In its first open meeting since 2016, the Commodity Futures Trading Commission met on June 4 to advance several rulemakings. They included proposed revisions to the Volcker rule, a proposed rule to permanently maintain the current threshold for swap dealer registration, and a final rule regarding access to swap data repositories.
Revisions to the Volcker Rule
The proposed rule advanced on a 2-1 vote, with CFTC Chairman Chris Giancarlo and Commissioner Brian Quintenz voting in favor, and Commissioner Rostin Behnam opposing.
Giancarlo said the proposal would simplify and tailor the Volcker Rule to increase efficiency, right-size firms’ compliance obligations, and allow smaller banking entities to more efficiently provide services to clients. Giancarlo also said he is committed to finalizing the rule by the end of the year.
Behnam, a Democrat, explained that he opposed the proposal because it may encourage a return to the risky activities that led to the financial crisis, and said the proposal would actually make compliance more complicated rather than less.
The proposal seeks to tailor compliance obligations to trading entities based on their activities and provide more clarity on what types of transactions are covered by the Volcker rule's prohibitions on proprietary trading. The move was part of a concerted effort among U.S. regulators to revisit the Volcker rule. Similar proposals were issued last week by the Federal Reserve, the Federal Deposit Insurance Corporation and Office of the Comptroller of Currency.
The details of the changes include:
- A three-tier compliance structure based on size, with large trading firms with trading assets and liabilities of $10 billion or greater, moderate-sized firms with assets and liabilities between $1 billion and $10 billion, and small-sized firms with assets and liabilities under $1 billion. Moderate-sized firms would be eligible for reduced compliance requirements, and small firms would enjoy “rebuttal presumption” of compliance, meaning they are presumed to be in compliance unless contested.
- The definition of “trading account” that subjects an entity to Volcker rule requirements will retain market risk capital and dealer prongs, but no longer attempt to establish “short-term intent” and will employ a new “accounting prong” that applies the proprietary trading ban to accounts where trading instruments are recorded at fair value. Under the proposal, trading desks where only the “accounting prong” applies are considered in compliance with the Volcker Rule.
CFTC registrants subject to the agency’s oversight of the Volcker rule include swap dealers and futures commission merchants that are not subject to oversight by other federal regulators. The CFTC estimated roughly 105 firms meet this definition. Additionally, certain commodity pools and their operators are subject to Volcker rule oversight.
Swap Dealer Threshold: On a 2-1 party-line vote, the CFTC voted to advance proposed amendments to the swap dealer registration de minimis threshold. Giancarlo and Quintenz voted in favor, and Behnam was opposed. The proposed change would maintain the current threshold of $8 billion in notional value of OTC derivatives. Any firms holding more than that amount must register as swap dealers and comply with a number of CFTC rules. Under the CFTC's current rules, the threshold is scheduled to drop to $3 billion at the end of 2019. The proposal also includes provisions allowing mid-sized firms to win exemption from registration and oversight.
Swap Data Access: On a 3-0 vote, the CFTC approved a final rule that amends swap data access provisions by eliminating an indemnification provision. In his opening remarks, Giancarlo explained that Dodd-Frank required regulators to indemnify swap data repositories for any expenses arising from litigation relating to the information provided by SDRs. Foreign and domestic regulators have been unable or unwilling to provide this indemnification, which has hindered the ability to share swaps data and monitor the amount of risk in the derivatives markets. Congress repealed the indemnification provision in December 2015 and the CFTC has now changed its regulations to reflect that change in the law.