Public Statements & Remarks

Dissenting Statement of Commissioner Dan M. Berkovitz

“Proposed Rule” and “Request for Additional Comment” on Capital Requirements of Swap Dealers and Major Swap Participants

December 10, 2019

I dissent from the document that is called a “Proposed Rule” on the Capital Requirements of Swap Dealers and Major Swap Participants (the “Document”).  My objections are both procedural and substantive.  Procedurally, the Document asks many open ended questions, is vague about what is being proposed, and lacks sufficient supporting data to serve as the basis for a final rule under the Administrative Procedure Act (“APA”).[1]  The Document as structured is not a proposal that can lead to a final rule; rather it appears to be more in the nature of an advance notice of proposed rulemaking.

Substantively, I dissent because the Document encourages mostly changes that only weaken what the Commission had previously proposed.  The path forward suggested by the proposed changes would undermine the statutory purpose of requiring swap dealers to retain an appropriate minimum level of capital to serve as a buffer of last resort after all other sources of credit support (e.g. initial and variation margin) have been exhausted.

The Document is not a Proposal that can Lead to a Final Rule

The Document asks over 140 questions regarding capital requirements that the Commission proposed in 2011 and again in 2016.  We received numerous public comments on both prior proposals.  The Document briefly discusses these comments, most of which were critical of the proposals, and then asks open-ended questions about various alternatives to the initial proposals.  The discussion of the rationale behind the general alternatives posed in the questions is often superficial.

For the most part, the Document does not propose any new rule text or amendments to previously proposed rule text, but rather summarizes comments and asks for further comments, data, and analysis to support suggested alternatives to the previously proposed regulations.  In many cases, a wide range of alternatives are suggested, such as capital levels ranging from 0 to 8% of risk margin.  In a number of places, the Document asks commenters to propose new rule text for the Commission.  The Document states “[t]he Commission notes that comments are of the greatest assistance to rulemaking initiatives when accompanied by supporting data and analysis, and, if appropriate, accompanied by alternative approaches and suggested rule text language.”[2]  As an illustrative example, the Document asks commenters to, “Please provide data and analysis in support of any suggested modified percentage of the risk margin amount.”[3]

To the extent that some commenters provide significant new information or data that the Commission intends to rely upon in formulating or justifying a final rule, the public must be afforded notice of and an opportunity to comment on the new information.  Under the APA it is not permissible for an agency to ask a wide range of questions about potential approaches, and then proceed to promulgate a final rule supported by new reasons and data sourced from the comments received.  Data that is relied on by an agency to support its final rule and that is not merely supplemental or confirming data must be subjected to the notice and comment process.[4]

Under the APA, an agency has a “duty to identify and make available technical studies and data that it has employed in reaching the decisions to propose particular rules. . . .  An agency commits serious procedural error when it fails to reveal portions of the technical basis for a proposed rule in time to allow meaningful commentary.”[5]

I have stated many times that when practical, the Commission should be guided by objective data in writing regulations.  An excellent example is our rule setting the minimum swap dealer registration threshold at $8 billion.  The CFTC staff undertook an exhaustive, objective data analysis that, when completed, showed that the $8 billion level captured the vast majority of swap dealing activity.  I voted for the rule based on that analysis.  However, we cannot rely on data submitted by commenters in the final rule without first allowing the public to comment on that data.

A Weaker Capital Rule is the Purpose

After reading the140-plus questions in the Document, it is clear that the Commission is headed in the wrong direction.  The Document does not pursue the goal stated by Congress for the capital requirements to help assure the safety and soundness of the swap dealers.[6]  In virtually every instance, the questions and accompanying discussion seek alternatives that would reduce the level of capital required or create greater flexibility for the swap dealers to comply.[7]  The Document reads like an extensive diner menu offering up every type of rule reduction that a hungry swap dealer might desire.

Let’s consider two significant examples.  Under one approach proposed in the prior proposals, a swap dealer would be required to hold capital equal to or exceeding 8% of uncleared swap margin and initial margin for certain swaps and futures positions of the swap dealer.  As explained in the Document, the 8% level is drawn from the Commission’s experience with its risk-based capital requirements for futures commission merchants.[8]

Based on comments received on the prior proposals, and in an effort to harmonize with the SEC, the Document now proposes dropping that level to 2% (or 4% or perhaps another level that a commenter may propose) and allowing swap dealers to “exclude any particular asset classes or positions from the computation of risk margin amount.”  No data is offered in the Document to explain why 2% would be a sufficient level.  Maybe 8% is not the right number, but how does 2% in a formula that potentially excludes more asset classes or swap positions from the calculation even enter the realm of possibility when FCMs are held to much higher levels?  The Document provides no clear rationale related to the statutory purpose of the rule.  The rationale in the Document boils down to saying 2% would harmonize our rule with the SEC’s security-based swap dealer capital rule.  But the security-based swap market is very small and relatively narrow in scope.  The Document includes virtually no analysis of whether a 2% level makes sense in the much larger, complex, and varied swap market.  An individual swap dealer may maintain a portfolio of hundreds of different swap products with a notional amount in excess of a trillion dollars and thousands of counterparties.  The dealer may enter into over a million swaps a year.  Asking generic questions about the differences in these two markets is helpful.  However, it is apparent that any significant new data or analysis provided by commenters in response to this Document that the Commission uses to support the final rule will need to be presented to the public for consideration and comment.

