[Federal Register Volume 83, Number 113 (Tuesday, June 12, 2018)]
[Proposed Rules]
[Pages 27444-27484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12362]



[[Page 27443]]

Vol. 83

Tuesday,

No. 113

June 12, 2018

Part IV





Commodity Futures Trading Commission





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17 CFR Part 1





De Minimis Exception to the Swap Dealer Definition; Proposed Rule

  Federal Register / Vol. 83 , No. 113 / Tuesday, June 12, 2018 / 
Proposed Rules  

[[Page 27444]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AE68


De Minimis Exception to the Swap Dealer Definition

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to amend the de minimis exception within the 
``swap dealer'' definition in the Commission's regulations by: Setting 
the aggregate gross notional amount threshold for the de minimis 
exception at $8 billion in swap dealing activity entered into by a 
person over the preceding 12 months; excepting from consideration when 
calculating the aggregate gross notional amount of a person's swap 
dealing activity for purposes of the de minimis threshold: Swaps 
entered into with a customer by an insured depository institution in 
connection with originating a loan to that customer; swaps entered into 
to hedge financial or physical positions; and swaps resulting from 
multilateral portfolio compression exercises; and providing that the 
Commission may determine the methodology to be used to calculate the 
notional amount for any group, category, type, or class of swaps, and 
delegating to the Director of the Division of Swap Dealer and 
Intermediary Oversight (``DSIO'') the authority to make such 
determinations (collectively, the ``Proposal''). In addition, the 
Commission is seeking comment on the following additional potential 
changes to the de minimis exception: Adding a minimum dealing 
counterparty count threshold and a minimum dealing transaction count 
threshold; excepting from consideration when calculating the aggregate 
gross notional amount for purposes of the de minimis threshold swaps 
that are exchange-traded and/or cleared; and excepting from 
consideration when calculating the aggregate gross notional amount for 
purposes of the de minimis threshold swaps that are categorized as non-
deliverable forward transactions.

DATES: Comments must be received on or before August 13, 2018.

ADDRESSES: You may submit comments, identified by RIN 3038-AE68, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish for the Commission to 
consider information that is exempt from disclosure under the Freedom 
of Information Act (``FOIA''),\1\ a petition for confidential treatment 
of the exempt information may be submitted according to the procedures 
set forth in Sec.  145.9 of the Commission's regulations.\2\
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    \1\ 5 U.S.C. 552.
    \2\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse, or remove any or all of 
your submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
FOIA.

FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, [email protected], Erik Remmler, Deputy Director, 202-418-7630, 
[email protected], Rajal Patel, Associate Director, 202-418-5261, 
[email protected], or Jeffrey Hasterok, Data and Risk Analyst, 646-746-
9736, [email protected], Division of Swap Dealer and Intermediary 
Oversight; Bruce Tuckman, Chief Economist, 202-418-5624, 
[email protected] or Scott Mixon, Associate Director, 202-418-5771, 
[email protected], Office of the Chief Economist; Mark Fajfar, Assistant 
General Counsel, 202-418-6636, [email protected], Office of General 
Counsel, Commodity Futures Trading Commission, Three Lafayette Centre, 
1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Statutory Authority
    B. Regulatory History
    C. Policy Considerations
    1. Swap Dealer Registration Policy Considerations
    2. De Minimis Exception Policy Considerations
    D. De Minimis Calculation
II. The Proposal
    A. $8 Billion De Minimis Threshold
    1. Methodology
    2. Data and Analysis
    3. Request for Comments
    B. Swaps Entered Into by Insured Depository Institutions in 
Connection With Loans to Customers
    1. Background
    2. Proposal
    3. Request for Comments
    C. Swaps Entered Into To Hedge Financial or Physical Positions
    1. Background and Proposal
    2. Request for Comments
    D. Swaps Resulting From Multilateral Portfolio Compression 
Exercises
    1. Background and Proposal
    2. Request for Comments
    E. Methodology for Calculating Notional Amounts
    1. Background and Proposal
    2. Request for Comments
III. Other Considerations
    A. Dealing Counterparty Count and Dealing Transaction Count 
Thresholds
    1. Background
    2. Potential Thresholds
    B. Exchange-Traded and/or Cleared Swaps
    C. Non-Deliverable Forwards
IV. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    1. $8 Billion De Minimis Threshold
    2. Swaps Entered Into by Insured Depository Institutions in 
Connection With Loans to Customers
    3. Swaps Entered Into To Hedge Financial or Physical Positions
    4. Swaps Resulting From Multilateral Portfolio Compression 
Exercises
    5. Methodology for Calculating Notional Amounts
    6. Request for Comment
    D. Antitrust Considerations

I. Background

A. Statutory Authority

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') was signed into law on July 21, 2010.\3\ Title VII 
of the Dodd-Frank Act established a statutory framework to reduce risk, 
increase transparency, and promote market integrity within the

[[Page 27445]]

financial system by regulating the swap market. Among other things, the 
Dodd-Frank Act amended the Commodity Exchange Act (``CEA'') \4\ to 
provide for the registration and regulation of swap dealers 
(``SDs'').\5\ The Dodd-Frank Act directed the CFTC and the U.S. 
Securities and Exchange Commission (``SEC'' and together with the CFTC, 
``Commissions'') to jointly further define, among other terms, the term 
``swap dealer,'' \6\ and to exempt from designation as an SD a person 
that engages in a de minimis quantity of swap dealing.\7\
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    \3\ Public Law 111-203, 124 Stat. 1376 (2010), available at 
https://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
    \4\ The CEA is found at 7 U.S.C. 1, et seq.
    \5\ See 7 U.S.C. 6s(a)(1).
    \6\ Dodd-Frank Act section 712(d)(1). See the definitions of 
``swap dealer'' in CEA section 1a(49) and Sec.  1.3 of Commission 
regulations. 7 U.S.C. 1a(49); 17 CFR 1.3.
    \7\ See Dodd-Frank Act section 721.
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    CEA section 1a(49) defines the term ``swap dealer'' to include any 
person who: (1) Holds itself out as a dealer in swaps; (2) makes a 
market in swaps; (3) regularly enters into swaps with counterparties as 
an ordinary course of business for its own account; or (4) engages in 
any activity causing the person to be commonly known in the trade as a 
dealer or market maker in swaps (collectively referred to as ``swap 
dealing,'' ``swap dealing activity,'' or ``dealing activity'').\8\ The 
statute also requires the Commission to promulgate regulations to 
establish factors with respect to the making of a determination to 
exempt from designation as an SD an entity engaged in a de minimis 
quantity of swap dealing.\9\ CEA section 1a(49) further provides that 
in no event shall an insured depository institution be considered to be 
an SD to the extent it offers to enter into a swap with a customer in 
connection with originating a loan with that customer.\10\
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    \8\ 7 U.S.C. 1a(49)(A). In general, a person that satisfies any 
one of these prongs is deemed to be engaged in swap dealing 
activity.
    \9\ 7 U.S.C. 1a(49)(D).
    \10\ 7 U.S.C. 1a(49)(A).
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B. Regulatory History

    Pursuant to the statutory requirements, in December 2010, the 
Commissions issued a proposing release further defining, among other 
things, the term ``swap dealer'' (``SD Definition Proposing 
Release'').\11\ Subsequently, in May 2012, the Commissions issued an 
adopting release (``SD Definition Adopting Release'') \12\ further 
defining, among other things, the term ``swap dealer'' in Sec.  1.3 of 
the CFTC's regulations (the ``SD Definition'') and providing for a de 
minimis exception in paragraph (4) therein.\13\ The de minimis 
exception states that a person shall not be deemed to be an SD unless 
its swaps connected with swap dealing activities exceed an aggregate 
gross notional amount (``AGNA'') threshold of $3 billion (measured over 
the prior 12-month period), subject to a phase-in period during which 
the AGNA threshold is set at $8 billion.\14\ The phase-in period was 
originally scheduled to terminate on December 31, 2017, and the de 
minimis threshold was scheduled to decrease to $3 billion at that time. 
However, as discussed below, pursuant to paragraph (4)(i)(D) of the SD 
Definition, the Commission issued two successive orders to set new 
termination dates, and the phase-in period is currently scheduled to 
terminate on December 31, 2019.\15\
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    \11\ Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' 75 FR 
80174 (proposed Dec. 21, 2010).
    \12\ Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' 77 FR 
30596 (May 23, 2012).
    \13\ See 17 CFR 1.3, Swap dealer. As discussed in more detail in 
section II, the Commission notes that a joint rulemaking with the 
SEC is not required to amend the de minimis exception, pursuant to 
paragraph (4)(v) of the SD Definition. See 17 CFR 1.3, Swap dealer, 
paragraph (4)(v); 77 FR at 30634 n.464.
    \14\ 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A). Paragraph 
(4)(i)(A) also provides for a de minimis threshold of $25 million 
with regard to swaps in which the counterparty is a ``special 
entity'' (excluding ``utility special entities'' as provided in 
paragraph (4)(i)(B) of the SD Definition) as defined in CEA section 
4s(h)(2)(C), 7 U.S.C. 6s(h)(2)(C). This proposal would not change 
the de minimis threshold for swaps with special entities.
    \15\ See Order Establishing De Minimis Threshold Phase-In 
Termination Date, 81 FR 71605 (Oct. 18, 2016); Order Establishing a 
New De Minimis Threshold Phase-In Termination Date, 82 FR 50309 
(Oct. 31, 2017).
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    When the $3 billion de minimis exception threshold was established, 
the Commissions explained that the information then available regarding 
certain portions of the swap market was limited, and that they expected 
more information to be available in the future (following the 
implementation of swap data reporting), which would enable the 
Commissions to make a more informed assessment of the proper level for 
the de minimis exception and to revise it as appropriate.\16\ In 
establishing the AGNA threshold of $3 billion, the Commissions stated 
that ``there may be some uncertainty regarding the exact level of swap 
dealing activity, measured in terms of a gross notional amount of swaps 
that should be regarded as de minimis.'' \17\ In light of this 
uncertainty, the Commissions provided for the phase-in period during 
which the de minimis threshold was set at $8 billion, explaining that 
this would: (1) Permit market participants and the Commissions to 
become familiar with the application of the SD Definition and 
regulatory requirements; (2) afford the Commissions time to study the 
swap market as it evolved and to consider new information about the 
swap market that became available (e.g., through swap data reporting); 
(3) provide potential SDs that engage in smaller amounts of activity 
additional time to adjust their business practices, while at the same 
time preserving a focus on the regulation of the largest and most 
significant SDs; and (4) address comments suggesting that the de 
minimis threshold be set higher initially to provide for efficient use 
of regulatory resources and that implementation of SD requirements in 
general be phased.\18\
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    \16\ See 77 FR at 30632-34. In making their determination, the 
Commissions considered the limited and incomplete swap market data 
that was available at that time and concluded that the $3 billion 
level appropriately considers the relevant regulatory goals. Id. at 
30632. The Commissions found merit in determining the threshold by 
multiplying the estimated size of the domestic swap market by a 
0.001 percent ratio suggested by several commenters. Id. at 30633.
    \17\ Id. at 30633.
    \18\ See id. at 30633-34.
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    In recognition of these limitations and in anticipation of 
additional swap market data becoming available to the CFTC through the 
reporting of transactions to swap data repositories (``SDRs''), 
paragraph (4)(ii)(B) of the SD Definition was adopted, which directed 
CFTC staff to complete and publish for public comment a report on 
topics relating to the definition of the term ``swap dealer'' and the 
de minimis threshold as appropriate, based on the availability of data 
and information.\19\ Paragraph (4)(ii)(C) of the SD Definition provided 
that after giving due consideration to the staff report and any 
associated public comment, the CFTC may either set a termination date 
for the phase-in period or issue a notice of proposed rulemaking to 
modify the de minimis exception.\20\
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    \19\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(B).
    \20\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(C).
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    In the interest of providing ample opportunity for public input on 
the relevant policy considerations, as well as on staff's preliminary 
analysis of the SDR data, and to ensure that the Commission had as much 
information and data as practicable for purposes of its determinations 
with respect to the de minimis exception, in November 2015 staff issued 
a preliminary report concerning the de minimis exception (``Preliminary 
Staff Report'').\21\ The

[[Page 27446]]

Preliminary Staff Report sought to analyze the available swap data, in 
conjunction with relevant policy considerations, to assess the $8 
billion AGNA de minimis threshold and potential alternatives to the 
AGNA de minimis exception.\22\ Commission staff received 24 comment 
letters responsive to the Preliminary Staff Report.\23\
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    \21\ See Swap Dealer De Minimis Exception Preliminary Report 
(Nov. 18, 2015), available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis_1115.pdf.
    \22\ For the Preliminary Staff Report, staff analyzed data from 
April 1, 2014 through March 31, 2015.
    \23\ The comment letters are available on the Commission website 
at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1634.
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    After consideration of the public comments received in response to 
the Preliminary Staff Report, and further data analysis, in August 2016 
staff issued a final staff report \24\ concerning the de minimis 
exception (``Final Staff Report,'' and together with the Preliminary 
Staff Report, ``Staff Reports''). The Final Staff Report refreshed much 
of the analysis conducted in the Preliminary Staff Report for a 
subsequent review period,\25\ and similar to the Preliminary Staff 
Report, discussed observations with respect to the $8 billion de 
minimis threshold, as well as the de minimis exception alternatives 
considered in the Preliminary Staff Report, in light of refreshed data 
and comments received.
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    \24\ See Swap Dealer De Minimis Exception Final Staff Report 
(Aug. 15, 2016), available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis081516.pdf.
    \25\ For the Final Staff Report, staff analyzed data from April 
1, 2015 through March 31, 2016.
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    The data analysis in the Staff Reports provided some insights into 
the effectiveness of the de minimis exception as currently implemented. 
For example, staff analyzed the number of swap transactions involving 
at least one registered SD,\26\ which is indicative of the extent to 
which swaps are subject to SD regulation at the current $8 billion 
threshold. Data reviewed for the Final Staff Report indicated that 
approximately 96 percent of all reported swap transactions involved at 
least one registered SD.\27\
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    \26\ Given that all of the CEA section 4s requirements have not 
yet been implemented by regulation, the term ``registered SD'' 
refers to an entity that is a provisionally registered SD. See 17 
CFR 3.2(c)(3)(iii).
    \27\ See section II.A below for additional discussion regarding 
the Staff Reports.
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    To provide additional time for more information to become available 
to reassess the de minimis exception, in October 2016 the Commission 
issued an order, pursuant to paragraph (4)(ii)(C)(1) of the SD 
Definition, establishing December 31, 2018, as the new termination date 
for the $8 billion phase-in period.\28\ As noted above, absent any 
action, the phase-in period would have terminated, and the de minimis 
threshold would have decreased to $3 billion, on December 31, 2017. To 
enable staff to conduct additional analysis, in October 2017 the 
Commission further extended the phase-in period to December 31, 
2019.\29\ Generally, the extensions provided additional time for 
Commission staff to conduct more complete data analysis regarding the 
de minimis exception, and gave market participants additional time to 
begin preparing for a change, if any, to the de minimis exception 
threshold.
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    \28\ 81 FR 71605.
    \29\ 82 FR 50309.
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C. Policy Considerations

