Exception to the Swap Dealer Definition.”  In purporting to provide greater clarity, they stated, in part, that, “[O]ur Commissions have not interpreted the joint rulemaking provisions of the Dodd-Frank act to require joint rulemaking with respect to the de minimis exception to the swap dealer definition, including an exception for a de minimis quantity of swaps entered into by IDIs in connection with loans.” While I agree that the CFTC has delegated authority to exercise its De Minimis Exception Authority under section 1a (49)(D) of the Commodity Exchange Act (“CEA” or the “Act”), this authority is not open-ended and cannot be interpreted to conflict with the clear Congressional directives regarding the exclusion set forth in the swap dealer definition in CEA section 1a(49)(A). Congress clearly did not confer the authority in CEA section 1a(49)(D) so that the CFTC would have free-flowing regulatory authority to determine the scope of the Dodd-Frank Act’s regulatory coverage with regard to an entire segment of the swap dealing population. Moreover, by viewing CEA section 1a(49)(D) as a blank-check for creating exemptions and exceptions that de facto alter the swap dealer definition, the Chairmen—and now the Commissions—are depriving IDIs of legal certainty and benefits of an exclusion.
I believe that IDIs deserve the fullest application of the exclusion provided by Congress in CEA section 1a(49)(A); not an exemption or exception that puts them within the crosshairs of future Commission action should political headwinds or shifting policy dispose it to again alter the rules or its interpretation of the CEA. I think the Commission should have worked with the SEC to jointly amend the IDI Swap Dealing Exclusion to more accurately address swap activities inherent to credit risk management encompassed by loan origination in the commercial lending space. And, I think the Commission should have considered alternative forms of relief that neither disturb the IDI Swap Dealing Exclusion nor require use of the De Minimis Exception Authority to reduce regulatory burdens of IDIs. By prioritizing shifting policy over regulatory implementation, the Commission acted impulsively, inviting risk and depriving IDIs and other affected parties the legal certainty and clarity intended by Congress.
IDIs Shall Not Be Considered Swap Dealers…
Section 1a(49)(A) of the CEA generally defines the term “swap dealer” to mean:
[A]ny person who—(i) holds itself out as a dealer in swaps; (ii) makes a market in swaps; (iii) regularly enters into swaps with counterparties in the 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.
As recognized by the Commission when first interpreting this language in a joint rulemaking with the SEC in 2012, as required by the Dodd-Frank Act, the statute “does not exclude any category of persons from coverage of the dealer definitions; rather it excludes certain activities from the dealer analysis.” Consistent with this understanding, in analyzing the breadth of the language relevant to IDIs, the CFTC and SEC recognized that the statute’s direct reference to “originating” the loan precluded it from “constru[ing] the exclusion as applying to all swaps entered between an IDI and a borrower at any time during the duration of the loan,” explaining, “If this were the intended scope of the statutory exclusion, there would be no reason for the text to focus on swaps in connection with ‘originating’ a loan.”
The CFTC and SEC understood that the Dodd-Frank Act did not entirely carve IDIs out from coverage of the swap dealer definition. Rather, Congress intended that, to the extent IDIs engage in certain swap activities with their customers related to loan origination, as interpreted by the CFTC jointly with the SEC, such activities would not be included in determining whether an individual IDI is a swap dealer. Critical to today’s decision, the Commissions understood that Congress clearly and specifically stated that the swap activities of IDIs with their customers in connection with originating loans were to be addressed by the Commissions jointly, and through an exclusion from the dealer definition, and not through each agency’s authority with respect to de minimis levels of swap dealing activity. The plain meaning is that the CFTC is not free to interpret its De Minimis Exception Authority as a means to unilaterally redefine IDI swap activities with customers in connection with loan origination as dealing activities to be wholly “factored” out of the $8 billion AGNA de minimis threshold calculation. The CFTC does not have a blank check.
