* CFTC votes 4-1 for dealer definition, SEC votes 5-0
* Final rule would capture fewer market players
* CFTC says the trigger point could change after study
* Gives firms latitude to exempt swaps for hedging
* CFTC's O'Malia says rule could cause instabilities
By Alexandra Alper and Sarah N. Lynch
WASHINGTON, April 18 U.S. regulators limited the
number of market players that will be slapped with a pricey
"swap dealer" tag, heeding warnings by swap users about getting
too tough but dismaying advocates of greater oversight.
The Commodity Futures Trading Commission and the Securities
and Exchange Commission finalized joint rules on Wednesday that
will determine which firms do so much swaps business that they
must register with regulators and back up their trades with more
capital and collateral.
The Dodd-Frank financial reform law called on regulators to
more closely police the swaps market after widespread ignorance
about swaps exposure, especially at insurer American
International Group, severely damaged the financial
system during the 2007-2009 crisis.
The CFTC originally said in December 2010 that firms would
be counted as swap dealers if they traded more than $100 million
in swaps over a 12-month period.
That threshold set off a desperate push by energy companies
and big commodity traders, who argued that they are using trades
to hedge against market risks, and that their exposure does not
endanger the broader financial system.
The final version released on Wednesday bumps the threshold
up to $8 billion for most asset classes as an initial phase-in.
Eventually, that threshold drops to $3 billion, unless
regulators decide a different threshold is appropriate.
It also added a more explicit exemption for swaps that are
used 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
Financial reform advocate groups called the final rules
"The $8 billion exemption level is far too high and far
higher than was originally proposed last year. I think this
demonstrates the enormous lobbying effort of Wall Street and
major energy and commodity companies that have been working to
undermine Dodd-Frank," said Tyson Slocum, director of Public
Citizen's Energy Program.
The CFTC estimated that 125 entities would register as swap
dealers under the final rule, compared to 300 under the original
proposal. Officials would not elaborate if the 125 figure was
based on the $8 billion phase-in threshold, or the $3 billion
The CFTC approved the reforms in a 4-1 vote, while the SEC
voted unanimously to back them.
Republican CFTC Commissioner Scott O'Malia on Wednesday
voted against the final swap dealer rule because it includes
"several unnecessary and astonishing contortions" to ensure that
companies that use swaps to hedge against everyday business
risks do not get crushed by unnecessary regulations.
Major Wall Street firms and banks dominate the derivatives
market and have been widely expected to fall into the swap
JPMorgan Chase & Co, Bank of America,
Citigroup, HSBC and Goldman Sachs control
96 percent of cash and derivatives trading for commercial banks
and trust companies as of Dec. 31, according to the Office of
the Comptroller of the Currency.
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
It is unclear how many firms will ultimately have to
register as a swap dealer because it is up to the firms to
decide which of their trades will be excluded as hedges.
Also, the threshold could change in the future because
regulators will revisit that number after collecting roughly two
years of data.
Andrea Kramer, a partner at law firm McDermott Will & Emery,
said only a few very large corporate entities that also have
trading operations might still be swept in.
"For the majority of end-users, this will be a huge relief,"
Sam Henry, president and chief executive of International
Power-GDF Suez Energy Marketing North America ,
one of the biggest energy companies in North America dealing in
oil, natural gas and power, said the changes are positive.
"I think that means the burdens of compliance will be less
on a larger number of energy companies and it may not have as
severe an impact on liquidity as we had feared," Henry said.
"We were close to the $3 billion range. At $8 billion, we
should not be classified as a swap dealer."
Other industry players said it is too early to know how many
firms will be impacted because regulators have not yet said how
the rule will apply to firms' international operations.
Also, the CFTC and SEC have not yet formally defined a
"swap," generally considered to involve an exchange of cash
flows of one party's financial instrument for the other's
The CFTC said entities will have to register as a swap
dealer 60 days after the "swap" definition is completed.
The regulators also finalized a rule defining a "major swap
participant", a designation that also comes with more expensive
trades and more oversight. The CFTC estimated that six entities
would fall under that category.
The CFTC on Wednesday adopted a separate rule that would
subject commodity options to the same rules that govern swaps.
The Dodd-Frank law split oversight of the $700 trillion
market between the SEC, which will regulate security-based
swaps, and the CFTC, which will regulate the vast majority of
the market, including interest-rate and commodity-linked swaps.
The SEC's oversight covers roughly 5 percent of the
over-the-counter derivatives market.
SEC Chairman Mary Schapiro said the final rules aim to only
capture the companies that truly deal in derivatives, sparing
mutual funds and pension funds from the new regulations.
The SEC's swap dealer rules on Wednesday were largely
similar to the CFTC's, but there were a few key differences.
The SEC had more swap data to work with, and was able to
more closely tailor the thresholds to the different derivatives
markets it will regulate.
For single-name credit-default swaps, which make up the vast
majority of the security-based swaps market, the $8 billion
threshold will apply during the phase-in period and then taper
down to $3 billion.
For all other security-based swaps, such as equity swaps, a
much smaller threshold will apply, with an initial phase-in
level of $400 million that later goes down to $150 million.
SEC Commissioner Luis Aguilar, a Democrat, said at first he
was afraid the $3 billion threshold for credit derivatives was
too high, but he is now convinced the number will capture nearly
all dealing activities.
The SEC said its cost-benefit analysis conservatively
estimates that as many as 50 firms that deal with security-based
swaps may register as swap dealers.
The agency went out of its way to highlight its economic
analysis. Problems with the quality of cost-benefit analyses has
drawn legal challenges to both SEC and CFTC rules.
Last year, an appeals court struck down an SEC rule that
would have made it easier for shareholders to nominate directors
to corporate boards, saying the SEC failed to properly weigh the
economic consequences of the rule.
The CFTC is currently fighting a suit by two industry groups
who are challenging the agency's "position limits" rule. That
suit also uses the argument of improper economic analysis.