1. Swap Dealer Registration Policy Considerations
    In adopting the SD Definition, the Commissions identified the 
policy goals underlying SD registration and regulation generally to 
include reducing systemic risk, increasing counterparty protections, 
and increasing market efficiency, orderliness, and transparency.
    Reducing systemic risk: The Dodd-Frank Act was enacted in the wake 
of the financial crisis of 2008, in significant part, to reduce 
systemic risk, including the risk to the broader U.S. financial system 
created by interconnections in the swap market.\30\ Pursuant to the 
Dodd-Frank Act, the Commission has adopted regulations designed to 
mitigate the potential systemic risk inherent in the previously 
unregulated swap market.\31\
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    \30\ Dodd-Frank Act, Preamble (indicating that the purpose of 
the Dodd-Frank Act was to promote the financial stability of the 
United States by improving accountability and transparency in the 
financial system, to end ``too big to fail,'' to protect the 
American taxpayer by ending bailouts, to protect consumers from 
abusive financial services practices, and for other purposes).
    \31\ For example, registered SDs have specific requirements for 
risk management programs and margin. See, e.g., 17 CFR 23.600; 17 
CFR 23.150-23.161.
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    Increasing counterparty protections: Providing regulatory 
protections for swap counterparties who may be less experienced or 
knowledgeable about the swap products offered by SDs (particularly end-
users who use swaps for hedging or investment purposes) is a 
fundamental policy goal advanced by the regulation of SDs.\32\ The 
Commissions recognized that a narrower or smaller de minimis exception 
would increase the number of counterparties that could potentially 
benefit from those regulatory protections.\33\
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    \32\ For example, registered SDs are subject to rigorous 
external business conduct standard regulations designed to provide 
counterparty protections. See, e.g., 17 CFR 23.400-23.451.
    \33\ 77 FR at 30628 (``On the one hand, a de minimis exception, 
by its nature, will eliminate key counterparty protections provided 
by Title VII for particular users of swaps and security-based 
swaps.'').
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    Increasing market efficiency, orderliness, and transparency: 
Increasing swap market efficiency, orderliness, and transparency is 
another goal of SD regulation.\34\ Regulations requiring SDs, for 
example, to keep detailed daily trading records, report trade 
information, and engage in portfolio reconciliation and compression 
exercises help achieve these market benefits.\35\
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    \34\ Id. at 30629 (``The statutory requirements that apply to 
[SDs] . . . include requirements . . . aimed at helping to promote 
effective operation and transparency of the swap . . . markets.''). 
See also id. at 30703 (``Those who engage in swaps with entities 
that elude [SD] or major swap participant status and the attendant 
regulations could be exposed to increased counterparty risk; 
customer protection and market orderliness benefits that the 
regulations are intended to provide could be muted or sacrificed, 
resulting in increased costs through reduced market integrity and 
efficiency. . . .'').
    \35\ See, e.g., 17 CFR 23.200-23.205; 17 CFR part 45; 17 CFR 
23.502-23.503.
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2. De Minimis Exception Policy Considerations
    The Commissions also recognized that, consistent with Congressional 
intent, ``an appropriately calibrated de minimis exception has the 
potential to advance other interests.'' \36\ The Commissions explained 
that these interests include increasing efficiency, allowing limited 
swap dealing in connection with other client services, encouraging new 
participants to enter the market, and focusing regulatory 
resources.\37\ The policy objectives underlying the de minimis 
exception are designed to encourage participation and competition by 
allowing persons to engage in a de minimis amount of dealing without 
incurring the costs of registration and regulation.\38\
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    \36\ See 77 FR at 30628.
    \37\ See 77 FR at 30628-30, 30707-08.
    \38\ In considering the appropriate de minimis threshold, the 
Commissions stated that ``exclud[ing] entities whose dealing 
activity is sufficiently modest in light of the total size, 
concentration and other attributes of the applicable markets can be 
useful in avoiding the imposition of regulatory burdens on those 
entities for which dealer regulation would not be expected to 
contribute significantly to advancing the customer protection, 
market efficiency and transparency objectives of dealer 
regulation.'' Id. at 30629-30.
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    Increasing efficiency: A de minimis exception based on an objective 
test with a limited degree of complexity enables entities to engage in 
a lower level of swap dealing with limited concerns about whether their 
activities

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would require registration.\39\ The de minimis exception thereby 
fosters efficient application of the SD Definition. Additionally, the 
Commission is of the view that the potential for regular or periodic 
changes to the de minimis threshold may reduce its efficacy by making 
it challenging for persons to calibrate their swap dealing activity as 
appropriate for their business models. Further, the existing de minimis 
exception reduces regulatory uncertainty and increases efficiency by 
establishing a simple threshold test for all of a person's swaps 
connected with swap dealing activity. Conversely, the more variables 
included in the de minimis calculation, the more complex the 
determination of whether a person must register, potentially resulting 
in less efficiency.\40\
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    \39\ Id. at 30628-29 (``[T]he de minimis exception may further 
the interest of regulatory efficiency when the amount of a person's 
dealing activity is, in the context of the relevant market, limited 
to an amount that does not warrant registration . . . . In addition, 
the exception can provide an objective test . . . .'').
    \40\ Id. at 30707-08 (``On the other hand, requiring market 
participants to consider more variables in evaluating application of 
the de minimis exception would likely increase their costs to make 
this determination.'').
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    Allowing limited ancillary dealing: A de minimis exception allows 
persons to accommodate existing clients that have a need for swaps (on 
a limited basis) along with other services.\41\ This interest enables 
end-users to continue transacting within existing business 
relationships, for example to hedge interest rate or currency risk.
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    \41\ Id. at 30629, 30708.
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    Encouraging new participants: A de minimis exception also promotes 
competition by allowing a person to engage in some swap dealing 
activities without immediately incurring the regulatory costs 
associated with SD registration and regulation.\42\ Without a de 
minimis exception, SD regulation could become a barrier to entry that 
may stifle competition. An appropriately calibrated de minimis 
exception could lower the barrier to entry of becoming an SD by 
allowing smaller participants to gradually expand their business until 
the scope and scale of their activity warrants regulation (and the 
costs involved with compliance).
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    \42\ Id. at 30629.
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    Focusing regulatory resources: Finally, the de minimis exception 
also increases regulatory efficiency by enabling the Commission to 
focus its limited resources on entities whose swap dealing activity is 
sufficient in size and scope to warrant oversight.\43\
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    \43\ Id. at 30628-29.
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    The Commissions explained that ``implementing the de minimis 
exception requires a careful balancing that considers the regulatory 
interests that could be undermined by an unduly broad exception as well 
as those regulatory interests that may be promoted by an appropriately 
limited exception.'' \44\ A narrower de minimis exception would likely 
mean that a greater number of entities would be required to register as 
SDs and become subject to the regulatory framework applicable to 
registered SDs. However, a de minimis exception that is too limited 
could, for example, discourage persons from engaging in swap dealing 
activity in order to avoid the burdens associated with SD regulation.
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    \44\ Id. at 30628. See also SD Definition Proposing Release, 75 
FR at 80179 (The de minimis exception ``should apply only when an 
entity's dealing activity is so minimal that applying dealer 
regulations to the entity would not be warranted.'').
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D. De Minimis Calculation

    Whether a person's activities constitute swap dealing is based on a 
facts and circumstances analysis. Generally, a person must count 
towards its AGNA de minimis threshold all swaps it enters into for 
dealing purposes over any rolling 12-month period. In addition, each 
person whose own swaps do not exceed the de minimis threshold must also 
include in its de minimis calculation the AGNA of swaps of any other 
unregistered affiliate controlling, controlled by, or under common 
control with that person (referred to as ``aggregation'').\45\
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    \45\ 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A); Interpretive 
Guidance and Policy Statement Regarding Compliance With Certain Swap 
Regulations, 78 FR 45292, 45323 (July 26, 2013).
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    Pursuant to various CFTC regulations, certain swaps, subject to 
specific conditions, need not be considered in determining whether a 
person is an SD, including: (1) Swaps entered into by an insured 
depository institution (``IDI'') with a customer in connection with 
originating a loan to that customer; \46\ (2) swaps between affiliates; 
\47\ (3) swaps entered into by a cooperative with its members; \48\ (4) 
swaps hedging physical positions; \49\ (5) swaps entered into by floor 
traders; \50\ (6) certain foreign exchange (``FX'') swaps and FX 
forwards; \51\ and (7) commodity trade options.\52\ In addition, 
certain cross-border swaps \53\ and swaps resulting from multilateral 
portfolio compression exercises \54\ need not be counted towards the 
person's de minimis threshold, subject to certain conditions, pursuant 
to CFTC interpretive guidance and staff letters. Further, certain 
inter-governmental or quasi-governmental international financial 
institutions are not included within the term ``swap dealer.'' \55\
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    \46\ See 17 CFR 1.3, Swap dealer, paragraph (5); 77 FR at 30620-
24.
    \47\ See 17 CFR 1.3, Swap dealer, paragraph (6)(i); 77 FR at 
30624-25.
    \48\ See 17 CFR 1.3, Swap dealer, paragraph (6)(ii); 77 FR at 
30625-26.
    \49\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); 77 FR at 
30611-14.
    \50\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iv); 77 FR at 
30614. The floor trader exclusion was also addressed in no-action 
relief. See CFTC Staff Letter No. 13-80, No-Action Relief from 
Certain Conditions of the Swap Dealer Exclusion for Registered Floor 
Traders (Dec. 23, 2013), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-80.pdf.
    \51\ See Determination of Foreign Exchange Swaps and Foreign 
Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694, 
69704-05 (Nov. 20, 2012); Further Definition of ``Swap,'' 
``Security-Based Swap,'' and ``Security-Based Swap Agreement''; 
Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 
48208, 48253 (Aug. 13, 2012).
    \52\ 17 CFR 32.3; Commodity Options, 77 FR 25320, 25326 n.39 
(Apr. 27, 2012).
    \53\ See 78 FR 45292; CFTC Staff Letter No. 12-61, No-Action 
Relief: U.S. Bank Wholly Owned by Foreign Entity May Calculate De 
Minimis Threshold Without Including Activity From Its Foreign 
Affiliates (Dec. 20, 2012), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/12-61.pdf; CFTC Staff Letter No. 12-71, No-Action Relief: U.S. Bank 
Wholly Owned by Foreign Entity May Calculate De Minimis Threshold 
Without Including Activity From Its Foreign Affiliates (Dec. 31, 
2012), available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/12-71.pdf; and CFTC Letter No. 
18-13, No-Action Position: Relief for Certain Non-U.S. Persons from 
Including Swaps with International Financial Institutions in 
Determining [SD] and Major Swap Participant Status (May 16, 2018), 
available at https://www.cftc.gov/sites/default/files/idc/groups/public/%40lrlettergeneral/documents/letter/2018-05/18-13.pdf.
    \54\ CFTC Staff Letter No. 12-62, No-Action Relief: Request that 
Certain Swaps Not Be Considered in Calculating Aggregate Gross 
Notional Amount for Purposes of the Swap Dealer De Minimis Exception 
for Persons Engaging in Multilateral Portfolio Compression 
Activities (Dec. 21, 2012), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/12-62.pdf.
    \55\ See 77 FR at 30693.
---------------------------------------------------------------------------

II. The Proposal

    Given the more complete information now available regarding certain 
portions of the swap market, the data analytical capabilities developed 
since the SD regulations were adopted, and five years of implementation 
experience, the Commission believes that modifications to the de 
minimis exception are necessary to increase efficiency, flexibility, 
and clarity in the application of the SD Definition.
    Additionally, in March 2017, Chairman Giancarlo initiated an 
agency-wide internal review of CFTC regulations and practices to 
identify those areas that could be simplified to make them less 
burdensome and costly

[[Page 27448]]

(``Project KISS'').\56\ The Commission subsequently published in the 
Federal Register a Request for Information soliciting suggestions from 
the public regarding how the Commission's existing rules, regulations, 
or practices could be applied in a simpler, less burdensome, and less 
costly manner.\57\ As discussed below, a number of responses submitted 
pursuant to the Project KISS Request for Information also support 
modifications to the de minimis exception.\58\
---------------------------------------------------------------------------

    \56\ See Remarks of then-Acting Chairman J. Christopher 
Giancarlo before the 42nd Annual International Futures Industry 
Conference in Boca Raton, FL (Mar. 15, 2017), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20.
    \57\ Project KISS, 82 FR 21494 (May 9, 2017), amended by 82 FR 
23765 (May 24, 2017). The Federal Register Request for Information, 
and the suggestion letters filed by the public are available at 
https://comments.cftc.gov/KISS/KissInitiative.aspx.
    \58\ See Letters from BP Energy Company and BP Products North 
America Inc. (collectively, ``BP'') (Sep. 29, 2017); Chatham 
Financial Corp. (``Chatham'') (Sep. 29, 2017); Coalition for 
Derivatives End-Users (``CDE'') (Sep. 29, 2017); The Commercial 
Energy Working Group (``CEWG'') (Sep. 30, 2017); Commodity Markets 
Council (``CMC'') (Sep. 29, 2017); EDF Trading North America, LLC 
(``EDF'') (Sep. 29, 2017); Edison Electric Institute and the 
Electric Power Supply Association (collectively, ``EEI/EPSA'') (Sep. 
29, 2017); Financial Services Roundtable (``FSR'') (Sep. 30, 2017); 
Futures Industry Association (``FIA'') (Sep. 28, 2017); Institute of 
International Bankers (``IIB'') (Sep. 29, 2017); International 
Energy Credit Association (``IECA'') (Sep. 30, 2017); International 
Swaps and Derivatives Association, Inc. (``ISDA'') (Sep. 29, 2017); 
Natural Gas Supply Association (``NGSA'') (Sep. 29, 2017); Northern 
Trust Company (``Northern Trust'') (Sep. 21, 2017); Securities 
Industry and Financial Markets Association (``SIFMA'') (Sep. 29, 
2017); Custom House USA, LLC and Western Union Business Solutions 
(USA), LLC (collectively, ``Western Union'') (Sep. 25, 2017); and 
Custom House USA, LLC, Western Union Business, GPS Capital Markets, 
Inc., and Associated Foreign Exchange, Inc. (collectively, ``WU/GPS/
AFEX'') (Sep. 29, 2017).
---------------------------------------------------------------------------

    The amendments proposed herein support a clearer and more 
streamlined application of the SD Definition. They also provide greater 
clarity regarding which swaps need to be counted towards the de minimis 
threshold and consider the practical application of swaps in different 
circumstances. This Proposal includes amendments regarding: (1) The 
appropriate de minimis threshold level; and (2) the swap transactions 
that are not required to be counted towards that threshold.
    With respect to the appropriate threshold level, the Commission is 
proposing to amend the de minimis exception in paragraph (4) of the SD 
Definition by setting the AGNA threshold at $8 billion in swap dealing 
activity. Additionally, to complement the Commission's definitions of 
the types of activities that do not constitute swap dealing, the 
Commission is proposing to add specific exceptions from the de minimis 
threshold calculation for certain swaps entered into: (1) By IDIs in 
connection with loans to customers; and (2) to hedge financial or 
physical positions.\59\ Additionally, the Commission is proposing to 
except from a person's de minimis threshold calculation swaps that 
result from multilateral portfolio compression exercises, in a manner 
consistent with relief granted in a 2012 DSIO staff no-action 
letter.\60\ Lastly, the Commission is proposing to provide that, for 
purposes of paragraph (4) of the SD Definition, the Commission may 
determine the methodology to be used to calculate the notional amount 
for any group, category, type, or class of swaps. The Commission is 
also proposing to delegate authority to the Director of DSIO to make 
such determinations.
---------------------------------------------------------------------------

    \59\ These proposed exceptions would be in addition to the 
existing exclusions in paragraphs (5) and (6)(iii) of the SD 
Definition for swaps entered into by IDIs and swaps entered into for 
the purpose of hedging physical positions, respectively.
    \60\ See CFTC Staff Letter No. 12-62, supra note 54.
---------------------------------------------------------------------------

    The proposed rule changes would amend the de minimis exception 
provision in paragraph (4) of the SD Definition, pursuant to the 
Commission's authority under CEA section 1a(49), which requires the 
Commission to promulgate regulations to establish factors with respect 
to the making of this determination to exempt a de minimis quantity of 
swap dealing.\61\ The Commissions issued the SD Definition Adopting 
Release pursuant to section 712(d)(1) of the Dodd-Frank Act, which 
requires the CFTC and SEC to jointly adopt rules regarding the 
definition of, among other things, the term ``swap dealer.'' The CFTC 
continues to coordinate with the SEC on SD and security-based swap 
dealer regulations. However, as discussed in the SD Definition Adopting 
Release, a joint rulemaking is not required with respect to the de 
minimis exception-related factors.\62\ The Commission notes that it is 
consulting with the SEC and prudential regulators regarding the changes 
to the SD Definition discussed in this Proposal.\63\
---------------------------------------------------------------------------

    \61\ 7 U.S.C. 1a(49)(D). See also 17 CFR 1.3, Swap dealer, 
paragraph (4)(v).
    \62\ 77 FR at 30634 n.464 (``We do not interpret the joint 
rulemaking provisions of section 712(d) of the Dodd-Frank Act to 
require joint rulemaking here, because such an interpretation would 
read the term ``Commission'' out of CEA section 1a(49)(D) (and 
Exchange Act section 3(a)(71)(D)), which themselves were added by 
the Dodd-Frank Act.'').
    \63\ As required by Sec.  712(a)(1) of the Dodd-Frank Act.
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    Although this Proposal includes several potential rule amendments 
in a single notice, the CFTC may in the future issue separate adopting 
releases for any aspect of this Proposal that is finalized.\64\
---------------------------------------------------------------------------

    \64\ See ICI v. CFTC, 720 F.3d 370, 379 (D.C. Cir. 2013) (``[A]s 
the Supreme Court has emphasized, `[n]othing prohibits federal 
agencies from moving in an incremental manner.' '') (quoting FCC v. 
Fox Television Stations, Inc., 556 U.S. 502, 522 (2009)).
---------------------------------------------------------------------------

