* SEC, CFTC to finalize definition of "swap dealer"
* Tag comes with more oversight, more expensive trades
* Final rule would capture fewer market players
* CFTC says the trigger point could change after study
* Gives firms latitude to exempt swaps for hedging
By Alexandra Alper and Sarah N. Lynch
WASHINGTON, April 18 U.S. regulators have
narrowed the universe of big commodity market players that will
get slapped with an expensive "swap dealer" tag, but left room
to later adjust rules that are due to be finalized on Wednesday.
The Commodity Futures Trading Commission and Securities and
Exchange Commission are scheduled to vote on rules that will
determine which firms must register with regulators and trim
their risks by backing up their trades with more capital and
The rules required by the Dodd-Frank financial oversight law
in reaction to the financial crisis have changed dramatically
from when they were proposed in December 2010.
The CFTC originally said firms would be counted as swap
dealers if they traded more than $100 million in swaps over a
12-month period. A swap trade involves an exchange of cash flows
of one party's financial instrument for the other's instrument.
After heavy lobbying from energy companies and big commodity
traders, the final version bumps the threshold up to $8 billion
for most asset classes as an initial phase-in. Eventually, that
threshold could drop to $3 billion.
The CFTC also added a more explicit exemption for swaps that
are done to hedge market risks, such as reducing exposure to
interest-rate fluctuations or oil price moves. Those trades will
not count toward the threshold that triggers the swap dealer
It is unclear how many firms would be affected by the rules,
partially because the CFTC will leave it up to the firms
themselves to determine which swap trades are hedges.
Also, the CFTC gave itself wide latitude to change the
threshold. The agency would collect two-and-a-half years of
swaps data, then study that data, and then the CFTC would have
nine months to determine whether to bring down the trigger from
$8 billion in annual swap trades to $3 billion.
Alternatively, the CFTC could propose new rules to
completely change the threshold.
Dodd-Frank gave the CFTC and SEC broad new authority over
the swaps market after widespread ignorance about swaps
exposure, especially at insurer American International Group
, severely damaged the financial system during the
The law split oversight of the $700 trillion market between
the SEC, which will regulate securities-based swaps, and the
CFTC, which will regulate the vast majority of the market,
including interest-rate and commodity-linked swaps.
Commissioners at the two agencies are due to vote later on
Wednesday on their respective joint rules on defining "swap
dealer" as well as "major swap participant".
Being defined as a major swap participant would also drive
up the cost of trades and come with more oversight.
Major Wall Street firms that regularly trade in derivatives,
like Goldman Sachs or Morgan Stanley, have been
widely expected to fall into the swap dealer category.
But large energy companies and traders such as Royal Dutch
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 say they should not be subjected to the
Disagreements between the SEC and the CFTC on the final
rules have led to numerous delays and kept companies waiting
with great anticipation 16 months after the rules were first
The uncertainty has already taken a toll on liquidity,
according to large brokers.
The industry has also preliminarily questioned whether the
regulators have done enough to estimate the costs that will be
associated with being a dealer.
The quality of cost-benefit analyses has been grounds for
legal challenges to both SEC and CFTC rules.
On Tuesday, two trade groups sued the CFTC over a rule that
would force some mutual funds to register with the agency. The
CFTC is also facing a legal challenge to its position limits
rule, and the SEC in July had a Dodd-Frank rule overturned for
flawed economic analysis.
SEC and CFTC officials told reporters late on Tuesday that
they lack hard estimates for how many companies will be deemed