On October 26, 2017, the Commodity Futures Trading Commission (“CFTC”) issued an order postponing the automatic lowering of the swap dealer de minimis threshold. Instead of dropping from $8 billion in notional value (measured over the prior 12-month period) to $3 billion on December 31, 2018, which would have required firms to begin tracking swap activity on January 1, 2018, the threshold will drop on December 31, 2019, unless the CFTC determines to change the threshold prior to this date. Thus, firms will not have to start tracking swap activity for the $3 billion threshold until January 1, 2019; firms will, of course, need to track for the $8 billion threshold. Chairman Giancarlo forecast this delay in his appearance before the House Committee on Agriculture on October 11, 2017, testifying that he would seek the delay because he wanted “to get the right result, not a rushed result,” and noting that recent turnover in the Commission made it difficult to implement “such an important decision in a rush.” However, Chairman Giancarlo indicated that no further delays were expected, and that the CFTC would establish a de minimis threshold in the first half of 2018.
The de minimis threshold has been a source of concern for both market participants and the CFTC. The Dodd-Frank Act established “swap dealer” as a new registrant category, with entities meeting the definition of swap dealer facing increased and prescriptive regulatory oversight. Congress instructed the CFTC to exempt from the definition of a swap dealer firms that engage in a de minimis amount of swap dealing, and to determine the de minimis threshold. In 2012, the CFTC defined the threshold as $3 billion, but provided for a phase-in period, to expire on December 31, 2017, during which the threshold would be $8 billion. In the meantime, CFTC Staff was directed to prepare a report addressing the de minimis threshold. Staff prepared a preliminary and final report, but the utility of the reports was limited by a lack of available swaps data, and the reports made no recommendations (which then Commissioner Giancarlo noted at the time was “not helpful.”). As we have previously explained, however, the swap data that was available indicated that, while lowering the threshold would impose a significant additional regulatory burden, requiring registration of 80 more entities, it would result in minimal additional regulatory coverage, capturing only 1% more of notional activity. This has understandably created concerns that lowering the threshold would have an adverse impact on many smaller market participants and end-users with little regulatory benefits. Recently appointed CFTC Commissioner Brian Quintenz echoed these concerns on October 11, 2017, releasing a statement arguing that a reduction in the threshold “would create a ‘black hole,’ sucking in community banks and end-users who pose zero systemic risk.” That same day, new CFTC Commissioner Rostin Behnam, who voted against the order, argued that “[a]dditional delays…will only serve to preserve market uncertainty” and urged that the CFTC “take further action now or let the current rule take effect.”
The swap dealer de minimis threshold will undoubtedly be a key regulatory issue for the CFTC in the coming months that market participants below the $8 billion level should be keen to monitor.