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CFTC finalizes capital requirements for swap participants

Commissioners split on rulemaking, the first CFTC action to cover certain swap dealers

23 July 2020

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The US Commodity Futures Trading Commission finalized a new rule on capital requirements for swaps market participants and advanced a proposed rulemaking on swaps margin in a public meeting held via teleconference on July 22.

The final capital requirements for swap participants will be flexible, offering three potential methodologies for market participants to follow, and is the first such measure at the agency since it was mandated by Congress under Dodd-Frank 10 years ago.

Separately, the CFTC also advanced rules on margin requirements for uncleared swaps and opened the proposal for public comment.

Final Rule: Capital Requirements of Swap Dealers and Major Swap Participants

The final rule on capital requirements for swap dealers and major swap participants, which passed by a vote of 3-2, establishes minimum capital requirements for participants who are not currently subject to oversight by prudential regulators such as the Federal Reserve.

An analysis of the CFTC's Division of Swap Dealer and Intermediary Oversight identified 56 firms that would be subject to these new rules and noted the wide differences in their business models. To accommodate the variety of market participants, the final rule implements three potential approaches to capital requirements based on an entity’s business model:

  • Calculation based on net liquid assets, which would accommodate firms including broker-dealers dually registered with the US Securities and Exchange Commission,
  • A bank-based approach, which would apply to non-bank subsidiaries of existing bank holding companies,
  • Calculation based on tangible net worth, which is designed for commercial agricultural or energy firms.

The final rule also allows non-US swap dealers to petition the CFTC for substituted compliance based on the rules of their home jurisdictions.

CFTC Chairman Heath Tarbert noted that the three-pronged approach accommodated "entities with a variety of business structures, asset profiles, and risk levels" and that "a one-size-fits-all approach would be incompatible with the rich gradations in our derivatives markets." 

Commissioners Brian Quintenz and Dawn Stump, both Republicans, joined Tarbert in voting in favor of the rulemaking. Quintenz noted "there are currently no federal minimum capital standard requirements in place for CFTC-regulated swap dealers" and called claims that the rulemaking would reduce oversight "absurd" given this fact. He also stressed that getting an initial standard in place is crucial to gathering information for future regulatory improvements. Stump added that the rulemaking targets "a small subset of swap dealers" and that other regulators have oversight and manage capital requirements over other market participants.

Commissioners Dan Berkovitz and Rostin Behnam, both Democrats, voted against the measure. Behnam said that the capital requirements represent "a significantly different final rule" from the previous proposal issued in 2016, and that his objections arise primarily from the lack of public input. He noted the recent withdrawal of the Regulation Automated Trading proposal (RegAT) and the CFTC bringing forward a new proposed rule addressing electronic trading risk principles as an example of how the CFTC could have conducted a more fulsome public debate before issuing a final rulemaking that differs materially from an initial proposal.

Berkovitz took issue with the fact that the rulemaking's own cost-benefit analysis estimated no significant increase in capital to protect any of the newly covered entities. Berkovitz noted that while it is important to tailor regulations in a way to foster competitiveness, "capital requirements should not be considered as an unnecessary regulatory burden."

Proposed Rules: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

The commission also heard a presentation on a set of three proposed margin rules for uncleared swaps. The proposed rules build on recommendations issued by the CFTC's Global Markets Advisory Committee (GMAC) in May and aim to conform the CFTC's regulation with international standards and address concerns in advance of a Phase 5 compliance date of Sept. 1, 2021.

Notably, staff from the agency's division of swap dealer and intermediary oversight recommended a proposal amending Commission regulation 23.151 to align the margin rules’ implementation timing and calculation methodology for material swaps exposure and the post phase‐in compliance periods with the international standards set by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions.

DSIO staff also recommended a proposal amending Commission regulation 23.154(a), which requires swap dealers and major swap participants subject to the CFTC margin rules to calculate the amount of initial margin to be collected from a counterparty that is a CFTC-registered swap dealer or MSP. The proposed amendment, consistent with CFTC no-action letter 19-29, sets forth an alternative method for the calculation of initial margin, which would permit these entities to rely on their counterparty to determine the amount of IM and whether documentation concerning the collection, posting, and custody of IM is required, provided that the counterparty is a CFTC-registered swap dealer or major swap participant. DSIO staff said they believe this will be used by a limited set of entities in the physical commodity space to hedge risk.

Lastly, DSIO staff recommended a proposal to permit the application of the minimum transfer amount (MTA) of up to $50,000 for each separately managed account of a legal entity. Additionally, the proposal would recognize that swap dealer and major swap participants can apply separate MTAs for IM and variation margin. These proposals are consistent with CFTC no-action letters 17‐12 and 19‐25.

Stump noted her hope that the CFTC will “continue to work together to address many of the other recommendations” included in the GMAC report.  

Statements and additional documents

Statement of Chairman Heath P. Tarbert in Support of Final Swap Dealer Capital Rule

Supporting Statement of Commissioner Brian Quintenz Regarding Establishing Capital Requirements for Swap Dealers and Major Swap Participants and Amending Existing FCM Capital Requirements

Dissenting Statement of Commissioner Rostin Behnam on Capital Requirements of Swap Dealers and Major Swap Participants

Statement of Commissioner Dawn D. Stump Regarding Final Rule: Capital Requirements of Swap Dealers and Major Swap Participants

Dissenting Statement of Commissioner Dan M. Berkovitz Regarding Final Rule: Capital Requirements for Swap Dealers and Major Swap Participants

Statement of Commissioner Dawn D. Stump on Refining Uncleared Margin Rules

Opening Statement of Commissioner Rostin Behnam before the Meeting of the Commodity Futures Trading Commission

Opening Statement of Commissioner Dan M. Berkovitz at July 22 Commission Meeting

View official documents and an archived webcast of the meeting

Press Release: CFTC Approves Final Swap Dealer Capital Rule at July 22 Open Meeting 

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