Exclusive: CFTC poised to raise swap dealer threshold
WASHINGTON (Reuters) - The U.S. futures regulator may agree to raise the threshold used to identify the biggest swaps market traders to $3 billion, an agency official told Reuters on Friday, providing more relief to commodity merchants and corporations that have fiercely fought the rule.
The $3 billion cut-off, based on the notional value of a company's annual swaps trade, will determine which market participants are deemed swap dealers, saddling them with more onerous capital requirements and higher hedging costs.
The Commodity Futures Trading Commission has been steadily increasing the proposed de minimis exemption since it first proposed a level of $100 million in December 2010, and the regulations have proven some of the most complicated of the agency's large Dodd-Frank reforms agenda.
Credit default swaps, a type of over-the-counter derivative, were blamed for amplifying market distress in 2008 as the world slipped into economic recession. Congress passed the Dodd-Frank law in 2010, which established a framework for regulators to use to boost oversight of the previously opaque $700 trillion OTC swaps market.
Several months ago the CFTC was considering a threshold of $1 billion, then the agency moved it up to $2 billion in recent weeks, sources have said. The moving target has caused repeated delays in the rule, which is being crafted with the Securities and Exchange Commission.
Now, the cut-off appears set to rise again after officials grew concerned that even a $2 billion limit would unfairly capture legitimate hedgers in the agriculture or energy markets - players that don't create systemic risk or problems to the marketplace. Big banks have long expected to be classified as swap dealers.
"I think as a general rule we're reaching a pretty good balance," said the CFTC official with knowledge of the regulation, adding it is inevitable that some people will say they are unfairly being defined as a swap dealer.
"It's not as constrictive as our proposal, but it also doesn't include legitimate hedgers, who given the normal financial hedging operations, aren't a risk to the system and don't necessarily need to be on our radar to the extent that larger players do."
Even the $3 billion level could change again before regulators vote on the final rule, expected sometime this month.
Regulators have delayed five times a vote on the rules, which will make it clearer which energy companies, banks and other firms will have to set aside more funds to cover their deals.
Gary Gensler, the CFTC's chairman, told reporters on Friday regulators are "very, very close" to finishing the measure.
The CFTC had planned a vote on the rule on March 9, but lawyers at the SEC told the agency they needed more time to work on the complex measure.
"If there is a chance that by continually kicking this can that we're actually making good changes to the rule then let's keep working on it," Jill Sommers, a Republican commissioner at the CFTC, said in an interview.
"These are changes that were requested by (public) commenters who were concerned they would be unfairly captured under earlier drafts of the rule," she said.
Officials at the CFTC have grown increasingly frustrated with the SEC, which has slowed down progress on the rule.
"We're sympathetic to the fact that they have many more rules to promulgate than our agency does, but at the same time these are pretty critical rules for both agencies and these are critical rules for the industry," the CFTC official said.
"I think there is a recognition of that, but (the SEC) has a procedure and a process that they need to go through."
Companies such as Shell, BP and Vitol contend that while they may trade billions of dollars a year in swaps, their trades are done to shield themselves from market risk such as changes in commodity prices or fluctuations in currency. As a result, they should not be subjected to the new regulations.
Currently, large Wall Street banks such as Goldman Sachs, Citigroup, JPMorgan Chase and Morgan Stanley are the major players in the swaps arena.