Put simply, in this context where the CFTC is seeking to address swap dealing activities by IDIs, section 712(d) of the Dodd-Frank Act only authorizes the CFTC to act independently when determining which IDIs to exempt from a swap dealer designation based solely on the quantity of dealing activity outside of such activity that falls within CEA section 1a(49)(A), and to establish factors in connection with establishing this quantitative determination. Congress clearly intended for the de minimis exemption to be a quantity based exemption, and not an exemption that also considers the characteristics of swap dealing activity as a means to create categorical exclusions, which is what the Commission is doing today for swaps entered by IDIs in connection with commercial loans.
The CFTC’s newly minted interpretation of the De Minimis Exception Authority in CEA section 1a(49)(D) in support of its unilateral ability to address swap activities as “factors” in a quantitative determination of de minimis swap dealing activity for registration purposes is a clever attempt to justify its decision to avoid productively collaborating with the SEC. However, this new interpretation is as an inexplicable departure from prior Commission interpretation and unsupported by the plain language of the statute.
Not only is the CFTC legally hamstrung from its chosen path, but its action today creates redundancy and inefficiencies in our rules. Because swap activities between IDIs and their customers in connection with originating loans were never intended to be swap dealing activity warranting swap dealer registration, it is odd to say that swap activities between IDIs and their customers in connection with originating loans are exceptions to the threshold test for swap dealer registration.  The IDI De Minimis Provision created today presupposes that what it exempts from counting towards the $8 billion AGNA de minimis threshold calculation are activities that are otherwise within the scope of the swap dealer definition. But, the Commission created the need for the exception, i.e. it defined “swap dealing” activities, when it determined to treat the IDI Swap Dealing Exclusion as immutable. The CFTC and SEC could have dodged further interpretive risk and inefficient application of the swap dealer definition and avoided considering the application of a de minimis threshold to the swaps activities at issue had the agencies jointly addressed the existing conditions of the IDI Swap Dealing Exclusion that fail to address the spectrum of swap activities typically engaged in with respect to the ongoing credit risk management associated with loan origination.
Risk Beyond Inefficiencies
Beyond the procedural and interpretive issues that call the Commission’s action into question, several requirements of the IDI De Minimis Provision push its coverage well beyond swap dealing activities in connection with loan origination that it purports to address. Rather, the Commission drafted the IDI De Minimis Provision to encompass any and all swaps entered into with customers in connection with loans to those customers with the effect that, despite classifying such swaps as dealing activity, they—and the market facing swaps used to hedge them—need not be counted towards the $8 billion AGNA de minimis threshold calculation. The end result being that IDIs, contrary to Congressional intent, will not have to register as swap dealers to the extent they engage in swaps with their loan customers during the lifetime of the loan. To be clear, had Congress wanted the prudential regulators to provide the sole oversight for IDIs to the extent they engaged in swap dealing activities with customers, it would not have included the exclusionary language for IDIs in CEA section 1a(49)(A) and would have clearly articulated this intent elsewhere in the Dodd-Frank Act.
With the purported goal of promoting greater use of swaps in hedging strategies to reduce business risk, and ultimately reducing the need for banks to turn away end-user client demand for swaps that would cut into their adjusted gross notional ancillary swap dealing activity subject to the $8 billion AGNA de minimis threshold, the IDI De Minimis Provision: (1) includes no timing restrictions following loan execution or commitment on when a swap must be entered to be in connection with originating a loan; (2) requires only that a swap be permissible under the IDIs loan underwriting criteria so as to permit greater use of swaps in “effective and dynamic hedging strategies” during the borrowing relationship, as opposed to mirroring the statute’s clear intent of addressing swaps in connection with loan origination; and (3) permits an unlimited adjusted gross notional amount of loan-related swaps to be entered, regardless of the principal loan amount outstanding. These requirements—or lack thereof—will permit IDIs to engage in an unlimited and indeterminate level of swap dealing with customers throughout the lifetime of a loan and without having to count such activities towards the $8 billion AGNA de minimis threshold.
