On September 15, 2016, CFTC Chairman Massad, in remarks at the OTC Derivatives Summit North America, indicated he would recommend delaying the drop in the swap dealer de minimis threshold. The threshold, currently at $8 billion in notional swap dealing activity over the course of a year, had been scheduled to drop to $3 billion as of December 31, 2017.
Given its importance, a delay is the sensible and responsible thing to do – and doing it now would provide much-needed certainty to market participants. – CFTC Chairman Massad
Chairman Massad offered several reasons for taking more time to study the threshold, including in part:
- limited swap data reporting quality, including inability to always accurately identify market participants and possible duplicative records – this is perhaps unsurprising, for anyone involved in the weeds of swap data reporting is familiar with the growing pains in the swap data reporting space;
- the difficulty of applying a notional test to non-financial commodity swaps – measuring units of barrels and bushels do not translate well into measuring notional amounts, not least because commodity prices fluctuate, sometimes dramatically (many energy firms that are not swap dealers will recognize this issue);
- concerns of smaller banks that it would limit their activity, which is primarily tied to their lending business;
- margin and capital rules can be implemented and assessed more fully before the threshold drops; and
- some participants have raised concerns as to how the drop might affect liquidity.
Some of these issues are recognizable because they have come up persistently throughout the implementation of Dodd-Frank: quality swap data reporting is challenging; measuring notionals is not always what it appears to be; and community banks and other small lenders would be adversely impacted by many of Dodd-Frank’s requirements if they were required to comply. It is refreshing to see these concerns acknowledged and the Chair taking a pragmatic approach to the swap dealer de minimis threshold.