A. $8 Billion De Minimis Threshold

    As discussed above, the de minimis threshold for the AGNA of a 
person's swap dealing activity is scheduled to decrease to $3 billion 
on December 31, 2019, requiring persons to begin calculating towards 
the lower threshold on January 1, 2019. Based on the data and analysis 
described below, the Commission is proposing to amend paragraph 
(4)(i)(A) of the SD Definition by setting the de minimis threshold at 
$8 billion. For added clarity, the Commission is also proposing to 
change the term ``swap positions'' to ``swaps'' in paragraph (4)(i)(A). 
Additionally, the Commission is proposing to delete a parenthetical 
clause in paragraph (4)(i)(A) referring to the period after adoption of 
the rule further defining the term ``swap,'' and to remove and reserve 
paragraph (4)(ii) of the SD Definition, which addresses the phase-in 
procedure and staff report requirements of the de minimis exception 
(discussed above in section I.B), since both of those provisions would 
no longer be applicable.
    The Commission recognizes the benefits and drawbacks of an SD 
Definition that relies upon AGNA for SD registration purposes. The 
Commission is aware of potential viable alternative metrics and remains 
open to the possibility of relying on a different approach in the 
future, such as a threshold based on entity-netted notional amounts 
\65\ or other risk metrics, including, but not limited to, initial 
margin, open positions, material swaps exposure, net current credit 
exposure, gross negative or positive fair value, potential future 
exposure, value-at-risk, or expected shortfall. However, at this time, 
the Commission continues to believe that the de minimis exception 
should include an AGNA threshold component. As noted in the SD 
Definition Adopting Release, a notional value test is useful to measure 
the relative amount of an entity's swap dealing activity, and it avoids 
potential

[[Page 27449]]

distorting effects from measures that reflect netting or collateral 
offsets.\66\
---------------------------------------------------------------------------

    \65\ See Introducing ENNs: A Measure of the Size of Interest 
Rate Swap Markets (Jan. 2018), available at http://www.cftc.gov/idc/groups/public/@economicanalysis/documents/file/oce_enns0118.pdf; 
Remarks of Chairman J. Christopher Giancarlo before Derivcon 2018, 
New York City, NY (Feb. 1, 2018), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo35.
    \66\ 77 FR at 30630.
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1. Methodology
(i) Filters and Assumptions
    For this Proposal, CFTC staff conducted an analysis of SDR data 
from January 1, 2017, through December 31, 2017 (the ``review 
period'').\67\ Generally, employing methodologies similar to those used 
for purposes of the Staff Reports, staff attempted to calculate 
persons' swaps activity in terms of AGNA to assess how the swap market 
might be impacted by potential changes to the current de minimis 
exception.
---------------------------------------------------------------------------

    \67\ The data used in this Proposal was sourced from data 
reported to the four registered SDRs: BSDR LLC, Chicago Mercantile 
Exchange Inc., DTCC Data Repository, and ICE Trade Vault.
---------------------------------------------------------------------------

    Given improvements in the quality of data being reported to SDRs 
since the Staff Reports were issued, Commission staff was able to 
analyze the AGNA of swaps activity for interest rate swaps (``IRS''), 
credit default swaps (``CDS''), FX swaps,\68\ and equity swaps (while 
by comparison, in the Staff Reports, AGNA analysis was limited to IRS 
and CDS).\69\ However, given certain limitations discussed below, AGNA 
data was not available for non-financial commodity (``NFC'') swaps. In 
addition to now-available AGNA information for FX swaps and equity 
swaps, there were also continued improvements in the consistency of 
legal entity identifier (``LEI'') and unique swap identifier reporting. 
However, as explained in the Staff Reports, the SDR data lacks: (1) A 
reporting field to indicate whether a swap was entered into for dealing 
purposes (as opposed to hedging, investing, or proprietary trading); 
and (2) a reporting field to indicate whether a specific swap need not 
be considered in determining whether a person is an SD or need not be 
counted towards the person's de minimis threshold, pursuant to one of 
the exclusions or exceptions identified above in section I.D.\70\ These 
constraints limited the usefulness of the SDR data to identify which 
swaps should be counted towards a person's de minimis threshold, and 
the ability to precisely assess the current de minimis threshold or the 
impact of potential changes to the current exclusions.
---------------------------------------------------------------------------

    \68\ The term ``FX swaps'' is used in this Proposal to only 
describe those FX transactions that are counted towards a person's 
de minimis calculation. The term ``FX swaps'' does not refer to 
swaps and forwards that are not counted towards the de minimis 
threshold pursuant to the exemption granted by the Secretary of the 
Treasury. See 77 FR at 69704-05; 77 FR at 48253. Section III.C below 
discusses the Secretary of the Treasury's exemption in more detail 
in the context of non-deliverable forward transactions.
    \69\ See Preliminary Staff Report, supra note 21, at 21-22; 
Final Staff Report, supra note 24, at 19.
    \70\ See Preliminary Staff Report, supra note 21, at 15; Final 
Staff Report, supra note 24, at 19.
---------------------------------------------------------------------------

    As noted above, for purposes of this Proposal, staff utilized 
assumptions and methodologies similar to those detailed in the Staff 
Reports to approximate potential swap dealing activity.\71\ To attempt 
to account for the various exclusions relevant to the SD Definition, 
filters were applied to the data to exclude certain transactions and 
entities from the analysis. The reason an entity enters into a swap 
(e.g., dealing, hedging, investing, proprietary trading) is not 
collected under the reporting requirements in part 45 of the 
Commission's regulations.\72\ Accordingly, staff used filters to 
identify and exclude certain categories of entities--such as funds, 
insurance companies, cooperatives, government-sponsored entities, most 
commercial end-users, and international financial institutions--as 
potential SDs because these entities generally use swaps for investing, 
hedging, or proprietary trading and do not seem to be engaged in swap 
dealing activity, or otherwise enter into swaps that would not be 
included in determining whether the entity is an SD.\73\ Further, 
additional filters allowed for the exclusion of inter-affiliate \74\ 
and non-U.S. swap transactions.\75\
---------------------------------------------------------------------------

    \71\ See Preliminary Staff Report, supra note 21, at 13-21; 
Final Staff Report, supra note 24, at 4-6, 19-20.
    \72\ See 17 CFR part 45 app.1.
    \73\ See section I.D (discussing the de minimis threshold 
calculation). The Commission notes that entity-based exclusions are 
not a determinative means of assessing whether any particular entity 
is engaged in swap dealing. See Preliminary Staff Report, supra note 
21, at 12; Final Staff Report, supra note 24, at 6.
    \74\ See 17 CFR 1.3, Swap dealer, paragraph (6)(i).
    \75\ See generally 78 FR 45292.
---------------------------------------------------------------------------

    With the benefits of improved data quality and analytical tools, 
staff was able to conduct a more granular analysis, as compared to the 
Staff Reports, in order to more accurately identify those entities 
that, based on their observable business activities, are potentially 
engaged in swap dealing activity (``In-Scope Entities'') \76\ versus 
those likely engaged in other kinds of transactions (e.g., entering 
into swaps for investment purposes). Further, for the purposes of this 
Proposal, a minimum unique counterparty count of 10 counterparties was 
utilized to better identify the entities that are likely to be engaged 
in transactions that have to be considered for the SD Definition. Each 
distinct, unaffiliated counterparty of a person was regarded as one 
unique counterparty (hereinafter referred to as ``counterparty'').\77\ 
A threshold of 10 counterparties was utilized because, after excluding 
inter-affiliate and non-U.S. swap transactions, 83 percent of 
registered SDs had 10 or more reported counterparties, while 
approximately 97 percent of unregistered entities had fewer than 10 
counterparties. Therefore, this appeared to be a reasonable threshold 
to better identify entities likely engaged in swap dealing. Adding this 
filter to the analysis reduced the likelihood of false positives--i.e., 
reduced the potential that entities likely engaged in hedging or other 
non-dealing activity would be identified as potential SDs.
---------------------------------------------------------------------------

    \76\ The majority of In-Scope Entities are banks, broker-
dealers, non-bank financial entities, and affiliates thereof.
    \77\ For example, if Bank A entered into swaps with each of 
three entities that are all affiliated with Bank B (i.e., Bank A 
entered into swaps with each of Bank B-1, Bank B-2, and Bank B-3), 
and also entered into a swap with Bank C, Bank A was considered to 
have four counterparties (Bank B-1, Bank B-2, Bank B-3, and Bank C). 
Additionally, each invalid identifier (i.e., an invalid LEI or a 
non-LEI identifier) was considered its own counterparty. However, it 
is possible that each invalid identifier does not actually represent 
a distinct counterparty because one counterparty may be associated 
with multiple invalid identifiers.
---------------------------------------------------------------------------

    The updated analysis largely confirmed the analysis conducted for 
the Staff Reports; \78\ however, there is greater confidence in the 
results given the improved data and refined methodology. Nonetheless, 
given the lack of a swap dealing indicator for individual swaps, and 
the lack of an indicator to identify whether a specific swap need not 
be considered in determining whether a person is an SD or counted 
towards the person's de minimis threshold, staff's analysis is based on 
a person's AGNA of swaps activity, as opposed to AGNA of swap dealing 
activity.
---------------------------------------------------------------------------

    \78\ See generally Final Staff Report, supra note 24; 
Preliminary Staff Report, supra note 21.
---------------------------------------------------------------------------

    With respect to NFC swaps, Commission staff encountered a number of 
challenges in calculating notional amounts. These included: (1) The 
vast array of underlying commodities with differing characteristics; 
(2) the multiple types of swaps (e.g., fixed-float, basis, options, 
multi-leg, exotic); (3) the variety of data points required to 
calculate notional amounts (e.g., price, quantity, quantity units, 
location, grades, exchange rate); (4) locality-specific terms; and (5) 
lack of industry standards for notional amount-equivalent 
calculations.\79\ However,

[[Page 27450]]

given the limitations in the AGNA data, counterparty counts and 
transaction counts were used to analyze likely swap dealing activity 
for participants in the NFC swap market.
---------------------------------------------------------------------------

    \79\ Compare Letter from American Petroleum Institute, Commodity 
Markets Council, Edison Electric Institute, Electric Power Supply 
Association, Independent Petroleum Association of America, and 
Natural Gas Supply Association (Sep. 20, 2012) (stating that ``The 
notional amount for options should be based on the absolute value of 
the product of the notional quantity of the option (without 
adjustment for the option delta) multiplied by the transaction value 
for the option (i.e., the premium).''), attached to a 2016 comment 
letter available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60595&SearchText, with Letter from Futures 
Industry Association Principal Traders Group (Dec. 20, 2012) 
(proposing a methodology that does not utilize premium value or the 
strike price, but does include option delta in the calculation), 
available at https://ptg.fia.org/file/487/download?token=HSUPcHmL. 
See also Ernst & Young, Notional value under Dodd-Frank: survey of 
energy commodities participants (2013) (``While the term notional 
value is commonly used in industry, in practice there isn't a single 
accepted definition.''), available at http://www.ey.com/Publication/
vwLUAssets/Notional_value_-_under_Dodd-Frank/$FILE/
Notional_value_under_Dodd_Frank.pdf.
---------------------------------------------------------------------------

(ii) Regulatory Coverage Analysis
    To assess the relative impact on the swap market of potential 
changes to the de minimis exception, CFTC staff analyzed the extent to 
which the swap market was subject to SD regulation during the review 
period because at least one counterparty to a swap was a registered SD 
(``2017 Regulatory Coverage''). For purposes of this analysis, any 
person listed as a provisionally registered SD on December 31, 2017, 
was considered to be a registered SD. Specifically, with regard to 2017 
Regulatory Coverage, staff identified the extent to which: (1) Swaps 
activity, measured in terms of AGNA, was subject to SD regulation 
during the review period because at least one counterparty to a swap 
was a registered SD (``2017 AGNA Coverage''); (2) swaps activity, 
measured in terms of number of transactions, was subject to SD 
regulation during the review period because at least one counterparty 
to a swap was a registered SD (``2017 Transaction Coverage''); and (3) 
swaps activity was subject to SD regulation during the review period, 
measured in terms of number of counterparties who transacted with at 
least one registered SD (``2017 Counterparty Coverage'').
    Additionally, staff estimated regulatory coverage by assessing the 
extent to which the swap market would have been subject to SD 
regulation at different de minimis thresholds because at least one 
counterparty to a swap was identified as a ``Likely SD'' (``Estimated 
Regulatory Coverage''). For purposes of this analysis, the term 
``Likely SD'' refers to an In-Scope Entity that exceeds a specified 
AGNA threshold level, and trades with at least 10 counterparties. With 
regard to Estimated Regulatory Coverage, staff identified the extent to 
which: (1) Swaps activity, measured in terms of AGNA, would have been 
subject to SD regulation during the review period, at a specified de 
minimis threshold, because at least one counterparty to a swap was 
identified as a Likely SD at that de minimis threshold (``Estimated 
AGNA Coverage''); (2) swaps activity, measured in terms of number of 
transactions, would have been subject to SD regulation during the 
review period, at a specified de minimis threshold, because at least 
one counterparty to a swap was identified as a Likely SD at that de 
minimis threshold (``Estimated Transaction Coverage''); and (3) 
counterparties in the swap market would have transacted with at least 
one Likely SD during the review period, at a specified de minimis 
threshold (``Estimated Counterparty Coverage'').
2. Data and Analysis
    For this Proposal, the Commission considered reducing the AGNA de 
minimis threshold to $3 billion, maintaining the threshold at $8 
billion, or increasing the threshold. Based on the data and related 
policy considerations discussed below, the Commission is of the view 
that maintaining the current $8 billion AGNA de minimis threshold is 
appropriate. The policy objectives underlying SD regulation--reducing 
systemic risk, increasing counterparty protections, and increasing 
market efficiency, orderliness, and transparency--would not be 
significantly advanced if the threshold were to decrease to $3 billion 
or to increase from the current $8 billion level.\80\ Nor does the 
Commission believe that the policy objectives furthered by a de minimis 
exception--increasing efficiency, allowing limited ancillary dealing, 
encouraging new participants, and focusing regulatory resources--would 
be significantly advanced if the threshold were to be changed.\81\
---------------------------------------------------------------------------

    \80\ As discussed below, the analysis explored the hypothetical 
effects on the swap market of changing the AGNA threshold to various 
amounts between $3 billion and $100 billion.
    \81\ The Commission also notes that setting the threshold at $8 
billion would be consistent with a non-binding Congressional 
Directive stating that the Commission should establish a de minimis 
threshold of $8 billion or greater within 60 days of enactment of 
the Consolidated Appropriations Act of 2016. See Accompanying 
Statement to the Consolidated Appropriations Act of 2016, 
Explanatory Statement Division A at 32 (Dec. 2015), available at 
http://docs.house.gov/meetings/RU/RU00/20151216/104298/HMTG-114-RU00-20151216-SD002.pdf; H.Rpt. 114-205 at 76 (July 14, 2015), 
available at https://www.congress.gov/114/crpt/hrpt205/CRPT-114hrpt205.pdf.
---------------------------------------------------------------------------

    Analysis of the data indicates that: (1) The current $8 billion 
threshold subjects almost all swap transactions (as measured by AGNA or 
transaction count) to SD regulations; \82\ (2) at a lower threshold of 
$3 billion, there would only be a small amount of additional AGNA and 
swap transactions subject to SD regulation, and potentially reduced 
liquidity in the swap market, as compared to the $8 billion threshold; 
(3) counterparty protections may be reduced at higher thresholds; and 
(4) a lower threshold could lead to reduced liquidity for NFC swaps, 
negatively impacting end-users and commercial entities who utilize NFC 
swaps for hedging purposes. Additionally, the Commission expects that 
maintaining an $8 billion threshold would foster the efficient 
application of the SD Definition by providing continuity and addressing 
the uncertainty associated with the end of the phase-in period.
---------------------------------------------------------------------------

    \82\ SD regulations include, among other things, registration, 
internal and external business conduct standards, reporting, 
recordkeeping, risk management, margin, and chief compliance officer 
requirements. However, the requirement to report a swap to an SDR 
applies regardless of whether an SD is a counterparty to the swap.
---------------------------------------------------------------------------

    The analysis below is based on a January 1, 2017, through December 
31, 2017, review period, and includes swap transactions reported to 
SDRs, excluding inter-affiliate and non-U.S. transactions.\83\ The 
total size of the swap market that was analyzed, after excluding inter-
affiliate and non-U.S. transactions, was approximately $221.1 trillion 
in AGNA of swaps activity (excluding NFC swaps), approximately 4.4 
million transactions, and 39,107 counterparties.
---------------------------------------------------------------------------

    \83\ See section II.A.1 above for additional discussion 
regarding the methodology utilized to conduct the analysis.
---------------------------------------------------------------------------

(i) Regulatory Coverage at $8 Billion Threshold
    As shown below, the data indicates that, at the $8 billion 
threshold, there was nearly complete 2017 Regulatory Coverage as 
measured by 2017 AGNA Coverage and 2017 Transaction Coverage.