As a further example, the Document asks questions about permitting expanded use of netting of offsetting positions when calculating the exposures against which minimum capital must be held.  Netting of offsetting positions is an important function for intermediaries like swap dealers for day-to-day cash flow, liquidity, and risk management.  In some respects, netting is the basis on which certain types of intermediaries build their business by dealing derivatives to different parties that want or need long positions when other parties need or want corresponding short positions.

However, when it comes to minimum capital requirements, which are intended to serve as a source of funding of last resort at all times, we must be very careful when proposing netting offsets.  Should a large swap dealer with a complex dealing book only be required to hold some minimum amount of collateral simply because it is able to net out its book?  That would not appear to serve the statutory purpose for a minimum capital requirement of helping to assure the safety and soundness of the swap dealer.[9]  While I am not suggesting that netting should play no role in the capital requirement calculations, my concern is that the Document provides little in the way of data, analysis, or rationale as to how the netting provisions discussed, which could net significant portions of the requirement down to nothing, would serve the intended purpose.  That is a concerning approach to take for a capital requirement and it is difficult to see how a final rule could be built on such questions in the Document.

Harmonization and Cost Reduction Alone are not Valid Policy Goals

In the Document, the costs of compliance and harmonization with the SEC’s capital rule are repeatedly mentioned as reasons for various possible changes.  Compliance cost reduction and rule harmonization, when feasible without undermining the policy goals of the regulations, are certainly important considerations in writing regulations.  However, as I have stated in other contexts, these are secondary considerations and should not supplant achieving the policy goals stated by Congress in the Commodity Exchange Act.  While the Document acknowledges that safety and soundness of each swap dealer is the stated purpose of the capital rule, and asks generic questions about the impact on swap dealer safety and soundness, that purpose is not mentioned as the reason for any of the proposed changes to the capital requirements.  This odd omission belies the purported goals of the Document.

The Document also exposes the one-sided nature of the “harmonization” rationale.  In several instances it relies almost completely on harmonizing the CFTC regulation with the comparable SEC regulation.  In each of those instances, the result is always a weaker regulatory requirement.  And yet in a other instances,[10] the Document acknowledges that a change to the existing capital rule proposals would conflict with the SEC’s rules, but then goes on to support implementing a different rule.  It seems that harmonization is used as a rationale for action only when it is convenient for reducing regulation and therefore obfuscates the real reason for the action.


For the reasons stated above, I dissent. 

Notwithstanding my dissent, I want to acknowledge the hard work of the staff in trying to address my many questions and comments in the limited time we had to consider the Document.  Capital requirements are one of the most complex and highly technical areas in our regulations.  We had a little less than a month to review the Document, which was not enough time given the heavy schedule currently set for the Commission and the complexity and history behind the Document and the two prior capital rule proposals.  Notwithstanding this short time frame, I appreciate the staff’s efforts to incorporate a number of my requested changes and address several complicated issues.


[1] It is ironic that on the very day this “proposal” is voted on, the Commission is also adopting an amendment to Part 13 that expressly confirms the APA as the procedures by which the Commission will propose and adopt its regulations.

[2] Document, introductory paragraph to section II.

[3] Document, question 1-b.

[4] See Idaho Farm Bureau Fed’n v. Babbitt, 58 F.3d 1392, 1402-03 (9th Cir. 1995).

[5] Owner-Operator Indep. Drivers Assoc. v. Fed. Motor Carrier Safety Admin., 494 F.3d 188, 199 (D.C. Cir. 2007) (quoting Solite Corp. v. EPA, 952 F.2d 473, 484 (D.C. Cir 1991) and Conn. Light & Power Co. v. NRC, 673 F.2d 525, 530-31 (D.C. Cir. 1982).

[6] See 7 U.S.C. 6s(e)(3)(A).

[7] In some instances, the questions are premised on the desire to harmonize with the provisions of the SEC’s securities-based swap dealer capital rules.  However, the SEC’s final rules were often premised on comments received on the CFTC’s earlier capital rule proposals and result in reduced requirements, as discussed later in my statement.

[8] See 17 CFR 1.17(a)(1)(i)(B).

[9] See 7 U.S.C. 6s(e)(3)(A).

[10] See e.g., Document, sections II.A.5 and 10.