Public Statements & Remarks

Statement of Commissioner Dawn D. Stump Regarding Final Rule: Capital Requirements of Swap Dealers and Major Swap Participants

July 22, 2020

Thank you Mr. Chairman for bringing the Commission together, albeit remotely, for both today and tomorrow’s open meetings.  I also want to express my gratitude for the hard work and dedication of the staff of the Division of Swap Dealer and Intermediary Oversight (DSIO), Office of General Counsel, and Office of the Chief Economist for the final capital rule before us.

Capital remains the last substantive Dodd-Frank Act rulemaking yet to be finalized by the CFTC.  When we last met on the question of capital in December, I spoke of the importance of regulatory certainty for Swap Dealers.  Today’s action will enable Swap Dealers to more comprehensively ascertain the cost of operating this business.  While I believe that adequate regulatory capital for Swap Dealers is an important component of the post-crisis reforms, the development of capital rules involves difficult questions to be answered and complicated decisions to be made.  Robust capital obligations are reasonably considered to increase the safety and soundness of the system, but we must ensure that such requirements do not deteriorate the availability of counterparties and liquidity required for well-functioning markets.  The benefit of capital requirements must be balanced to prevent disproportionate unfavorable impacts on the very markets we are attempting to protect.

Only time will serve as the judge of our actions today.  The preamble speaks to how the Commission will continually monitor and evaluate the final rule and make fact-based assessments about the efficacy of today’s action.  As I have repeatedly stated, this sort of lookback is prudent because the markets we regulate are dynamic.  Therefore, the rules we adopt will require ongoing review and possible adjustments.

This rule making is by no means simple.  The length of time it took us to get here, breadth and depth of comments received, and hard work by Commission staff is a testament to the difficult path.  Last summer, in what seems to be a lifetime ago, I provided remarks titled “The Law Is Our Authority and Common Sense Our Judge”[1] centered on Thomas Paine’s Common Sense pamphlet.[2] While much has changed since then, I felt a return to the principle of applying common sense when considering how to approach the final version of the rulemaking on capital was appropriate.  Instead of focusing on any imperfections that remain, I prefer to instead target the logical choices below concerning capital that I am happy to support based on common sense.