[[Page 27451]]



                                     Table 1--Swaps Subject to SD Regulation
                                            2017 Transaction Coverage
----------------------------------------------------------------------------------------------------------------
                                                                                   Number of
                                                                                  transactions         2017
                         Asset class                           Total number of    including at     transaction
                                                                 transactions      least one       coverage (%)
                                                                                 registered SD
----------------------------------------------------------------------------------------------------------------
IRS..........................................................          945,593          937,975            99.19
CDS..........................................................          133,570          132,899            99.50
FX swaps.....................................................        2,443,659        2,435,537            99.67
Equity swaps.................................................          281,219          281,211           >99.99
NFC swaps....................................................          633,943          546,823            86.26
                                                              --------------------------------------------------
    Total....................................................        4,437,984        4,334,445            97.67
----------------------------------------------------------------------------------------------------------------

    As seen in Table 1, at the $8 billion threshold, almost all swap 
transactions involved at least one registered SD as a counterparty, 
greater than 99 percent for IRS, CDS, FX swaps, and equity swaps. For 
NFC swaps, approximately 86 percent of transactions involved at least 
one registered SD as a counterparty. As discussed in more detail in 
section II.A.2.iv, although that percentage is lower than the 
approximately 99 percent for the other asset classes, the Commission is 
of the view that with respect to NFC swaps, lower SD regulatory 
coverage is acceptable given the unique characteristics of the NFC swap 
market. Overall, approximately 98 percent of transactions involved at 
least one registered SD.

                                     Table 2--Swaps Subject to SD Regulation
                                               2017 AGNA Coverage
----------------------------------------------------------------------------------------------------------------
                                                                                 AGNA including
                                                                  Total AGNA      at least one      2017 AGNA
                         Asset class                                ($Bn)        registered SD     coverage (%)
                                                                                     ($Bn)
----------------------------------------------------------------------------------------------------------------
IRS..........................................................          182,961          182,847            99.94
CDS..........................................................            7,527            7,490            99.51
FX swaps.....................................................           28,794           28,775            99.93
Equity swaps \84\............................................            1,850            1,850            99.99
                                                              --------------------------------------------------
    Total....................................................          221,132          220,963            99.92
----------------------------------------------------------------------------------------------------------------

    As seen in Table 2, at the $8 billion threshold, almost all AGNA of 
swaps activity included at least one registered SD, greater than 99 
percent for IRS, CDS, FX swaps, and equity swaps.
---------------------------------------------------------------------------

    \84\ Coverage is approximately 99.99 percent due to rounding.
---------------------------------------------------------------------------

    The 2017 Transaction Coverage and 2017 AGNA Coverage ratios 
indicate that SD regulations covered nearly all swaps in these asset 
classes, signifying that nearly all swaps already benefited from the 
policy considerations discussed above (e.g., reducing systemic risk, 
increasing counterparty protections, and increasing market efficiency, 
orderliness, and transparency) at the existing $8 billion threshold.
    The Commission notes the 2017 Counterparty Coverage was 
approximately 83.5 percent--i.e., approximately 16.5 percent of the 
counterparties in the swap market did not transact with at least one 
registered SD on at least one swap (6,440 counterparties out of a total 
of 39,107), and therefore potentially did not benefit from the 
counterparty protection aspects of SD regulations.\85\ However, given 
the 2017 AGNA Coverage and 2017 Transaction Coverage statistics, these 
6,440 entities overall had limited swaps activity. Collectively, the 
6,440 entities entered into 77,333 transactions, an average of 
approximately 12 transactions per entity, and represented only 
approximately 1.7 percent of the overall number of transactions during 
the review period. Additionally, collectively, the 6,440 entities had 
an AGNA of approximately $68 billion in swaps activity, an average of 
approximately $10.6 million per entity, and they represented only 
approximately 0.03 percent of the overall AGNA of swaps activity during 
the review period in IRS, CDS, FX swaps, and equity swaps.
---------------------------------------------------------------------------

    \85\ The actual number of entities without a single transaction 
with a registered SD is likely lower than 6,440. Of the 6,440 
entities, 1,780 have invalid identifiers that staff was unable to 
manually replace with a valid LEI. It is possible that these 1,780 
invalid identifiers actually represent fewer than 1,780 distinct 
counterparties because one counterparty may be associated with 
multiple invalid identifiers.
---------------------------------------------------------------------------

    The Commission also believes that this limited activity indicates 
that, to the extent these 6,440 entities are engaging in swap dealing 
activities, such activity is likely ancillary and in connection with 
other client services, potentially advancing the policy rationales 
behind a de minimis exception. For example, of the 6,440 entities, 
5,302 are active in IRS, indicating that these entities may be entering 
into loan-related swaps with banks. These banks may be entering into an 
outright amount of swap dealing activity at a level below the de 
minimis threshold, or do not have to register because of the exclusion 
for swaps entered into by IDIs in connection with originating 
loans.\86\
---------------------------------------------------------------------------

    \86\ See 17 CFR 1.3, Swap dealer, paragraph (5).
---------------------------------------------------------------------------

    Generally, the Commission is of the view that the policy 
considerations underlying SD regulation--reducing systemic risk, 
increasing counterparty protections, and increasing market efficiency, 
orderliness, and

[[Page 27452]]

transparency--are being appropriately advanced at the current $8 
billion threshold given the regulatory coverage statistics discussed 
above. Only a low percentage of swaps activity is not currently covered 
by SD regulation-related requirements,\87\ indicating that the current 
threshold is appropriate. Additionally, as discussed below in sections 
II.A.2.ii and II.A.2.iv, a reduction in the de minimis threshold could 
negatively affect the policy considerations underlying the de minimis 
exception, as compared to the current $8 billion threshold.
---------------------------------------------------------------------------

    \87\ Transactions that do not include at least one registered SD 
as a counterparty would generally not be subject to SD-specific 
regulations (e.g., margin, business conduct standard, and risk 
management requirements). However, such transactions would still be 
subject to swap reporting requirements (e.g., 17 CFR part 45), among 
other regulations.
---------------------------------------------------------------------------

(ii) Regulatory Coverage at Lower Threshold
    Given the high percentage of swaps that were subject to SD 
regulation at the existing $8 billion threshold during the review 
period, a lower threshold of $3 billion would result in only a small 
amount of additional activity being directly subjected to SD 
regulation. To estimate the effect of a lower de minimis threshold 
during the review period, staff compared the number of Likely SDs and 
the Estimated AGNA Coverage, Estimated Transaction Coverage, and 
Estimated Counterparty Coverage at $8 billion and $3 billion 
thresholds.
    Table 3 estimates the percentage of IRS, CDS, FX swaps, and equity 
swaps that would involve at least one Likely SD at de minimis 
thresholds of $3 billion and $8 billion. To make these calculations, 
staff used the methodology described in section II.A.1 to determine 
Likely SDs at the indicated thresholds.\88\ Because SDR data does not 
include information indicating the underlying purposes of a swap,\89\ 
the analysis likely includes swaps that were not required to be counted 
under the SD Definition (e.g., swaps entered into for hedging, 
investing, or proprietary trading purposes). Therefore, the estimates 
of the number of Likely SDs at various AGNA thresholds may differ from 
the actual number of entities that would be required to register at 
those thresholds. For example, Table 3 shows that an estimated 108 
entities could be required to register as SDs at the $8 billion 
threshold, whereas the figures in Table 1 are based on the 100 actual 
registered SDs.\90\ Nevertheless, the Commission believes that Table 3 
presents a reasonably accurate estimate of how the number of SDs that 
are required to register will fluctuate with changes in the threshold.
---------------------------------------------------------------------------

    \88\ The term ``Likely SD'' refers to an In-Scope Entity that 
exceeds a notional threshold test, and trades with at least 10 
counterparties.
    \89\ See 17 CFR part 45 app. 1.
    \90\ Some registered SDs were not captured in the Estimated 
Regulatory Coverage analysis since they primarily are involved in 
the NFC swap market, which is excluded from this AGNA-based 
analysis. In addition, some of the existing registered SDs reported 
AGNA of swaps activity below $8 billion in 2017 but remained 
registered SDs.

                         Table 3--Number of Likely SDs and Estimated Regulatory Coverage
                                      IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
                                                     Likely SD
                                     Number of     count change   Estimated AGNA     Estimated       Estimated
      AGNA threshold ($Bn)          likely SDs       vs. $8 Bn     coverage (%)     transaction    counterparty
                                                     threshold                     coverage (%)    coverage (%)
----------------------------------------------------------------------------------------------------------------
1                                              2               3               4               5               6
----------------------------------------------------------------------------------------------------------------
3...............................             121              13           99.96           99.83           90.75
8...............................             108  ..............           99.95           99.77           88.80
----------------------------------------------------------------------------------------------------------------

    Column 1 of Table 3 lists the AGNA thresholds for which information 
is being presented. Column 2 is the number of Likely SDs at each given 
threshold as determined using the methodology described above, 
including a 10 counterparty minimum. Column 3 is the change in the 
number of Likely SDs, as compared to the current $8 billion threshold. 
Columns 4, 5, and 6 illustrate the Estimated Regulatory Coverage, in 
percentage terms, for the $3 billion and $8 billion de minimis 
thresholds during the review period. The percentages are based on a 
total market size in IRS, CDS, FX swaps, and equity swaps of 
approximately $221.1 trillion in AGNA of swaps activity, 3.8 million 
transactions, and 34,774 counterparties, after excluding inter-
affiliate and non-U.S. transactions.\91\
---------------------------------------------------------------------------

    \91\ Note that the market totals of 3.8 million transactions and 
34,774 counterparties exclude NFC swaps, whereas the market totals, 
in section II.A.2.i above, of 4.4 million transactions and 39,107 
counterparties include NFC swaps.
---------------------------------------------------------------------------

    As columns 2 and 3 indicate, the number of Likely SDs increases 
from 108 at an $8 billion AGNA threshold to 121 at a $3 billion AGNA 
threshold--an increase of 13 entities. However, as columns 4 through 6 
indicate, and as explained in more detail below in Tables 4 through 6, 
if these 13 entities were all registered as SDs, the increase in 
Estimated Regulatory Coverage would be small.

                               Table 4--Estimated AGNA Coverage ($3 Bn and $8 Bn)
                                      IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
                                                                     Change in
                                                  Estimated AGNA  estimated AGNA  Estimated AGNA     Change in
              AGNA threshold ($Bn)                 coverage (%)   coverage (pct.  coverage ($Bn)  estimated AGNA
                                                                      point)                      coverage ($Bn)
----------------------------------------------------------------------------------------------------------------
3...............................................           99.96            0.01         221,039              19
8...............................................           99.95  ..............         221,020  ..............
----------------------------------------------------------------------------------------------------------------


[[Page 27453]]

    As seen in Table 4, at a $3 billion threshold, the Estimated AGNA 
Coverage would have increased from approximately $221,020 billion 
(99.95 percent) to $221,039 billion (99.96 percent)--an increase of $19 
billion (a 0.01 percentage point increase).

                            Table 5--Estimated Transaction Coverage ($3 Bn and $8 Bn)
                                      IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties)
----------------------------------------------------------------------------------------------------------------
                                                                                                     Change in
                                                                     Change in       Estimated       estimated
                                                     Estimated       estimated      transaction     transaction
              AGNA threshold ($Bn)                  transaction     transaction      coverage        coverage
                                                   coverage (%)   coverage (pct.    (number of      (number of
                                                                      point)          trades)         trades)
----------------------------------------------------------------------------------------------------------------
3...............................................           99.83            0.06       3,797,734           2,404
8...............................................           99.77  ..............       3,795,330  ..............
----------------------------------------------------------------------------------------------------------------

    As seen in Table 5, at a $3 billion threshold, the Estimated 
Transaction Coverage would have increased from 3,795,330 trades (99.77 
percent) to 3,797,734 trades (99.83 percent)--an increase of 2,404 
trades (a 0.06 percentage point increase).

                           Table 6--Estimated Counterparty Coverage ($3 Bn and $8 Bn)
                                      IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
                                                                                                    Change in
                                                                   Change in       Estimated        estimated
                                                   Estimated       estimated      counterparty     counterparty
             AGNA threshold ($Bn)                counterparty    counterparty       coverage         coverage
                                                 coverage (%)   coverage (pct.     (number of       (number of
                                                                    point)      counterparties)  counterparties)
----------------------------------------------------------------------------------------------------------------
3.............................................           90.75            1.96           31,559              680
8.............................................           88.80  ..............           30,879  ...............
----------------------------------------------------------------------------------------------------------------

    As seen in Table 6, at a $3 billion threshold, the Estimated 
Counterparty Coverage would have increased from 30,879 counterparties 
(88.80 percent) to 31,559 counterparties (90.75 percent)--an increase 
of 680 counterparties (a 1.96 percentage point increase).
    The Commission is of the view that these small increases in 
Estimated AGNA Coverage, Estimated Transaction Coverage, and Estimated 
Counterparty Coverage indicate that the systemic risk mitigation, 
counterparty protection, and market efficiency benefits of SD 
regulation would be enhanced in only a very limited manner if the de 
minimis threshold decreased from $8 billion to $3 billion. 
Additionally, the limited regulatory and market benefits of a $3 
billion threshold should be considered in conjunction with the costs 
associated with a lower threshold. In particular, the persons required 
to register would incur the likely significant costs of implementing, 
among other things, policies and procedures, technology systems, and 
training programs to address requirements imposed by SD 
regulations.\92\
---------------------------------------------------------------------------

    \92\ Registered SDs are subject to a broad range of regulatory 
requirements. See, e.g., supra note 82.
---------------------------------------------------------------------------

    Further, if the de minimis threshold decreases to $3 billion, it is 
possible that the number of Likely SDs would be smaller than estimated 
because the analysis includes swaps that would not be required to be 
counted under the SD Definition (e.g., swaps entered into for hedging, 
investing, or proprietary trading purposes). Further, persons engaged 
in swap dealing in amounts between $3 billion and $8 billion may also 
reduce their swap dealing activity to remain under a lower threshold, 
thus further reducing the actual incremental change.
    To more fully understand the potential market impact of a lower 
threshold, the Commission also analyzed the 13 entities that were 
identified as Likely SDs at a $3 billion threshold but not at an $8 
billion threshold.
---------------------------------------------------------------------------

    \93\ ``Other'' refers to commercial entities, such as consumers, 
merchants, producers, or traders of physical commodities, who appear 
to be engaging in some swap dealing activity.

                               Table 7--Categories of Likely SDs ($3 Bn and $8 Bn)
                                      IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
                            Category                                   $3 Bn           $8 Bn        Difference
----------------------------------------------------------------------------------------------------------------
Bank/Bank subsidiary/Bank affiliate.............................             105              95              10
Non-bank financial..............................................              14              11               3
Other \93\......................................................               2               2               0
                                                                 -----------------------------------------------
    Total.......................................................             121             108              13
----------------------------------------------------------------------------------------------------------------


[[Page 27454]]

    As seen in Table 7, for IRS, CDS, FX swaps, and equity swaps, 
entities that would potentially have to register at a lower threshold 
primarily include banks or bank affiliates, 10 of the 13 entities in 
total. In the aggregate, these 13 entities have only approximately $19 
billion in AGNA of swaps activity (approximately 0.01 percent of the 
overall market) and 2,406 transactions (approximately 0.06 percent of 
the overall market) with currently unregistered market participants, 
further indicating that decreasing the threshold to $3 billion would 
yield only a small increase in Estimated Regulatory Coverage. After 
reviewing the list of the 10 banking entities' counterparties, it is 
also likely that some of the activity for the 10 banking entities 
consists of swaps that would be excluded from the de minimis 
calculation pursuant to the exclusion for swaps entered into by IDIs in 
connection with loans to customers (as provided for in paragraph (5) of 
the SD Definition), potentially reducing the likelihood that all or 
some of these entities would be required to register at a lower 
threshold.
    In addition to a negligible increase in the AGNA or number of 
transactions that would be subject to SD regulation at a $3 billion 
threshold, policy considerations may indicate that lowering the 
threshold would not be beneficial to the market. A number of Project 
KISS suggestions addressed these policy-related concerns.\94\
---------------------------------------------------------------------------

    \94\ See Letters from BP, Chatham, CDE, CMC, EDF, EEI/EPSA, FSR, 
IIB, IECA, ISDA, NGSA, SIFMA, Western Union, and WU/GPS/AFEX, supra 
note 58.
---------------------------------------------------------------------------

    The Commission believes that a $3 billion AGNA de minimis threshold 
could lead certain entities to reduce or cease swap dealing activity to 
avoid registration and its related costs. Generally, the costs 
associated with registering as an SD may exceed the revenue from 
dealing swaps for many small or mid-sized banks and non-financial 
entities. Additionally, some persons engaged in swap dealing activities 
below the current $8 billion threshold have indicated that swap dealing 
is not a major source of revenue and is only complementary to other 
client-facing businesses, suggesting that these smaller dealing 
entities could reduce or eliminate their swap dealing activities if the 
threshold is lowered. Although the magnitude of this effect is not 
certain, reduced swap dealing activity could lead to increased 
concentration in the swap dealing market, reduced availability of 
potential swap counterparties, reduced liquidity, increased volatility, 
higher fees, wider bid/ask spreads, or reduced competitive pricing. The 
end-user counterparties of these smaller swap dealing entities may be 
adversely impacted by the above consequences and could face a reduced 
ability to use swaps to manage their business risks.\95\
---------------------------------------------------------------------------

    \95\ See generally Letters from BP, Chatham, CDE, CMC, EDF, EEI/
EPSA, FSR, IIB, IECA, ISDA, NGSA, SIFMA, Western Union, and WU/GPS/
AFEX, supra note 58; Final Staff Report, supra note 24, at 11-12 
(citing comment letters submitted in response to Preliminary Staff 
Report, supra note 21).
---------------------------------------------------------------------------

    Based on the likely small increase in regulatory coverage, and the 
potential negative market effects of a $3 billion de minimis threshold, 
the Commission is of the view that, on balance, the overall policy 
goals of SD registration and the de minimis exception would not be 
advanced by lowering the threshold from $8 billion.
(iii) Regulatory Coverage at Higher Thresholds
    To assess the effect of a higher de minimis threshold, staff 
compared the number of Likely SDs and the Estimated AGNA Coverage, 
Estimated Transaction Coverage, and Estimated Counterparty Coverage at 
$8 billion, $20 billion, $50 billion, and $100 billion thresholds. As 
with the analysis above regarding $3 billion and $8 billion thresholds, 
to make these calculations, staff used the methodology described in 
section II.A.1 to determine Likely SDs at the indicated thresholds.\96\ 
As discussed, if a swap transaction includes at least one Likely SD, 
that transaction would theoretically be subject to SD-related 
regulations.
---------------------------------------------------------------------------

    \96\ Additionally, as discussed in section II.A.2.ii, the 
percentages are based on a total market size in IRS, CDS, FX swaps, 
and equity swaps of approximately $221.1 trillion in AGNA of swaps 
entered into, 3.8 million transactions, and 34,774 counterparties, 
after excluding inter-affiliate and non-U.S. transactions.