While the Commission believes that the swap dealing activity to be covered by the IDI De Minimis Provision in total does not raise systemic risk concerns, it has made no effort to quantify or qualify how this indeterminate level of swap dealing activity may affect the risk profile of the individual IDIs who each would potentially be subject to swap dealer registration. The Commission simply assumes that the overall risk attributed to the community of small and mid-sized IDIs it has currently identified does not and will not in the future raise systemic risk concerns. With this in mind, it is worth articulating that despite suggestions that this relief is surgically targeted to help “small and midsize” banks, it can in fact be utilized by banks of all sizes, including those that may be systemically risky. I do not mean to suggest at all that size should be deterministic of which financial entities can avail themselves of relief intended for all IDIs; however, taken in context of the unrestricted nature of the rule before the Commission today, as it relates to the relationship between swaps activity and loan origination, I am extremely concerned about what systemic risks may arise as a result from these unrestricted activities.
The Commission, in part, is punting to prudential regulatory oversight and supervision to ensure that the IDI De Minimis Provision will not lead to a significant expansion of swap dealing activity by unregistered entities, as compared to the overall size of the swap market and not on an individual IDI basis. The Commission should always consider and rely on the risk mitigating effects of prudential oversight when evaluating its approach to swap dealer regulation. However, where Congress clearly dictated that the CFTC primarily regulate certain swap dealing activities, the Commission cannot be so quick to completely defer. Indeed, it is astonishing that the IDI De Minimis Provision lacks any requirements to demonstrate compliance or adherence to the Provision with respect to any particular swap or otherwise. As the current swap data reporting rules (parts 43 and 45 of the Commission’s regulations) do not require IDIs or any entity to indicate whether a particular swap is within the IDI Swap Dealing Exclusion or will be subject to the IDI De Minimis Provision, the Commission will ultimately rely on its enforcement authority to determine whether an IDI can demonstrate why it is not required to register if its adjusted gross notional amount of swap dealing activity appears to exceed the $8 billion AGNA de minimis threshold. This cannot be the most efficient use of anyone’s resources.
Missed Opportunities and Alternatives
In its efforts to avoid improving the swap dealer definition for the limited purpose of addressing longstanding concerns with the IDI Swap Dealing Exclusion, the Commission missed an opportunity to engage with the SEC and prudential regulators to strategically fix those aspects of the Exclusion that fail to address the realities and practicalities of the IDI swap activities connected to loan origination, which Congress intended our agencies to address. In reviewing the record, it is clear, for example, that the timing parameters in subparagraph (i)(A) of the IDI Swap Dealing Exclusion may be too restrictive and do not correspond to the reality of an ongoing relationship between an IDI and a customer commonly associated with loan origination. Historically, and in comments to the IDI De Minimis Proposals, IDIs have provided compelling arguments in support of permitting the termination date of a swap to extend beyond the termination date of the related loan. The Commission declined to include “that much flexibility” in the duration requirement of IDI De Minimis Provision due to the added complexity and potential for abuse. However, it seems that the Commission could have sought—and may still seek—the expertise of the prudential regulators to evaluate the merits of these arguments for consideration in amending the IDI Swap Dealing Exclusion.
In response to Chairman Giancarlo’s statement that Commission staff would consider no-action relief for IDIs pending formal Commission action on the proposal for the IDI De Minimis Provision, the Commission received at least two requests. I believe these requests presented opportunities for a consensus path forward. Given current market uncertainties, data challenges, legal risks, and ambitious policy changes, Commission staff could have: (1) granted temporary no-action relief consistent with the parameters of the requests—none of which were so inconsistent with the NPRM or policy considerations at issue as to raise additional concerns; (2) committed to completing a data-driven, economic analysis of the foreseeable impacts of the various requirements of the IDI de Minimis Provision and any related systemic risks; and (3) proceeded to engage with the SEC and prudential regulators towards a joint rulemaking to amend the IDI Swap Dealing Exclusion as directed by Congress.
