On October 13, 2016 the Commodity Futures Trading Commission (CFTC) approved an order (the Order) to push back the deadline for certain market participants to apply for provisional registration as a swap dealer. The CFTC had previously established December 31, 2017 as the initial registration de minimis threshold phase-in termination date for market participants with dealing notional amounts above the threshold. Instead of dropping to a $3 billion dealing threshold on December 31, 2017, the swap dealer de minimis threshold will remain at $8 billion until December 31, 2018. In his statement announcing the Order, Chairman Massad summarized the key issues:

“The de minimis threshold determines when an entity’s swap dealing activity requires registration with the CFTC. Registration triggers capital and margin requirements as well as other responsibilities, such as disclosure, recordkeeping, and documentation requirements. In 2012, the CFTC set the threshold initially at $8 billion in notional amount of swap dealing activity over the course of a year, and provided that it would fall to $3 billion at the end of 2017.”

With the CFTC’s decision to postpone the threshold phase-in termination deadline, middle market banks, utilities and energy producers will have additional time to consider how the compliance requirements will impact their swap trading activities. Some market participants have already taken steps to comply with the capital, margin, disclosure, recordkeeping, and documentation requirements noted by Chairman Massad. However, other participants may be forced to limit dealing activity or even close trading desks to avoid registration. In the CFTC’s preliminary and final swap dealer de minimis exception reports, the CFTC noted potential for:

  • increased concentration in the swap dealing market,
  • reduced availability of potential swap counterparties,
  • reduced liquidity,
  • increased volatility, and
  • higher fees or reduced competitive pricing.

Based on the potential for further reduction in market liquidity and the challenges associated with the implementation of capital and margin requirements, the CFTC decided to push back its swap dealer registration de minimis threshold deadline until the end of 2018. The CFTC’s decision is a relief for market participants, particularly banks that rely on the insured depository institution exemption to remain below the de minimis threshold, as well as for utilities and energy producers with large non-financial commodity marketing operations to develop methods for determining and reporting swap notional amounts. The Order will enable the CFTC to perform a thorough analysis of market liquidity and more fully assess how capital and margin rules are working.