                              Table 8--Number of Likely SDs and Regulatory Coverage
                                      IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
                                                     Likely SD
                                     Number of     count change   Estimated AGNA     Estimated       Estimated
      AGNA threshold ($Bn)          likely SDs       vs. $8 Bn     coverage (%)     transaction    counterparty
                                                     threshold                     coverage (%)    coverage (%)
----------------------------------------------------------------------------------------------------------------
1                                              2               3               4               5               6
----------------------------------------------------------------------------------------------------------------
8...............................             108  ..............           99.95           99.77           88.80
20..............................              93            (15)           99.94           99.72           86.00
50..............................              81            (27)           99.91           99.35           83.09
100.............................              72            (36)           99.88           99.20           81.19
----------------------------------------------------------------------------------------------------------------

    As seen in Table 8, the number of Likely SDs decreases from 108 at 
an $8 billion AGNA threshold to 93, 81, and 72 Likely SDs, at the $20 
billion, $50 billion, and $100 billion thresholds, respectively. As 
columns 4 and 5 indicate, and as explained in more detail below in 
Tables 9 and 10, the reduction in the number of Likely SDs would lead 
to only a relatively small decrease in Estimated AGNA Coverage and 
Estimated Transaction Coverage at higher AGNA thresholds of up to $100 
billion. However, as column 6 indicates, and as explained in more 
detail below in Table 11, there would potentially be a more pronounced 
reduction in Estimated Counterparty Coverage at higher AGNA thresholds.

[[Page 27455]]



                      Table 9--Estimated AGNA Coverage ($8 Bn, $20 Bn, $50 Bn, and $100 Bn)
                                      IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
                                                                     Change in
                                                  Estimated AGNA  estimated AGNA  Estimated AGNA     Change in
              AGNA threshold ($Bn)                 coverage (%)   coverage (pct.  coverage ($Bn)  estimated AGNA
                                                                      point)                      coverage ($Bn)
----------------------------------------------------------------------------------------------------------------
8...............................................           99.95  ..............         221,020  ..............
20..............................................           99.94          (0.01)         221,005            (15)
50..............................................           99.91          (0.04)         220,935            (85)
100.............................................           99.88          (0.06)         220,877           (143)
----------------------------------------------------------------------------------------------------------------

    As seen in Table 9, at a $100 billion threshold, the Estimated AGNA 
Coverage would have decreased from approximately $221,020 billion 
(99.95 percent) to $220,877 billion (99.88 percent)--a decrease of $143 
billion (a 0.06 percentage point decrease). The decrease would be lower 
at thresholds of $20 billion and $50 billion, at 0.01 percentage points 
and 0.04 percentage points, respectively.

                  Table 10--Estimated Transaction Coverage ($8 Bn, $20 Bn, $50 Bn, and $100 Bn)
                                      IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Change in
                                                                     Change in       Estimated       estimated
                                                     Estimated       estimated      transaction     transaction
              AGNA threshold ($Bn)                  transaction     transaction      coverage        coverage
                                                   coverage (%)   coverage (pct.    (number of      (number of
                                                                      point)          trades)         trades)
----------------------------------------------------------------------------------------------------------------
8...............................................           99.77  ..............       3,795,330  ..............
20..............................................           99.72          (0.05)       3,793,454         (1,876)
50..............................................           99.35          (0.42)       3,779,466        (15,864)
100.............................................           99.20          (0.58)       3,773,440        (21,890)
----------------------------------------------------------------------------------------------------------------

    As seen in Table 10, at a $100 billion threshold, the Estimated 
Transaction Coverage would have decreased from 3,795,330 trades (99.77 
percent) to 3,773,440 trades (99.20 percent)--a decrease of 21,890 
trades (a 0.58 percentage point decrease). The decrease would be lower 
at thresholds of $20 billion and $50 billion, at 0.05 percentage points 
and 0.42 percentage points, respectively.

                 Table 11--Estimated Counterparty Coverage ($8 Bn, $20 Bn, $50 Bn, and $100 Bn)
                                      IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
                                                                                                    Change in
                                                                   Change in       Estimated        estimated
                                                   Estimated       estimated      counterparty     counterparty
             AGNA threshold ($Bn)                counterparty    counterparty       coverage         coverage
                                                 coverage (%)   coverage (pct.     (number of       (number of
                                                                    point)      counterparties)  counterparties)
----------------------------------------------------------------------------------------------------------------
8.............................................           88.80  ..............           30,879  ...............
20............................................           86.00          (2.80)           29,907            (972)
50............................................           83.09          (5.71)           28,893          (1,986)
100...........................................           81.19          (7.61)           28,234          (2,645)
----------------------------------------------------------------------------------------------------------------

    As seen in Table 11, at a $100 billion threshold, the Estimated 
Counterparty Coverage would have decreased from 30,879 counterparties 
(88.80 percent) to 28,234 counterparties (81.19 percent)--a decrease of 
2,645 counterparties (a 7.61 percentage point decrease). The decrease 
would be lower at thresholds of $20 billion and $50 billion, at 2.80 
percentage points and 5.71 percentage points, respectively.
    The small decrease in Estimated AGNA Coverage and Estimated 
Transaction Coverage at higher thresholds potentially indicates that 
increasing the threshold to up to $100 billion may have a limited 
effect on the systemic risk and market efficiency policy considerations 
of SD regulation. Additionally, a higher threshold could enhance the 
benefits associated with a de minimis exception, for example by 
allowing entities to increase ancillary dealing activity. However, the 
decrease in Estimated Counterparty Coverage indicates that fewer 
entities would be transacting with registered SDs, and therefore, the 
counterparty protection benefits of SD regulation might be reduced if 
the de minimis threshold increased from $8 billion to $20 billion, $50 
billion, or $100 billion.

[[Page 27456]]

    Also, the Commission is preliminarily of the view that maintaining 
the status quo signals long-term stability of the de minimis threshold. 
This should provide for the efficient application of the SD Definition 
as it allows for long-term planning based on the current AGNA de 
minimis threshold.
(iv) Regulatory Coverage of NFC Swap Market
    As indicated in Table 1 above, approximately 86 percent of NFC 
swaps involved at least one registered SD. Although that percentage is 
lower than the approximately 99 percent for other asset classes, as 
discussed below, the Commission is of the view that lower SD regulatory 
coverage is acceptable given the unique characteristics of the NFC swap 
market. Table 12 presents information on the category and SD 
registration status of In-Scope Entities with at least 10 NFC swap 
counterparties.

              Table 12--Categories and Registration Status
                            In-Scope Entities
                     [Minimum 10 NFC counterparties]
------------------------------------------------------------------------
                                                           Unregistered
                Category                  Registered SDs     entities
------------------------------------------------------------------------
Bank/Bank subsidiary/Bank affiliate.....              39              12
Non-bank financial entity (e.g., traders               2               8
 without physical assets)...............
Other (e.g., commercial entities, such                 3              22
 as consumers, merchants, producers, or
 traders of physical commodities, who
 appear to be engaging in some swap
 dealing activity)......................
                                         -------------------------------
    Total...............................              44              42
------------------------------------------------------------------------

    Analysis of SDR data indicates that were 86 In-Scope Entities with 
10 or more NFC swap counterparties during the review period. As seen in 
Table 12, of these 86 entities, 44 are registered SDs and 42 are 
unregistered entities. Of the 42 unregistered entities, 22 have a 
primary business that is non-financial in nature. Specifically, these 
are commercial entities, such as consumers, merchants, producers, or 
traders of physical commodities, who appear to be engaging in some swap 
dealing activity. Moreover, half of the 12 unregistered banks or bank 
affiliates active in the NFC swap market are small or mid-sized in 
nature. Further, of the 42 unregistered entities, only seven have AGNA 
of swaps activity greater than $3 billion in IRS, CDS, FX swaps, and 
equity swaps, indicating that the majority of these entities are 
primarily or exclusively active in NFC swaps.\97\ In addition to the 
fact that entering into NFC swaps is the primary swaps activity for the 
majority of these 42 entities, a review of these entities' transaction 
data indicates that they appear to provide NFC swaps generally to 
smaller end-user counterparties, potentially to permit these 
counterparties to hedge risks associated with physical commodities.
---------------------------------------------------------------------------

    \97\ Five have greater than $8 billion in AGNA of swaps 
activity.
    \98\ The transaction and counterparty totals are not mutually 
exclusive, as some of the 44 registered SDs transact with the 42 
unregistered entities. The 44 registered SDs also transact with some 
of the same counterparties as the 42 unregistered entities.

                Table 13--NFC Swap Transaction Statistics
                            In-Scope Entities
                  [Minimum 10 NFC counterparties] \98\
------------------------------------------------------------------------
                                                           Unregistered
                Statistic                 Registered SDs   entities (42
                                            (44 total)        total)
------------------------------------------------------------------------
Transactions:
    Mean................................          12,638           2,195
    Total...............................         546,656          85,025
    Total as Percent of all NFC                      86%             13%
     transactions.......................
Counterparties:
    Mean................................             176              40
    Total...............................           4,626           1,207
    Total as Percent of all NFC                      83%             22%
     counterparties.....................
------------------------------------------------------------------------

    Table 13 indicates that registered SDs with 10 or more 
counterparties entered into 86 percent of the transactions in the NFC 
swap market, and faced 83 percent of counterparties in at least one 
transaction,\99\ indicating that the existing $8 billion de minimis 
threshold has helped extend the benefits of SD registration to much of 
the NFC swap market. The trading activity of the 42 unregistered 
entities represents approximately 13 percent of the overall NFC swap 
market by transaction count. However, as compared to the existing 44 
registered SDs with at least 10 counterparties, these 42 unregistered 
entities have significantly lower mean transaction and counterparty 
counts, indicating that they may only be providing ancillary dealing 
services to accommodate commercial end-user clients, and/or be engaged 
in non-swap dealing activity, such as hedging activity or proprietary 
trading.
---------------------------------------------------------------------------

    \99\ Including existing registered SDs with fewer than 10 
counterparties would only add 167 trades to the analysis.
---------------------------------------------------------------------------

    Lacking notional-equivalent data for NFC swaps, it is unclear how 
many of the 42 entities would actually be subject to SD registration at 
any given de minimis threshold. It is possible that a portion of the 
swaps activity for some or all of these entities qualifies for the 
physical hedging exclusion in paragraph (6)(iii) of the SD Definition 
or is

[[Page 27457]]

otherwise not swap dealing activity, regardless of the de minimis 
threshold level.\100\
---------------------------------------------------------------------------

    \100\ Hypothetically, if all 42 entities registered, the 
percentage of all NFC swaps facing at least one registered SD would 
rise from approximately 86 percent to 98 percent.
---------------------------------------------------------------------------

    The Commission believes that the available data, related policy 
considerations, and comments from market participants \101\ demonstrate 
that maintaining an $8 billion threshold is also appropriate with 
respect to the NFC swap asset class.
---------------------------------------------------------------------------

    \101\ See Letters from BP, CDE, CMC, EDF, EEI/EPSA, FSR, IIB, 
IECA, ISDA, NGSA, and SIFMA, supra note 58.
---------------------------------------------------------------------------

    First, a reduced de minimis threshold likely would have negative 
impacts on NFC swap liquidity. Specifically, some entities may reduce 
dealing to avoid registration and its related costs. Many of the 
entities identified in Table 12 that are not registered as SDs are non-
financial in nature and trade in physical commodity markets, or are 
small or mid-sized banks. Based on analysis of data and comments from 
swap market participants, it is likely that much of the swap dealing by 
these entities serves small or mid-sized end-users in their localized 
markets. Often, the end-users served by these entities do not have 
trading relationships with larger, financial-entity SDs, and the end-
users rely on these small to mid-sized and/or non-financial entities to 
access liquidity provided by larger dealers.
    For example, the 42 unregistered In-Scope Entities described above 
entered into NFC swaps with 1,207 counterparties, 1,174 of which were 
not registered SDs. Of these 1,174 entities, 705 had no transactions 
with registered SDs. Almost all of the 705 entities are commercial end-
users.\102\ Of the 52,396 NFC swaps that these 705 entities entered 
into, 48,813 were entered into with the 42 unregistered In-Scope 
Entities discussed above.\103\ Therefore, it is likely that these 705 
entities are generally relying on the 42 unregistered In-Scope Entities 
for access to the NFC swap market. It is unclear if these 705 entities 
would be able to establish trading lines with registered SDs if some of 
the 42 entities reduced or eliminated their NFC swap dealing 
activities.
---------------------------------------------------------------------------

    \102\ The 705 entities comprise 12.6 percent of the 5,578 
counterparties who entered into NFC swaps.
    \103\ The 48,413 NFC swaps comprise 7.6 percent of the 633,943 
NFC swaps entered into during the review period.
---------------------------------------------------------------------------

    If the de minimis threshold is decreased, the Commission is of the 
view that this would negatively affect swap market access and liquidity 
for commercial end-user counterparties of currently unregistered 
entities that are active in NFC swaps. Specifically, these entities may 
reduce or stop dealing activity if a lower threshold would subject them 
to SD registration.\104\ The swap dealing activity of unregistered 
entities dealing in NFC swaps is likely a smaller part of those 
entities' overall business activities, and may not support the costs 
associated with SD registration and compliance.\105\
---------------------------------------------------------------------------

    \104\ Comments from market participants have specifically 
indicated that some entities would reduce or stop dealing activity 
if the de minimis threshold is reduced. See generally Letters from 
BP, CMC, EDF, IIB, and NGSA; Final Staff Report, supra note 24, at 
11-12, 16-17 (citing comment letters submitted in response to 
Preliminary Staff Report, supra note 21).
    \105\ See generally Letters from BP, CDE, CMC, EDF, EEI/EPSA, 
FSR, IIB, IECA, ISDA, NGSA, and SIFMA, supra note 58; Final Staff 
Report, supra note 24, at 11-12, 16-17 (citing comment letters 
submitted in response to Preliminary Staff Report, supra note 21).
---------------------------------------------------------------------------

    Generally, a reduction in the threshold could negatively affect the 
ability of these entities to provide ancillary services involving swap 
transactions, a stated benefit for having a de minimis exception. 
Further, if the threshold is maintained at $8 billion, it is possible 
that unregistered entities that currently limit trading activity to 
below $3 billion may increase dealing volumes to levels closer to $8 
billion, potentially increasing liquidity in the NFC swap market. As 
the Commission has stated:

    The futures and swaps markets are essential to our economy and 
the way that businesses and investors manage risk. Farmers, 
ranchers, producers, commercial companies, municipalities, pension 
funds, and others use these markets to lock in a price or a rate. 
This helps them focus on what they do best: innovating, producing 
goods and services for the economy, and creating jobs. The CFTC 
works to ensure these hedgers and other market participants can use 
markets with confidence.\106\
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    \106\ CFTC Responsibilities, available at https://www.cftc.gov/About/MissionResponsibilities/index.htm.

