On November 18, 2015, the Commodity Futures Trading Commission (“CFTC”) issued for public comment the Swap Dealer De Minimis Exception Preliminary Report (the “Preliminary Report”).[1]  The de minimis exception from the swap dealer (“SD”) registration requirement currently provides an $8 billion threshold (in aggregate gross notional SD activity measured over the prior 12-month period).[2]  The $8 billion threshold, however, was intended as a “phase-in” amount under the Dodd-Frank Act, and is scheduled to decrease to $3 billion on December 31, 2017, unless the CFTC takes prior action to set a different termination date or to modify the de minimis exception.[3]  The Preliminary Report was issued by the CFTC to assess the de minimis exception and to allow public comment on the relevant policy considerations. Following publication of, and public comment on, a subsequent “final report,” the CFTC may either extend the phase-in period or issue a notice of proposed rulemaking to modify the de minimis exception.[4]

The Preliminary Report discusses, among other topics, the potential effects of reducing the de minimis threshold to $3 billion (the CFTC estimates, for example, that such a reduction would cause at least 83 additional entities to become subject to SD registration).[5]  Moreover, the Preliminary Report discusses alternative approaches to the de minimis exception, including: (i) setting different de minimis notional thresholds by asset class; (ii) establishing a de minimis exception based on some combination of gross notional SD activity, number of counterparties and number of transactions; (iii) having differing tiers of regulatory rigor based on gross notional dealing activity or other factors; and (iv) excluding cleared swaps or swaps executed on a swap execution facility or designated contract market from the de minimis calculation.

Although the Preliminary Report contains extensive explanations and analyses, it does not indicate whether, or how, the termination date of the phase-in period is likely to be changed or the de minimis exception is likely to be modified.  Depending on the outcome, certain potential consequences of the ultimate de minimis exception are discussed below.

First, conferring SD status on a previously-excepted entity (a “New SD”) would subject that entity to a broad range of requirements, including, among others, registration, business conduct standards, SD-specific reporting and recordkeeping requirements, risk management requirements, chief compliance officer designation and responsibilities, and membership in a registered futures association.  Moreover, to facilitate its compliance with certain of the foregoing requirements, a New SD likely would require each of its non-SD counterparties to enter into the ISDA Dodd-Frank Protocols in connection with the execution of new swap, or the amendment, novation or termination of an existing swap.  A New SD also would need to be operationally and technologically able to comply with reporting responsibilities in connection with swaps with certain counterparties.

Second, the CFTC’s re-proposed margin rules and the prudential regulators’ final margin rules apply only if at least one of the counterparties is a registered SD.[6]  Accordingly, a swap between a New SD and a counterparty that is entered into, novated, or amended following the applicable compliance date under the relevant margin rules, may be subject to such margin rules.[7]

Third, pursuant to the CFTC’s Advisory 13-69:  “[A] non-U.S. SD (whether an affiliate or not of a U.S. person) regularly using personnel or agents located in the U.S. to arrange, negotiate, or execute a swap with a non-U.S. person generally would be required to comply with the Transaction-Level Requirements [e.g., clearing and execution, external business conduct standards, margin, etc.].”  Accordingly, a swap between a non-U.S. New SD subject to Advisory 13-69 and a non-U.S. person may be subject to the Transaction-Level Requirements, upon the expiration of current no-action relief from Advisory 13-69.[8]

Fourth, pursuant to the CFTC’s July 2013 Cross-Border Guidance, “Category A” Transaction-Level Requirements (i.e., all of the Transaction-Level Requirements except the external business conducts standards) apply to a swap between (i) a non-U.S. SD and (ii) a non-U.S. person that is guaranteed by, or an “affiliate conduit” of, a U.S. person.[9]  Accordingly, absent substituted compliance, a swap between (i) a New SD and (ii) a non-U.S. non-SD counterparty that is guaranteed by, or an affiliate conduit of, a U.S. person, may be subject to the Category A Transaction-Level Requirements.

Fifth, if, conversely, a currently-registered SD counterparty to a non-SD ceases to be subject to SD registration as a result of the ultimate de minimis exception, the various requirements summarized in the paragraphs above generally would cease to apply.