Special report: CFTC approves Brexit-related rule on swaps transfers, extends swaps relief to smaller banks

25 March 2019


The Commodity Futures Trading Commission held an open meeting on March 25 to vote on two swap-related rulemakings.

The first measure, which was approved unanimously, was an interim final rule to address Brexit-related uncertainty regarding margin requirements for the transfer of uncleared swaps.

The second measure, which was approved by a 3-2 vote, was a final rulemaking to exclude certain swaps entered into by insured depository institutions from calculations related to the $8 billion de minimis threshold for swap dealer registration requirements.

The agency also stated that several other rulemakings will be voted on by the CFTC commissioners through a different procedure that does not require a public meeting, and are set to be released in the near future.

Margin requirements for uncleared swaps for swap dealers

The Brexit-related rule provides for transfers of uncleared swaps to affiliates outside the U.K. without triggering margin impacts for market participants. The interim rule only will allow relief in the event of a "no deal" Brexit. If there is a negotiated departure of the U.K. from the European Union or if the departure date continues to be delayed, market participants would be required to margin any transferred swap in accordance with existing CFTC regulations.

"Consistent with actions already taken by U.S. prudential regulators, we are providing regulatory certainty regarding the transfer of uncleared legacy swaps to facilitate global swaps market participants' needs in the event that the U.K. withdraws from the EU without a negotiated withdrawal agreement," CFTC Chairman Chris Giancarlo said.

Swap dealer registration exception

The second rulemaking, related to the $8 billion de minimis threshold for swap dealer registration that was finalized in a November meeting of the CFTC, applies specifically to banks that are insured depository institutions. The rule allows these IDIs to enter into a swap contract 181 days after entering into a loan without counting the transaction towards the $8 billion threshold to register as a swap dealer with the regulator.

The measure was approved 3-2 on party lines; Republican commissioners Dawn DeBerry Stump and Brian Quintenz joined Giancarlo in voting for the measure, Democrats Rostin Behnam and Dan Berkovitz voted against the measure.

Giancarlo said the amendment focuses narrowly on loan-related swaps at smaller IDIs such as community banks that allow borrowers to hedge interest rate, currency and commodity risks. He noted there is an explicit provision in the rule preventing speculative swaps from being excluded. In his remarks at the meeting, Quintenz expressed the importance of maintaining access to hedging services via swaps is particularly important right now in a rising interest rate environment.

In his dissent, Behnam expressed sympathy towards the notion of relief for smaller banks engaging in swap dealing, but said the CFTC "has to adhere to process." Specifically, Behnam took issue with the fact that the CFTC was acting alone instead of in concert with the Securities and Exchange Commission and expressed concerns that the rulemaking was circumventing Congressional intent.

Berkovitz questioned the lack of a limit on the notional size of swaps entered into by an IDI, and warned the rule is a "wolf in sheep's clothing" that primarily will benefit larger banks. Giancarlo acknowledged that concern, but said that the agency does not have sufficient data to set such a limit. He also noted that the CFTC's economists will conduct a three-year study into how the market operates under the new rule, and whether such a limit would be appropriate to add via future rulemakings.


Other items

At the meeting, Giancarlo noted the CFTC is preparing to sign updated memoranda of understanding with the U.K.'s Financial Conduct Authority to provide for "continued supervisory cooperation."

He also indicated that other items previously listed on the March 25 meeting agenda "will be forthcoming through seriatim and released over the next couple of days." These include:

  • Amendment to the Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants;
  • Comparability Determination for Australia: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants;
  • Final Rule Amending Regulations on Segregation of Assets Held as Collateral in Uncleared Swap Transactions;
  • Final Rule Regarding the De Minimis Exception to the Swap Dealer Definition – Swaps Entered into by Insured Depository Institutions in Connection with Loans to Customers
  • Final Rule Regarding Financial Surveillance Examination Program Requirements for Self-Regulatory Organizations

Full remarks

  • FIA
  • Regulation