    Allowing small to mid-sized non-financial entities with a presence 
in the physical commodity markets to provide ancillary services 
involving swap transactions helps fulfill this goal.
    Second, even if the threshold were decreased, it is unclear if or 
to what extent the 2017 Counterparty Coverage statistic of 86 percent 
would increase for NFC swaps since several of those entities likely 
already have less than $3 billion in AGNA of swap dealing activity. 
Additionally, as discussed above, many of these entities would likely 
reduce activity to remain below the SD de minimis threshold, further 
reducing any increase in Estimated Counterparty Coverage from a lower 
threshold.
    Third, many of the entities engaged in limited swap dealing 
activity for NFC swaps appear to have a unique role in the market in 
that their primary business is generally non-financial in nature and 
the swap dealing activity is ancillary to their primary role in the 
market. Further, these firms generally pose less systemic risk than 
financial market SDs.\107\ For these reasons, the Commission believes 
that there are strong public policy arguments not to require that all 
of these entities register with the Commission.
---------------------------------------------------------------------------

    \107\ See e.g., Letter from CDE, supra note 58; Final Staff 
Report, supra note 24, at 12 (citing comment letters submitted in 
response to Preliminary Staff Report, supra note 21).
---------------------------------------------------------------------------

    Fourth, although it has not conducted an analysis of AGNA activity 
in NFC swaps,\108\ the Commission is of the preliminary view that 
increasing the de minimis threshold could potentially lead to fewer 
entities being required to register as SDs due to their NFC swap market 
activity. This could reduce the number of entities transacting with 
registered SDs, and therefore also reduce the benefits of those SD 
regulations concerned with counterparty protections.
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    \108\ As discussed above in section II.A.1.i, there were 
challenges in calculating notional amounts for NFC swaps.
---------------------------------------------------------------------------

    Preliminarily, the Commission does not believe that decreasing or 
increasing the de minimis threshold would have much benefit for the NFC 
swap market. Rather, there is a concern that a change in the threshold 
would cause harm to that market.
(v) Setting an $8 Billion Threshold Avoids Potential Administrative 
Burdens
    The Commission notes that setting the de minimis threshold at $8 
billion would allow persons to continue to use existing calculation 
procedures and business processes that are geared towards the $8 
billion threshold. Modifying the threshold could require entities to 
revise monitoring processes, modify internal systems, and amend 
policies and procedures tied to an $8 billion threshold, leading to 
increased costs. Further, as discussed, the Commission expects that 
maintaining an $8 billion threshold would foster the efficient 
application of the SD Definition by providing continuity and addressing 
the uncertainty associated with the end of the phase-in period.
    Based on the available data and policy considerations discussed 
above, the Commission proposes to maintain the de minimis threshold for 
AGNA of swap dealing at $8 billion.

[[Page 27458]]

3. Request for Comments
    The Commission requests comments on the following questions. To the 
extent possible, please quantify the impact of issues discussed in 
comments, including costs and benefits, as applicable.
    (1) Based on the data and related policy considerations, is an $8 
billion de minimis threshold appropriate? Why or why not?
    (2) Should the de minimis threshold be reduced to $3 billion? Why 
or why not?
    (3) Should the de minimis threshold be increased? If so, to what 
threshold? Why or why not?
    (4) Are the assumptions discussed above regarding a $3 billion de 
minimis threshold, an $8 billion de minimis threshold, or a higher de 
minimis threshold accurate, including, but not limited to, compliance 
costs and market liquidity assumptions?
    (5) As an alternative or in addition to maintaining an $8 billion 
threshold, should the Commission consider a tiered SD registration 
structure that would establish various exemptions from SD compliance 
requirements for SDs whose AGNA of swap dealing activity is between the 
$3 billion and $8 billion?
    (6) What is the impact of the de minimis threshold level on market 
liquidity? Are there entities that would increase their swap dealing 
activities if the Commission raised the de minimis exception, or 
decrease their swap dealing activities if the Commission lowered the 
threshold? How might these changes affect the swap market?
    (7) Are there additional policy or statutory considerations 
underlying SD regulation or the de minimis exception that the 
Commission should consider?
    (8) Have there been any structural changes to the swap market such 
that the policy considerations have evolved since the adoption of the 
SD Definition?
    (9) Are entities curtailing their swap dealing activity to avoid SD 
registration at $8 billion or $3 billion thresholds, and if so, what 
impact is that having on the swap market? Are certain asset classes or 
product types more affected by such curtailed dealing activity than 
others?
    (10) Does registration as an SD allow persons to substantially 
increase their swap dealing activity, or is increased swap dealing 
activity constrained by capital requirements at the firm level and 
other considerations?
    (11) Should an entity's AGNA of swap dealing activity continue to 
be tested against the de minimis threshold for any rolling 12-month 
period, only for calendar year periods, or for some other regular 12-
month period such as quarterly or semi-annual testing?
    (12) What are the benefits and detriments to using AGNA of swap 
dealing activity as the relevant criterion for SD registration, as 
compared to other options, including, but not limited to, entity-netted 
notional amounts or credit exposures?

B. Swaps Entered Into by Insured Depository Institutions in Connection 
With Loans to Customers

1. Background
    The CEA provides that in no event shall an IDI be considered to be 
an SD to the extent it offers to enter into a swap with a customer in 
connection with originating a loan with that customer.\109\ With 
respect to the statutory exclusion, the Commissions jointly adopted 
paragraph (5) of the SD Definition, which allows an IDI to exclude--
when determining whether it is an SD--certain swaps it enters into with 
a customer in connection with originating a loan to that customer (the 
``IDI Swap Dealing Exclusion'').\110\
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    \109\ 7 U.S.C. 1a(49)(A).
    \110\ 17 CFR 1.3, Swap dealer, paragraph (5).
---------------------------------------------------------------------------

    For a swap to be considered to have ``been entered into . . . in 
connection with originating a loan,'' the IDI Swap Dealing Exclusion 
requires that: (1) The IDI enter into the swap no earlier than 90 days 
before and no later than 180 days after execution of the loan agreement 
(or transfer of principal); \111\ (2) the rate, asset, liability, or 
other notional item underlying the swap be tied to the financial terms 
of the loan or be required as a condition of the loan to hedge risks 
arising from potential changes in the price of a commodity; \112\ (3) 
the duration of the swap not extend beyond termination of the loan; 
\113\ (4) the IDI be the source of at least 10 percent of the principal 
amount of the loan, or the source of a principal amount greater than 
the notional amount of swaps entered into by the IDI with the customer 
in connection with the loan; \114\ (5) the AGNA of swaps entered into 
in connection with the loan not exceed the principal amount 
outstanding; \115\ (6) the swap be reported as required by other CEA 
provisions if it is not accepted for clearing; \116\ (7) the 
transaction not be a sham, whether or not the transaction is intended 
to qualify for the IDI Swap Dealing Exclusion; \117\ and (8) the loan 
not be a synthetic loan, including, without limitation, a loan credit 
default swap or a loan total return swap.\118\ A swap that meets the 
above requirements would not be considered when assessing whether a 
person is an SD.
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    \111\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(A).
    \112\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(B).
    \113\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(C).
    \114\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(D).
    \115\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(E).
    \116\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(F).
    \117\ 17 CFR 1.3, Swap dealer, paragraph (5)(iii)(A).
    \118\ 17 CFR 1.3, Swap dealer, paragraph (5)(iii)(B).
---------------------------------------------------------------------------

    Based on information gained from market participants,\119\ as well 
as analysis of data submitted to SDRs, the Commission believes that the 
IDI Swap Dealing Exclusion: (1) Has unnecessarily restrictive 
conditions; (2) is not clear in certain instances; and (3) limits the 
ability of IDIs to provide swaps that would allow their customers to 
properly hedge risks associated with bank loans. In general, these 
issues make it more difficult for IDIs that are not registered as SDs 
to provide swaps to loan customers because of the concern that certain 
swaps would not qualify for the IDI Swap Dealing Exclusion. Certain 
IDIs are restricting loan-related swaps because of the potential that 
such swaps would have to be counted towards an IDI's de minimis 
threshold, leading the IDI to register as an SD and incur registration-
related costs. The restrictions on loan-related swaps by IDIs may 
result in reduced availability of swaps for the loan customers of these 
IDIs, potentially hampering the ability of end-user borrowers to enter 
into hedges in connection with their loans.
---------------------------------------------------------------------------

    \119\ See, e.g., Letters from Chatham, FSR, and Northern Trust, 
supra note 58; Final Staff Report, supra note 24, at 17 (citing 
comment letters submitted in response to Preliminary Staff Report, 
supra note 21).
---------------------------------------------------------------------------

    The Commission is not at this time proposing to amend the IDI Swap 
Dealing Exclusion in paragraph (5) of the SD Definition. As discussed 
above, pursuant to requirements of section 712(d)(1) of the Dodd-Frank 
Act, the CFTC and SEC jointly adopted the IDI Swap Dealing Exclusion in 
paragraph (5) as part of the definition of what constitutes swap 
dealing activity. Rather than proposing to revise the scope of activity 
that constitutes swap dealing, the Commission is proposing to amend 
paragraph (4) of the SD Definition, which addresses the de minimis 
exception.\120\ In particular, the

[[Page 27459]]

Commission is proposing to add specific factors that an IDI can 
consider when assessing whether swaps entered into with customers in 
connection with loans to those customers must be counted towards the 
IDI's de minimis calculation. The IDI could assess these factors and 
exclude qualifying swaps from the de minimis calculation regardless of 
whether the swaps would qualify for the IDI Swap Dealing Exclusion.
---------------------------------------------------------------------------

    \120\ A joint rulemaking is not required with respect to changes 
to the de minimis exception-related factors. 77 FR at 30634 n.464 
(``We do not interpret the joint rulemaking provisions of section 
712(d) of the Dodd-Frank Act to require joint rulemaking here, 
because such an interpretation would read the term ``Commission'' 
out of CEA section 1a(49)(D) (and Exchange Act section 3(a)(71)(D)), 
which themselves were added by the Dodd-Frank Act.''). As noted 
above, pursuant to section 712(a)(1) of the Dodd-Frank Act, the 
Commission is consulting with the SEC and prudential regulators 
regarding the changes to the de minimis exception discussed in this 
Proposal.
---------------------------------------------------------------------------

    Specifically, the Commission is proposing new paragraph (4)(i)(C) 
of the SD Definition, which would except from the calculation of the de 
minimis threshold certain loan-related swaps entered into by IDIs (the 
``IDI De Minimis Provision''). The IDI De Minimis Provision would have 
requirements that are similar to the IDI Swap Dealing Exclusion, but 
would encompass a broader scope of loan-related swaps. The proposed IDI 
De Minimis Provision includes: (1) A lengthier timing requirement for 
when the swap must be entered into; (2) an expansion of the types of 
swaps that are eligible; (3) a reduced syndication percentage 
requirement; (4) an elimination of the notional amount cap; and (5) a 
refined explanation of the types of loans that would qualify.
    The Commission notes that any swap that meets the requirements of 
the IDI Swap Dealing Exclusion in paragraph (5) of the SD Definition 
would also meet the requirements of the proposed IDI De Minimis 
Provision. However, proposed paragraph (4)(i)(C) provides additional 
flexibility as to what swaps need to be counted towards an IDI's de 
minimis calculation. The Commission believes that the broader scope of 
the proposed IDI De Minimis Provision, described in further detail 
below, may advance the policy objectives of the de minimis exception by 
allowing some IDIs to provide swaps to customers in connection with 
loans without having to register as an SD. In other words, the proposed 
provision would facilitate swap dealing in connection with other client 
services and may encourage more IDIs to participate in the swap 
market--two policy objectives of the de minimis exception. Greater 
availability of loan-related swaps may also improve the ability of 
customers to hedge their loan-related exposure. The Commission also 
believes that the more flexible provisions of the proposed IDI De 
Minimis Provision may allow for more focused, efficient application of 
the SD Definition to the activities of IDIs that offer swaps in 
connection with loans.
    Commission staff reviewed data to assess the potential impact of 
the IDI De Minimis Provision. Table 14 below provides information 
regarding the AGNA of swaps activity entered into by entities that were 
identified as IDIs \121\ with at least 10 counterparties in IRS, CDS, 
FX swaps, and equity swaps.\122\ The table summarizes the AGNA of swaps 
activity of smaller IDIs within various AGNA ranges from $1 billion to 
$50 billion. Note that persons that are affiliated with IDIs were not 
included in this analysis (e.g., broker-dealer subsidiaries, other non-
IDI affiliates).
---------------------------------------------------------------------------

    \121\ Based on information on the Federal Deposit Insurance 
Corporation website, available at https://www5.fdic.gov/idasp/advSearch_warp_download_all.asp.
    \122\ As discussed above in section II.A.1.i, there were 
challenges in calculating notional amounts for NFC swaps. Therefore, 
the analysis in this section focuses on the other asset classes.

          Table 14--IDI Activity (Ranges Between $1 Bn and $50 Bn) IRS, CDS, FX Swaps, and Equity Swaps
                                           [Minimum 10 counterparties]
----------------------------------------------------------------------------------------------------------------
                                          Number of IDIs                   AGNA of swaps activity \123\
                                 -------------------------------------------------------------------------------
                                                                                                   Total with no
 Range of AGNA of swaps activity                                   Total with at   Total with no  registered SDs
              ($Bn)                Registered as  Not registered     least one    registered SDs    (percent of
                                        SDs           as SDs       registered SD       ($Bn)          overall
                                                                       ($Bn)                          market)
----------------------------------------------------------------------------------------------------------------
1-3.............................               0              13            13.5             8.9           0.004
3-8.............................               0              10            37.5            16.5           0.007
8-20............................               0               4            42.6             6.5           0.003
20-50...........................               2               3           160.7            14.2           0.006
----------------------------------------------------------------------------------------------------------------

    As seen in Table 14, there are a number of IDIs that have 10 or 
more counterparties and are active in the swap market at lower 
AGNAs.\124\ For example, there are 13 IDIs that are not currently 
registered as SDs and have between $1 billion and $3 billion in AGNA of 
swaps activity. Based on market participant comments \125\ and review 
of the trading data, the Commission believes that many of the 
unregistered entities engaged in $1 billion to $50 billion in AGNA of 
swaps activity are entering into swaps with customers in connection 
with loans to those customers. Additionally, many of these IDIs could 
be restricting their swaps activity because the IDI Swap Dealing 
Exclusion limits, or is ambiguous regarding, which swaps are considered 
to be ``in connection with'' originating a loan (and therefore are 
excluded from the SD analysis).
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    \123\ The AGNA totals are not mutually exclusive across rows, 
and therefore cannot be added together without double counting. For 
example, some IDIs in the $1 billion to $3 billion range transact 
with IDIs in the $3 billion to $8 billion range. Transactions that 
involve entities from multiple rows are reported in both rows.
    \124\ Although staff did not manually identify the category of 
every counterparty with less than $1 billion of activity, there are 
at least 200 entities generally identified as banks, each with AGNA 
of swaps activity below $1 billion and with at least 10 
counterparties.
    \125\ See generally supra note 119.
---------------------------------------------------------------------------

    As Table 14 indicates, the AGNA of swaps activity that these 
unregistered IDIs enter into with other non-registered entities is low 
relative to the total swap market analyzed. For example, there are 10 
IDIs that have between $3 billion and $8 billion each in AGNA of swaps 
activity--none of which are registered SDs. In aggregate, these IDIs 
entered into approximately $54.0 billion in AGNA of swaps activity. 
However, only $16.5 billion of that activity was between two entities 
not registered as SDs, representing only 0.007 percent of the total 
AGNA of swaps activity during the review period. Depending on the range 
of AGNA of swaps activity examined, the level of activity occurring 
between two entities not registered as SDs (at least one of which is an 
IDI) varies between only approximately 0.003 percent and 0.007 percent 
of the total AGNA of swaps activity.
    Given those low percentages, the Commission is of the view that the 
policy benefits of SD regulation likely would not be significantly 
diminished if the proposed IDI De Minimis Provision