Albert Einstein said that, “A clever person solves a problem. A wise person avoids it.” There is no doubt that the Commission was clever in choosing to address longstanding concerns that the IDI Swap Dealing Exclusion is unnecessarily restrictive, lacks clarity, and limits the ability of IDIs to serve their loan customers through the unilateral exercise of its authority with respect to the de minimis exception. However, there is also little doubt in my mind that being clever does not make one correct. The uncertainties embodied in the IDI De Minimis Provision deprive IDIs and their customers the legal certainty and clarity intended by Congress, and may result in increased risk for market participants and uncertain impact on systemic risk to the financial system. The Commission would have been wise to avoid creating this rambling IDI exemption that will now sit awkwardly beside the IDI Swap Dealing Exclusion in the Commission regulations. These regulations are a marker of our inability to engage and harmonize with our fellow regulators towards a more practical and legally sound solution. As an independent agency, the Commission should use its expertise to act within its authority; and not abuse ill-defined powers to create loopholes. Our agencies are better than that. And more importantly, our stakeholders deserve it.
 See 17 CFR 1.3 swap dealer, paragraph (4)(v), providing that the Commission may by rule or regulation change the requirements of the de minimis exception described in paragraphs (4)(i) through (iv) (“De Minimis Exception Authority”).
 De Minimis Exception to the Swap Dealer Definition, 83 FR 27444, 27481-2 (proposed June 12, 2018) (“Notice of Proposed Rulemaking” or “NPRM”).
 See The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 § 712(a) and (d), 124 Stat. 1376, 1644 (2010) (the “Dodd-Frank Act”).
 See, e.g. De Minimis Exception to the Swap Dealer Definition, 83 FR 56666, 56691 (Nov. 13, 2018).
 J. Christopher Giancarlo, Chairman, CFTC and Jay Clayton, Chairman, SEC, Joint Statement from Chairmen Giancarlo and Clayton on the IDI Exception to the Swap Dealer Definition (Dec. 13, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement121318.
 Congress clearly understood that IDIs are subject to prudential regulation and anticipated that depository institutions generally could be required to register as swap dealers regardless of such status. See 7 U.S.C. 6s(c)(1) (providing that any person that is required to be registered as a swap dealer shall register with the CFTC regardless of whether the person also is a depository institution or is registered with the SEC as a security-based swap dealer).
 For example, given the default presumption of full swap dealer designation, it is unclear as to whether and how the CFTC might exercise its authority to grant a limited purpose swap dealer designation under CEA section 1a(49)(B) and CFTC regulation 1.3 Swap dealer, paragraph 3 to an IDI that is required to register as a swap dealer for swap dealing activities that do not meet the IDI De Minimis Provision, but may meet the IDI Swap Dealing Exclusion. See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” 77 FR 30596, 30644-46, (May 23, 2012) (“SD Definition Adopting Release”).
 For example, the Commissions could have, in consultation with the prudential regulators, reconsidered their interpretation of what Congress meant by “loan origination” in the context of the credit risk management relationship and extended, conditioned, or removed the IDI Swap Dealing Exclusion’s requirement that an IDI enter into a swap within 180 days after the execution of the loan agreement (or date of transfer of principal to the customer) (17 CFR 1.3 Swap dealer, paragraph (5)(i)(A)) to more accurately address how customers actively manage loan-related risk. Similarly, the Commissions could have more fully analyzed whether and under what circumstances permitting the termination date of a swap to extend beyond the termination date of the related loan could bear an appropriate relationship to loan origination.
 For example, the CFTC could consider permitting IDIs that register as swap dealers to demonstrate compliance with their prudential regulatory requirements as a substitute for comparable CFTC swap dealer regulations.
 7 U.S.C. 1a(49)(A) (emphasis added).
 Dodd-Frank Act at § 712(d).
 SD Definition Adopting Release, 77 FR at 30619-20. As acknowledged by the two Commissions:
In this regard, it is significant that the exceptions in the dealer definitions depend on whether a person engages in certain types of swap or security-based swap activity, not on other characteristics of the person. That is, the exceptions apply for swaps between an insured depository institution and its customers in connection with originating loans, swaps or security-based swaps entered into not as a part of a regular business, and swap or security-based swap dealing that is below a de minimis level. SD Definition Adopting Release, 77 FR at 30619.
 SD Definition Adopting Release, 77 FR at 30621-2.
 See Dodd-Frank Act, supra note 3.