  1. The Commission acted appropriately in re-opening the comment period last year to allow for market participants to update their views based on developments since the 2016 CFTC proposal and improve the end product.  As a result, the Commission considered the actions taken by our fellow regulators, especially the SEC finalizing their capital and financial reporting rules in the interim, concerning capital and adopting their lessons learned and harmonizing where appropriate.  Re-opening the comment period provided us with an opportunity to rethink our approach to capital and allowed us to be more consistent with what other regulators had accomplished.
  2.  It is worthwhile to frame today’s capital conversation appropriately by reminding ourselves that we are setting policy for the 55 Swap Dealers that are subject to the Commission’s jurisdiction for capital, 40% of which are non-US financial entities.  The other 57 CFTC-registered Swap Dealers are prudentially regulated when it comes to capital requirements.  It is reasonable to provide three different alternatives for entities to choose from based on their operations and balance sheets rather than a one-size fits all approach.
  • First, for the largest swap dealers expected to adopt the Bank Based Approach, based upon the Federal Reserve Board’s capital requirements, the rule will ultimately retain the proposed maintenance of minimum capital equal to or greater than 8% of the initial margin amount associated with uncleared swaps.  In addition, these SDs will also be required to meet an 8% of risk weighted assets component, an amount established by the Registered Futures Association, and a $20 million floor, but each of the components have been adjusted to permit different compositions of capital as defined under banking rules.  The importance of these institutions to the vitality of the financial system makes it understandable to require this robust amount of capital
  • Second, for other swap dealers applying the Net Liquid Asset Approach, the Commission is adjusting the requirement to 2% of initial margin to address concerns the approach may over-account for market and credit risk and thereby place these Swap Dealers at a competitive disadvantage.  This approach also better aligns with that required for similarly situated dealers registered with the SEC.  For those Swap Dealers dually registered as FCMs, this 2% multiplier will function as an add-on to already existing requirements for these firms.
  • Third, for Swap Dealers that are predominantly engaged in non-financial activities, the rule applies a Tangible Net Worth approach, and allows firms to apply the proposed commercial activity test at the parent level, thus potentially making more commodity firms eligible for this treatment.  It is a measured resolution to facilitate commodity based swap dealers adopting a more tailored and nuanced approach for their activities, commensurate to the key function they serve in providing valuable production and hedging avenues in the real economy, consisting of physical goods and products.
  1. The rule also tailors the types of positions included within the margin amount, which is used as a minimum component across each of the elective approaches, to remove all security based swaps, cleared proprietary futures, cleared foreign futures, and cleared swaps since those products are either overseen by fellow regulators or are subject to requirements imposed on central counterparties and their clearing members to decrease bilateral credit risk.
  2. The Commission is showing flexibility by deferring the financial reporting to previously existing formats, such as utilizing SEC financial reporting forms or other types of financial reporting already employed by the Swap Dealer, rather than forcing entities to adopt a prescriptive, CFTC-unique reporting schema.  As a result, Swap Dealers will be able to leverage existing financial reporting to meet these obligations rather than incurring more costs and resources to comply.
  3. Allowing swap dealers to continue to use models already reviewed and approved for capital by the SEC, a prudential regulator, a foreign regulatory authority in a jurisdiction that the Commission has found to be eligible for substituted compliance, or a foreign regulatory authority whose capital adequacy requirements are consistent with the capital requirements issued by the Basel Committee on Banking Supervision demonstrates recognition of prior work by swap dealers and respects the work of the international regulatory process.  At the same time, it is also logical for a registered futures association to play a role in reviewing and approving models.
  4. Equally important is a transparent and reasonable schedule for the implementation of capital requirements.   Businesses need accurate and timely information to make sound decisions and plan for the allocation of resources.  While not providing as much time as some commenters requested, harmonization with the SEC’s implementation schedule to allow for dually-registered entities to prepare more efficiently and not cause a competitive disadvantage or regulatory arbitrage makes sense.

It is these last two topics, model approval and implementation, that I wish to address a bit further as we project the next steps in this process.  Even though I am satisfied as to where this final rule has arrived and pleased to finalize this portion of the CFTC’s post-financial crisis mandate, the work of a regulator is never done.

First, I wish to focus on the model approvals to be conducted by the National Futures Association.  While the final rule makes considerable improvements to better prioritize the approval process for covered Swap Dealer’s internal models, there is a new, related element that warrants mention.  The rule establishes a Commission review process to ascertain the consistency of NFA’s approval process with that of the CFTC’s approval process.  The Commission will subsequently need to issue a determination that NFA approvals may serve as a means of alternative compliance to the CFTC’s own approval process.  Today, the Commission and the NFA are in constant communication to ensure our objectives are aligned and I hope we will be able to leverage that interaction in order for this process review to be done expeditiously.  Then the NFA personnel can focus on the task at hand – reviewing models on an implementation timeline that though improved, remains ambitious.

Second, I previously spoke of my hope that the reopening of the comment period last December would provide insight into properly determining a compliance date with the incorporation of substituted compliance considerations.  While the October 2021 deadline is reasonable and harmonizes with implementation of the SEC’s capital rule, I want to emphasize the importance of attention to substituted compliance determinations as this date is already fast approaching.  Achieving substituted compliance for capital adequacy and financial reporting by operating in a jurisdiction deemed comparable would have a material impact on regulated Swap Dealers, but this must be achieved well in advance of the compliance date.  DSIO has worked tirelessly on this and other significant rules and I hope that they will be able to turn their energy towards reviewing and recommending to the Commission whether it be appropriate to grant such comparability determinations.

Overall, I believe that many of the policy choices concerning capital are appropriate and I am happy to support today’s final rule on capital.  I again want to commend all the staff involved for their hard work to this endeavor.


[1] The Law Is Our Authority and Common Sense Our Judge, Keynote Address of Commissioner Dawn D. Stump at the ISDA Annual Legal Forum (June 11, 2019), available at

[2]  Thomas Paine, Common Sense 103 (Bradford’s ed., 3d ed.  1776).