[[Page 27460]]

is adopted and some of the unregistered IDIs marginally expand the 
number and AGNA of swaps they enter into with customers in connection 
with loans to those customers. This low percentage of swap activity 
between two unregistered entities may also indicate that the limits of 
the IDI Swap Dealing Exclusion are restricting certain IDIs from taking 
full advantage of the exclusion. Further, though these entities are 
active in the swap market, the Commission is of the view that their 
activity poses less systemic risk as compared to larger IDIs because of 
their limited AGNA of swaps activity as compared to the overall size of 
the market. Generally, the reduced potential for risk, combined with 
the potential that end-user loan customers may benefit from increased 
access to loan-related swaps, provides support for the proposed IDI De 
Minimis Provision.
    The proposed rule text described below may provide greater ability 
for IDIs to not count loan-related swaps towards their de minimis 
threshold calculations, potentially increasing the availability of 
loan-related swaps for their borrowers and advancing the stated policy 
goals of the de minimis exception.
2. Proposal
(i) Timing Requirement
    Pursuant to the IDI Swap Dealing Exclusion in paragraph (5) of the 
SD Definition, if an IDI enters into a swap in connection with 
originating a loan to a customer, that swap must be entered into no 
more than 90 days before or 180 days after the date of execution of the 
loan agreement (or date of transfer of principal to the customer) for 
the IDI Swap Dealing Exclusion to apply.\126\
---------------------------------------------------------------------------

    \126\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(A).
---------------------------------------------------------------------------

    The Commission is proposing new paragraph (4)(i)(C)(1) of the SD 
Definition, which, for purposes of an IDI's de minimis calculation, 
does not include the 180-day restriction. Therefore, an IDI would not 
have to count towards its de minimis calculation any swap entered into 
in connection with a loan after the date of execution of the loan 
agreement (or date of transfer of principal). Additionally, the 
Commission is proposing to generally maintain the restriction for swaps 
entered into more than 90 days before loan funding, except where an 
executed commitment or forward agreement for the applicable loan 
exists, in which case the 90-day restriction would not apply.
    The Commission believes that the timing restrictions in the IDI 
Swap Dealing Exclusion limit the ability of IDIs to effectively provide 
hedging solutions to end-user borrowers. Depending on market conditions 
or business needs, it is not uncommon for a borrower to wait for a 
period of time greater than 180 days after a loan is originated to 
enter into a hedging transaction. For example, if an IDI provides a 
loan with a 10-year term, and the borrower chooses to wait until 181 
days after the loan to hedge interest rate risk underlying that loan, 
the swap would not qualify for the IDI Swap Dealing Exclusion. However, 
under the proposed IDI De Minimis Provision, if the borrower entered 
into the hedge 181 days after execution, the swap would not have to be 
counted towards an IDI's de minimis calculation. Given that many of the 
entities that the Commission expects to utilize the IDI De Minimis 
Provision are small and mid-sized banks, not including this timing 
restriction could lead to increased swap availability for the borrowing 
customers that rely on such IDIs for access to swaps (and thereby 
advance a policy objective of the de minimis exception).
    For a swap to be considered ``in connection with'' a loan for the 
purposes of the IDI De Minimis Provision, the Commission believes there 
should be a reasonable expectation that the loan will be entered into 
with a customer. Therefore, the proposed 90-day restriction is suitable 
because it requires that the swap be entered into within an appropriate 
period of time prior to the execution of the loan. However, where an 
executed commitment or forward agreement to loan money exists between 
the IDI and the borrower prior to the 90-day limit, the Commission 
believes a reasonable expectation for the loan is demonstrated. 
Accordingly, for purposes of the IDI De Minimis Provision, the 
Commission is proposing that an IDI may enter into a swap with a 
customer, in connection with a loan to that customer, more than 90 days 
prior to the execution of the loan where there is an executed 
commitment or forward agreement to loan money.
(ii) Relationship of Swap to Loan
    The IDI Swap Dealing Exclusion requires that the rate, asset, 
liability, or other notional item underlying such swap is, or is 
directly related to, a financial term of such loan or that such swap is 
required, as a condition of the loan under the insured depository 
institution's loan underwriting criteria, to be in place in order to 
hedge price risks incidental to the borrower's business and arising 
from potential changes in the price of a commodity (other than an 
excluded commodity).\127\ As explained in the SD Definition Adopting 
Release, the first category is for ``adjusting the borrower's exposure 
to certain risks directly related to the loan itself, such as risks 
arising from changes in interest rates or currency exchange rates,'' 
and the second category is to ``mitigate risks faced by both the 
borrower and the lender, by reducing risks that the loan will not be 
repaid.'' \128\ Therefore, both categories of swaps are directly 
related to repayment of the loan.
---------------------------------------------------------------------------

    \127\ See 17 CFR 1.3, Swap dealer, paragraph (5)(i)(B); 77 FR at 
30622.
    \128\ 77 FR at 30622.
---------------------------------------------------------------------------

    The Commission is proposing new paragraph (4)(i)(C)(2), which 
states that for purposes of the IDI De Minimis Provision, a swap is 
``in connection with'' a loan if the rate, asset, liability or other 
term underlying such swap is, or is related to, a financial term of 
such loan, or if such swap is required as a condition of the loan, 
either under the insured depository institution's loan underwriting 
criteria or as is commercially appropriate, in order to hedge risks 
incidental to the borrower's business (other than for risks associated 
with an excluded commodity) that may affect the borrower's ability to 
repay the loan.
    The Commission is of the view that the proposed language would 
further the policy objectives of the de minimis exception by providing 
flexibility to reflect the actual market practices of end-users who 
hedge their risk. The first provision refers to a ``term'' rather than 
a ``notional item,'' and does not include the word ``directly,'' for 
added flexibility. Because the second provision in the proposed 
language allows for swaps that are not explicitly required as a 
condition of the IDI's underwriting criteria, it provides flexibility 
for IDIs to enter into certain swaps with borrowers to hedge risks 
(e.g., commodity price risks) that may not have been evident at the 
time the loan was entered into or that are determined based on the 
unique characteristics of the borrower rather than the standard bank 
underwriting criteria. For example, physical commodity-related hedging 
decisions may not be made at the time the loan is entered into, but 
rather at a future point when inventory is purchased or produced. 
Additionally, in these cases, the underwriting criteria may not 
explicitly require that the borrower enter into swaps to hedge 
commodity price risk. This additional flexibility allows IDIs to enter 
into swaps, as commercially appropriate, with borrowers to hedge 
risks--in this case,

[[Page 27461]]

commodity price risk--that may affect the borrower's ability to repay 
the loan without the limitation that such swaps must be contemplated in 
the original underwriting criteria in order not to be counted towards 
an IDI's de minimis calculation. The Commission believes that this 
proposal benefits both IDIs and customers and serves the purposes of 
the de minimis exception by allowing for greater use of swaps in 
effective and dynamic hedging strategies. The Commission also believes 
that this aspect of the proposed new provision would facilitate 
efficient application of the SD Definition by reducing the concern that 
ancillary dealing activity may subject the IDI to SD registration-
related requirements.
(iii) Syndicated Loan Requirement
    For a loan-related swap with a notional amount equal to the full 
principal amount of the loan to qualify for the IDI Swap Dealing 
Exclusion, an IDI must be responsible for at least 10 percent of a 
syndicated loan.\129\ In the proposed IDI De Minimis Provision, new 
paragraph (4)(i)(C)(4)(i) requires an IDI to be, under the terms of the 
agreements related to the loan, the source of at least five percent of 
the maximum principal amount under the loan for a related swap not to 
be counted towards its de minimis calculation.\130\ In addition to this 
different syndication requirement, proposed paragraph (4)(i)(C)(4)(i) 
also includes a single provision that consolidates the separate 
provisions in paragraphs (5)(i)(D)(1) and (5)(i)(D)(2) of the IDI Swap 
Dealing Exclusion.
---------------------------------------------------------------------------

    \129\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(D).
    \130\ Moreover, as discussed below in section II.B.2.iv, if the 
IDI is responsible for at least five percent of a syndicated loan, 
the Commission is proposing to not include the restriction that the 
AGNA of swaps entered into in connection with the loan not exceed 
the principal amount outstanding.
---------------------------------------------------------------------------

    For loans that are widely syndicated, lenders may not have control 
over their final share of the syndication. It is not uncommon for 
borrowers to enter into negotiations regarding related swaps before the 
underlying loan has been executed. The need to have at least a 10 
percent share of the syndicate can make it more difficult for IDIs to 
determine, in advance, whether a swap they have negotiated with a 
borrower will qualify for the IDI Swap Dealing Exclusion. The lower 
syndication threshold of five percent in this Proposal provides 
additional flexibility for IDIs to enter into a greater range of loan-
related swaps without having those swaps count towards their de minimis 
calculations.
    The Commission is also proposing to add paragraph (4)(i)(C)(4)(ii), 
which states that if an IDI is a source of less than a five percent of 
the maximum principal amount of the loan, the notional amount of all 
swaps the IDI enters into in connection with the financial terms of the 
loan cannot exceed the principal amount of the IDI's loan in order to 
qualify for the IDI De Minimis Provision. This provision is similar to 
existing paragraph (5)(i)(D)(3) of the IDI Swap Dealing Exclusion, 
except that it uses a five percent participation threshold.
(iv) Total Notional Amount of Swaps
    The IDI Swap Dealing Exclusion requires that the AGNA of swaps 
entered into in connection with the loan not exceed the principal 
amount outstanding.\131\ The Commission is proposing to not include 
this restriction in the IDI De Minimis Provision in the case of IDIs 
responsible for at least five percent of the loan principal.\132\ It is 
not uncommon for an IDI-related loan to have related swaps that hedge 
multiple categories of exposure. For example, it is possible for a 
borrower to hedge some combination of interest rate, foreign exchange, 
and/or commodity risk in connection with a loan. The Commission notes 
that the AGNA of such swaps entered into in connection with the loan 
could exceed the principal amount outstanding; therefore, this 
restriction might unduly restrict the ability of certain IDIs to 
provide loan-related swaps to their borrowing customers to more 
effectively allow the customers to hedge loan-related risks. Not 
including this restriction in the IDI De Minimis Provision would 
thereby advance the policy objectives of the de minimis exception noted 
above.
---------------------------------------------------------------------------

    \131\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(E).
    \132\ As discussed above in section II.B.2.iii in connection 
with proposed paragraph (4)(i)(C)(4)(ii), if an IDI is a source of 
less than a five percent of the maximum principal amount of the 
loan, the notional amount of all swaps the IDI enters into in 
connection with the financial terms of the loan cannot exceed the 
principal amount of the IDI's loan.
---------------------------------------------------------------------------

(v) Types of Loans
    The requirements of the IDI Swap Dealing Exclusion do not account 
for types of credit financings that are similar to loans (e.g., credit 
enhanced bonds, letters of credit, leases, revolving credit 
facilities). When the Commission adopted the IDI Swap Dealing 
Exclusion, it generally referenced existing common law definitions for 
the term ``loan,'' \133\ stating that ``[r]ather than examine at this 
time the many particularized examples of financing transactions cited 
by some commenters, the term `loan' for purposes of this exclusion 
should be interpreted in accordance with this settled legal meaning.'' 
\134\ Additionally, to prevent evasion, the Commission adopted 
restrictions stating that the term ``loan'' shall not include any 
synthetic loan, including, without limitation, a loan credit default 
swap or loan total return swap, and stating that the term ``loan'' does 
not include sham loans, whether or not intended to qualify for the 
exclusion from the definition of the term swap dealer in this 
rule.\135\
---------------------------------------------------------------------------

    \133\ 77 FR at 30622 n.326 (``To constitute a loan there must be 
(i) a contract, whereby (ii) one party transfers a defined quantity 
of money, goods, or services, to another, and (iii) the other party 
agrees to pay for the sum or items transferred at a later date.'' 
(internal citations omitted)).
    \134\ Id. at 30622.
    \135\ 17 CFR 1.3, Swap dealer, paragraph (5)(iii). See 77 FR at 
30622, 30708.
---------------------------------------------------------------------------

    Similarly, to prevent evasion, the Commission is proposing new 
paragraph (4)(i)(C)(6), which states that the IDI De Minimis Provision 
shall not apply to any transaction that is a sham and shall not apply 
to any synthetic loan. The Commission believes it is appropriate to 
continue to require that swaps associated with synthetic loans be 
counted towards the de minimis exception. However, for added 
simplicity, the Commission has not included the provision specifically 
listing ``a loan credit default swap or loan total return swap.'' The 
Commission notes that certain loan credit default swaps and loan total 
return swaps may be valid loan structures. Nonetheless, to the extent a 
credit default swap, loan total return swap, or any other financial 
instrument would be considered a synthetic lending arrangement, swaps 
entered into in connection with such a synthetic lending arrangement 
would not qualify for the IDI De Minimis Provision.
    The Commission is of the view that swaps entered into in connection 
with non-synthetic lending arrangements that are commonly known in the 
market as ``loans'' would generally not need to be counted towards an 
IDI's de minimis calculation if the other requirements of the IDI De 
Minimis Provision are also met. Although the Commission is not 
proposing to assess individual categories of transactions to determine 
whether they qualify as loans, it recognizes the common law definition 
cited in the SD Definition Adopting Release. Additionally, the 
Commission's regulations in part 75 (regarding ``Proprietary Trading 
and Certain Interests in and Relationships with Covered Funds'') define 
a loan as any loan, lease, extension of credit, or

[[Page 27462]]

secured or unsecured receivable that is not a security or 
derivative.\136\ The Commission is of the view that this definition 
would also apply for purposes of the IDI De Minimis Provision. 
Generally, allowing swaps entered into in connection with other forms 
of financing commonly known as loans not to be counted towards the de 
minimis threshold calculation better reflects the breadth of lending 
products and credit financings that borrowers often utilize and thereby 
advances the policy objectives of the de minimis exception noted above.
---------------------------------------------------------------------------

    \136\ 17 CFR 75.2(s).
---------------------------------------------------------------------------

(vi) Additional Requirements
    The remaining requirements for the IDI De Minimis Provision are 
substantively identical to the IDI Swap Dealing Exclusion provisions in 
paragraph (5) of the SD Definition.
    Proposed paragraph (4)(i)(C)(3) is identical to paragraph 
(5)(i)(C), stating that the termination date of the swap cannot extend 
beyond termination of the loan.
    Proposed paragraph (4)(i)(C)(5) states that a swap is considered to 
have been entered into in connection with originating a loan to a 
customer if the IDI: (1) Directly transfers the loan amount; (2) is 
part of a syndicate of lenders that is the source of the loan amount; 
(3) purchases or receives a participation in the loan; or (4) under the 
terms of the agreements related to the loan, is, or is intended to be, 
the source of funds for the loan. This provision is similar to 
paragraph (5)(ii) of the IDI Swap Dealing Exclusion, except that it 
also encompasses a loan-related swap if the IDI ``is intended to be'' 
the source of the funds. This difference is consistent with the timing 
requirement provision, discussed above in section II.B.2.i, which does 
not include the 90 days before execution of the loan restriction in 
situations where an executed commitment or forward agreement for the 
applicable loan exists.
3. Request for Comments
    The Commission requests comments on the following questions. To the 
extent possible, please quantify the impact of issues discussed in the 
comments, including costs and benefits, as applicable.
    (1) Based on the data and related policy considerations, is the 
proposed IDI De Minimis Provision appropriate? Why or why not?
    (2) How will the proposed IDI De Minimis Provision impact IDIs who 
enter into swaps with customers in connection with loans? Will IDIs 
enter into more swaps with loan customers as result of the proposed IDI 
De Minimis Provision?
    (3) If the underlying loan is called, put, accelerated, or if it 
goes into default before the scheduled termination date, should the 
related swap be required to be terminated to remain eligible for the 
IDI De Minimis Provision?
    (4) Are there circumstances that can be anticipated at the time of 
loan origination that would support permitting the termination date of 
the swap to extend beyond termination of the loan?
    (5) Does the provision in proposed paragraph (4)(i)(C)(1) 
referencing ``executed commitment'' or ``forward agreement'' 
sufficiently reflect market practice regarding how swaps may be entered 
into in connection with a loan in advance of the loan being executed?
    (6) Is it common for an IDI to have as low as five percent 
participation in a syndicated loan and also provide swaps in connection 
with the loan?
    (7) Is it common for the AGNA of loan-related swaps to exceed the 
outstanding principal amount of the loan? In what circumstances?
    (8) Should the Commission define ``synthetic loan''? How should 
that term be defined?
    (9) Are there circumstances in which a loan credit default swap or 
loan total return swap would not be considered a synthetic lending 
arrangement?
    (10) If an IDI would have to register as an SD but for the IDI De 
Minimis Provision, should that IDI be required to provide notice to the 
Commission, Commission staff, or the National Futures Association? 
Alternatively, to utilize the proposed IDI De Minimis Provision, should 
IDIs be required to directly reference the related loan in the written 
swap confirmation?