 See SD Definition Adopting Release, 77 FR at 30619, supra note 13 (in addition to recognizing that the statutory exceptions to the dealer definitions are activities-based, the CFTC and SEC also understood the differentiation between the exceptions available for swaps between an IDI and its customers in connection with originating loans and for swap or security-based swap dealing that is below a de minimis level).
 See Larry M. Eig, Cong. Research Serv., 97-589, Statutory Interpretation: General Principles and Recent Trends 18 (2014) (it is assumed that Congress speaks to major issues directly: “Congress…does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not … hide elephants in mouseholes.” (quoting Whitman v. American Trucking Ass’ns, Inc., 531 U.S. 457, 468 (2001))).; See also, e.g. Lamie v. U.S. Trustee, 540 U.S. 526, 538 (2004) (“There is a basic difference between filling a gap left by Congress’ silence and rewriting rules that Congress has affirmatively and specifically enacted.” (quoting Mobil Oil. Corp. v. Higginbottom, 468 U.S. 618, 625 (1978))).
 See, e.g. Neomi Rao, Address at the Brookings Institution: What’s next for Trump’s regulatory agenda: A conversation with OIRA Administrator Neomi Rao (Jan. 26, 2018), Transcript at 10 (“…agencies should not act as though they have a blank check from congress to make law.”), available at https://www.brookings.edu/wp-content/uploads/2018/01/es_20180126_oira_transcript.pdf.
 See 83 FR at 56692-3.
 See, e.g., Frederick Schauer, Exceptions, 58 U. Chi. L. Rev. 871, 874-5 877 (1991) (explaining the expectation that exceptions are generally built into the meaning of a primary technical term such that it is odd to say, for example, that foul balls are exceptions to the rule defining home runs because foul balls are not home runs in the first place).
 Not only is this far from efficient, it is a burden. In determining how to exercise its authority, a federal agency should not create solutions in search of problems. See, e.g. Neomi Rao, supra note 18 at 10.
 See Larry M. Eig, supra note 17 at 3, 14-15 (explaining the basic principles that statutory language should be construed to give effect to all its provisions).
 See Final Rule, De Minimis Exception to the Swap Dealer Definition - Swaps Entered into by Insured Depository Institutions in Connection with Loans to Customers, section II.B.3. (to be codified at 17 CFR pt. 1).
 Similarly, it is not clear to me that supplementary ISDA protocols are an appropriate substitute for the customer protections afforded under the external business conduct rules applicable to swap dealers. See Final Rule, De Minimis Exception to the Swap Dealer Definition - Swaps Entered into by Insured Depository Institutions in Connection with Loans to Customers, section III.C.1. (to be codified at 17 CFR pt. 1).
 This seems inconsistent with the Commission’s treatment of exemptions in other registration categories. For example, CFTC regulation 4.13(a)(3) provides an exemption from commodity pool operator (CPO) registration for an operator that, among other requirements, meets one of two “de minimis” tests with respect to each individual pool for which it claims an exemption. To claim the exemption, the CPO must file an initial electronic notice of exemption with the National Futures Association. Thereafter, the CPO must annually reaffirm its reliance on the exemption. See 17 CFR 4.13(b). Among other things, CFTC regulation 4.13(c) requires each person who has filed a notice of exemption from registration to make and keep records and submit to special calls by the Commission to demonstrate compliance with the applicable criteria for the exemption. In contrast, with regard to the IDI De Minimis Provision, the Commission suggests that “it would be good practice for an IDI to note and track all loans for which the IDI De Minimis Provision applies to be able to demonstrate” compliance. Final Rule, De Minimis Exception to the Swap Dealer Definition - Swaps Entered into by Insured Depository Institutions in Connection with Loans to Customers, section II.C.6.(iii) (to be codified at 17 CFR pt. 1).
 See, e.g. Swap Dealer De Minimis Exception Final Staff Report at 17 (Aug.15, 2016), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/dfreport_sddeminis081516.pdf; Final Rule, De Minimis Exception to the Swap Dealer Definition - Swaps Entered into by Insured Depository Institutions in Connection with Loans to Customers, section II. B. 4. (to be codified at 17 CFR pt. 1).
 83 FR at 56690.