C. Swaps Entered Into To Hedge Financial or Physical Positions

1. Background and Proposal
    In adopting the SD Definition, the Commission provided that, 
subject to certain requirements, swaps entered into by a person for 
purposes of hedging physical positions are not considered in 
determining whether the person is an SD (the ``Physical Hedging 
Exclusion'').\137\ However, the regulatory text does not include a 
specific exclusion for swaps entered into for purposes of hedging 
financial positions. Rather, the Commission stated that swaps entered 
into for hedging purposes that did not fall within the SD Definition, 
including those that qualify for an exclusion in the SD Definition, 
would not count towards the de minimis threshold.\138\
---------------------------------------------------------------------------

    \137\ 17 CFR 1.3, Swap dealer, paragraph ] (6)(iii).
    \138\ 77 FR at 30631 n.433 (``For purposes of the de minimis 
exception to the [SD Definition] . . . the relevant question in 
determining whether swaps count as dealing activity against the de 
minimis thresholds is whether the swaps fall within the [SD 
Definition] . . . . If hedging or proprietary trading activities did 
not fall within the definition, including because of the application 
of [paragraph (6) of the SD Definition in Sec.  1.3], they would not 
count against the de minimis thresholds.'').
---------------------------------------------------------------------------

    Based on feedback from swap market participants during 
implementation of the SD regulations and in connection with Project 
KISS,\139\ the Commission believes that although there is a specific 
exclusion for swaps entered into in connection with hedging physical 
positions, the absence of an explicit exclusion in the regulations for 
swaps entered into for purposes of hedging financial positions has 
caused uncertainty in the marketplace regarding whether swaps that 
hedge, for example, interest rate risk, credit risk, or foreign 
exchange risk, would also need to be counted towards a person's de 
minimis threshold. This uncertainty could cause inefficient application 
of the SD Definition by leading some persons to: (1) Count swaps that 
they enter into to hedge financial positions as swap dealing activity 
for purposes of assessing whether the persons would need to register as 
SDs; or (2) not enter into swaps to hedge financial positions for fear 
of exceeding the de minimis threshold.
---------------------------------------------------------------------------

    \139\ See Letters from IIB, Western Union, and WU/GPS/AFEX, 
supra note 58.
---------------------------------------------------------------------------

    The Commission is of the view that an explicit statement of the 
factors that indicate when a swap entered into to hedge financial or 
physical positions (``hedging swap'') is excluded from counting towards 
the de minimis threshold would help swap market participants know with 
greater certainty what swaps have to be counted towards the de minimis 
threshold, and thereby help market participants apply the SD Definition 
more efficiently. The Commission is proposing to add a hedging 
exception in new paragraph (4)(i)(D) of the SD Definition, permitting 
entities to not count towards their de minimis calculations hedging 
swaps, when such swaps meet certain conditions (the ``Hedging De 
Minimis Provision''). Similar to the proposed IDI De Minimis Provision, 
the Hedging De Minimis Provision does not revise the scope of activity 
that constitutes swap dealing. Rather, the new provision would set out 
explicit factors an entity can consider for purposes of assessing 
whether hedging swaps must be counted towards the de minimis

[[Page 27463]]

calculation.\140\ The Commission notes that any swap that meets the 
requirements of the Physical Hedging Exclusion in paragraph (6)(iii) of 
the SD Definition would also meet the requirements of the proposed 
Hedging De Minimis Provision, but meeting the requirements of the 
Physical Hedging Exclusion is not a prerequisite for application of the 
Hedging De Minimis Provision. In addition, as the Commission noted in 
the SD Definition Adopting Release, if a swap does not satisfy the 
criteria of the Hedging De Minimis Provision, this does not mean the 
swap is necessarily swap dealing activity.\141\ Rather, such hedging 
activity should then be considered in light of all the other relevant 
facts and circumstances to determine whether the person is engaging in 
activity (e.g., market making, accommodating demand) that brings the 
person within the SD Definition.
---------------------------------------------------------------------------

    \140\ See section II.B.1. As discussed, a joint rulemaking with 
the SEC is not required under the statute with respect to the de 
minimis exception-related factors. 77 FR at 30634 n.464.
    \141\ 77 FR at 30613.
---------------------------------------------------------------------------

    Proposed paragraph (4)(i)(D) states that to qualify for the Hedging 
De Minimis Provision, a swap must be entered into by a person for the 
primary purpose of reducing or otherwise mitigating one or more of the 
specific risks to which it is subject, including, but not limited to, 
market risk, commodity price risk, rate risk, basis risk, credit risk, 
volatility risk, correlation risk, foreign exchange risk, or similar 
risks arising in connection with existing or anticipated identifiable 
assets, liabilities, positions, contracts or other holdings of the 
person or any affiliate. Additionally, the person entering into the 
hedging swap must not: (1) Be the price maker of the hedging swap; (2) 
receive or collect a bid/ask spread, fee, or commission for entering 
into the hedging swap; and (3) receive other compensation separate from 
the contractual terms of the hedging swap in exchange for entering into 
the hedging swap.
    The requirements that the person not be a price maker of the swap 
or receive compensation for the swap should ensure that the Hedging De 
Minimis Provision does not improperly exclude swap dealing activity. As 
discussed in the SD Definition Adopting Release, in connection with 
swaps that hedge physical positions:

    When a person enters into a swap for the purpose of hedging the 
person's own risks in specified circumstances, an element of the 
[SD] definition--the accommodation of the counterparty's needs or 
demands--is absent. Therefore, consistent with our overall 
interpretive approach to the definition, the activity of entering 
into such swaps (in the particular circumstances defined in the 
rule) does not constitute swap dealing. Providing an exception for 
such swaps from the [SD] analysis reduces costs that persons using 
such swaps would incur in determining if they are [SDs].\142\
---------------------------------------------------------------------------

    \142\ 77 FR at 30710.

    The Commission believes that this rationale applies broadly to 
swaps that hedge both financial and physical positions. When the person 
is not the price maker of the hedging swap, or otherwise receiving 
compensation, the person is not accommodating the needs of a 
counterparty, such swap is generally not swap dealing activity, and 
therefore should not be counted for purposes of the de minimis 
exception. Adding this specific exception as a factor to be considered 
for purposes of the de minimis calculation provides additional clarity 
which advances the policy objectives of the de minimis threshold. In 
particular, the Commission believes that the scope of the Hedging De 
Minimis Provision would encourage greater use of swaps (i.e., greater 
participation in the swap market) to hedge risks. Additionally, the 
proposed rule accounts for circumstances where entities may hedge risks 
using affiliates. The flexible terms of the Hedging De Minimis 
Provision should facilitate an efficient application of the SD 
Definition that is more focused on activity that is covered by the 
statutory and regulatory definition of swap dealing. As noted below, 
the Hedging De Minimis Provision contains elements to ensure that it 
does not improperly exclude swap dealing activity that should be 
counted against the de minimis threshold.
    The SD Definition Adopting Release also states that, generally, 
swaps that hedge positions that were entered into as part of swap 
dealing activity would also not need to be counted towards a person's 
de minimis threshold calculation if they meet the requirements of the 
proposed exception.\143\ The proposed Hedging De Minimis Provision is 
consistent with the CFTC's position in the SD Definition Adopting 
Release.
---------------------------------------------------------------------------

    \143\ The CFTC stated that ``the relevant question in 
determining whether swaps count as dealing activity against the de 
minimis thresholds is whether the swaps fall within the [SD 
Definition] . . . . If hedging or proprietary trading activities did 
not fall within the definition . . . they would not count against 
the de minimis thresholds.'' Id. at 30631 n.433. DSIO later stated 
that back-to-back swaps should each undergo a facts and 
circumstances analysis to determine if they should be considered 
swap dealing activity. See Frequently Asked Questions (FAQ)--[DSIO] 
Responds to FAQs About Swap Entities (Oct. 12, 2012), available at 
https://www.cftc.gov/idc/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf.
---------------------------------------------------------------------------

    Lastly, the proposed Hedging De Minimis Provision also includes, in 
paragraphs (D)(3) through (D)(5), the following requirements that are 
in the Physical Hedging Exclusion: (1) The swap must be economically 
appropriate to the reduction of risks that may arise in the conduct and 
management of an enterprise engaged in the type of business in which 
the person is engaged; (2) the swap must be entered into in accordance 
with sound business practices; and (3) the swap is not in connection 
with activity structured to evade designation as an SD. The Commission 
believes that these requirements are also appropriate for this broader 
Hedging De Minimis Provision to ensure that swap dealing activity is 
not improperly being excluded from a person's de minimis threshold 
calculation.
2. Request for Comments
    The Commission requests comments on the following questions. To the 
extent possible, please quantify the impact of issues discussed in the 
comments, including costs and benefits as applicable.
    (1) Based on the policy considerations, is the proposed Hedging De 
Minimis Provision appropriate? Why or why not?
    (2) Is the proposed Hedging De Minimis Provision too narrowly or 
broadly tailored?
    (3) How will the proposed Hedging De Minimis Provision impact 
entities that enter into swaps to hedge financial or physical 
positions?
    (4) The proposed Hedging De Minimis Provision would be used to 
determine whether a person has exceeded the AGNA threshold set forth in 
paragraph (4)(i)(A) of the SD Definition, whereas the Physical Hedging 
Exclusion in paragraph (6)(iii) of the SD Definition addresses when a 
swap is not considered in determining whether a person is an SD. How 
might this distinction impact how entities analyze their swap dealing 
activity and whether they would exceed the de minimis threshold?

D. Swaps Resulting From Multilateral Portfolio Compression Exercises

1. Background and Proposal
    The Commission is proposing new paragraph (4)(i)(E) of the SD 
Definition, which would allow a person to exclude from its de minimis 
calculation swaps that result from multilateral portfolio compression 
exercises (``MPCE De

[[Page 27464]]

Minimis Provision'').\144\ The MPCE De Minimis Provision is consistent 
with DSIO no-action relief issued on December 21, 2012 (``Staff Letter 
12-62'').\145\ Specifically, DSIO stated that it would not recommend 
that the Commission take enforcement action against any person for 
failure to include in its de minimis calculation the terminations of 
swaps (in whole or in part) or swaps entered into as replacement swaps 
as part of a multilateral portfolio compression exercise (as defined in 
paragraph 23.500(h) of the Commission's regulations). The relief 
provided was not time-limited.
---------------------------------------------------------------------------

    \144\ Similar to the proposed IDI De Minimis Provision and the 
Hedging De Minimis Provision, the MPCE De Minimis Provision does not 
revise the scope of activity that constitutes swap dealing. Rather, 
the new provision sets out factors an entity can consider for 
purposes of assessing whether swaps resulting from multilateral 
portfolio compression exercises need to be counted towards the de 
minimis calculation.
    \145\ CFTC Staff Letter No. 12-62, supra note 54.
---------------------------------------------------------------------------

    The Commission concurs with the position taken in Staff Letter 12-
62. Generally, multilateral portfolio compression allows swap market 
participants with large portfolios to ``net down'' the size and number 
of outstanding swaps between them. The Commission is of the view that 
this advances the policy considerations behind SD regulation by 
reducing counterparty credit risk, lowering the AGNA of outstanding 
swaps, and reducing operational risks by decreasing the number of 
outstanding swaps. The Commission understands that multilateral 
portfolio compression exercises do not permit participants to provide 
liquidity or set prices in the market. A participant in a multilateral 
portfolio compression exercise submits some criteria for its 
participation in the exercise (e.g., credit or counterparty limits), 
but the outcome of a compression cycle will depend on several variables 
that the participants cannot know or control, such as the positions in 
counterparties' portfolios and the criteria set by other participants. 
Given this process, the Commission is of the view that multilateral 
portfolio compression exercise swaps generally do not involve any of 
the attributes the Commission has identified as indicative of swap 
dealing activity.\146\ Further, the Commission notes that counting such 
swaps towards a person's de minimis threshold could discourage 
participation in multilateral portfolio compression exercises, reducing 
the market benefit of the risk reduction such exercises provide.
---------------------------------------------------------------------------

    \146\ See, e.g., 77 FR at 30606-19 (e.g., accommodating demand, 
market making, holding oneself out as a dealer in swaps, seeking to 
profit by providing liquidity, etc.).
---------------------------------------------------------------------------

    To advance the policy objectives of the de minimis exception 
discussed above, proposed paragraph (4)(i)(E) would allow a person to 
exclude from its de minimis calculation swaps that result from 
multilateral portfolio compression exercises. In particular, the MPCE 
De Minimis Provision's explicit statement that such swaps do not need 
to be counted towards the de minimis threshold would facilitate 
efficient application of the SD Definition. Moreover, adding this 
proposed exception to the regulatory text would therefore be consistent 
with the goals of Project KISS. Additionally, to ensure that the scope 
of this exception is not improperly exceeded, the proposed rule 
includes an anti-evasion provision.
2. Request for Comments
    The Commission requests comments on the following questions. To the 
extent possible, please quantify the impact of issues discussed in the 
comments, including costs and benefits, as applicable.
    (1) Is the proposed MPCE De Minimis Provision appropriate? Why or 
why not?
    (2) Is the proposed MPCE De Minimis Provision too narrowly or 
broadly tailored? Are there additional restrictions or conditions that 
should apply in order for swaps resulting from multilateral portfolio 
compression exercises to not count towards a person's de minimis 
threshold?
    (3) How will the proposed MPCE De Minimis Provision impact entities 
that enter into multilateral portfolio compression exercises?

E. Methodology for Calculating Notional Amounts

1. Background and Proposal
    Given the potential variety of methods that could be used to 
calculate the notional amount for certain swaps, particularly for swaps 
where notional amount is not a contractual term of the transaction 
(e.g., NFC swaps), the Commission is proposing new paragraph (4)(vii) 
of the SD Definition, which provides that the Commission may approve or 
establish methodologies for calculating notional amounts for purposes 
of determining whether a person exceeds the AGNA de minimis threshold. 
Further, the Commission is proposing to delegate to the Director of 
DSIO the authority to make such determinations.
    In the SD Definition Adopting Release, the Commission did not 
prescribe specific calculation methodologies for notional amounts 
(except for leveraged swaps),\147\ and in the context of calculating 
notional amounts to determine whether an entity was a major swap 
participant (``MSP''), the Commission explicitly stated that it 
``contemplate[d] the use of industry standard practices.'' \148\ 
Subsequent to issuance of the SD Definition Adopting Release, DSIO 
issued interpretive responses to frequently asked questions regarding 
calculating notional amounts for purposes of the de minimis exception 
(the ``DSIO FAQ Guidance'').\149\
---------------------------------------------------------------------------

    \147\ The Commission noted that ``effective notional'' should be 
used if the swap is leveraged or structurally enhanced. See 17 CFR 
1.3, Swap dealer, paragraph (4)(i)(A); 77 FR at 30630.
    \148\ 77 FR at 30670 n. 902.
    \149\ See Frequently Asked Questions (FAQ)--[DSIO] Responds to 
FAQs About Swap Entities (Oct. 12, 2012), available at https://www.cftc.gov/idc/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf.
---------------------------------------------------------------------------

    Further, for purposes of reporting swaps to trade repositories, the 
Committee on Payments and Market Infrastructures (``CPMI'') and the 
Board of the International Organization of Securities Commissions 
(``IOSCO'') recently issued guidance regarding the definition, format, 
and usage of key over-the-counter derivative data elements, which 
included guidance on calculating certain notional amounts (the 
``Technical Guidance'').\150\ The calculation methodologies described 
in the Technical Guidance will be considered for adoption by the 
Commission in future rulemakings related to swap data reporting.\151\ 
However, the Commission recognizes that the Technical Guidance does not 
necessarily address how notional amounts should be calculated for 
purposes of the de minimis exception under CFTC regulations.
---------------------------------------------------------------------------

    \150\ See CPMI and Board of IOSCO, Technical Guidance--
Harmonisation of critical OTC derivatives data elements (other than 
UTI and UPI) (Apr. 2018), available at https://www.bis.org/cpmi/publ/d175.pdf.
    \151\ See Technical Guidance, supra note 150, at 7 (``The 
responsibility for issuing requirements for market participants on 
the reporting of OTC derivative transactions to [trade repositories] 
falls within the remit of the relevant authorities. Therefore, this 
document does not represent guidance on which critical data elements 
will be required to be reported in a given jurisdiction. Rather, if 
such data elements are required to be reported in a given 
jurisdiction, this document represents guidance to the authorities 
in that jurisdiction on the definition, the format and the allowable 
values that would facilitate consistent aggregation at a global 
level.'').
---------------------------------------------------------------------------

    The Commission notes that market participants have already 
requested clarity regarding how notional amounts should be calculated 
for NFC swaps for purposes of determining whether a person exceeds the 
AGNA de minimis

[[Page 27465]]

threshold.\152\ Additionally, the notional amount calculation 
methodologies described in the DSIO FAQ Guidance, the methodologies 
used by market participants as industry standard practice, and the 
methodologies described in the Technical Guidance differ from one 
another in some respects. Thus, the Commission believes additional 
clarity about the appropriate notional amount calculation methodologies 
for purposes of the SD de minimis threshold would be beneficial. 
Further, additional questions may arise regarding notional amount 
calculations, as it relates to the AGNA de minimis threshold, given the 
broad array of swaps available across all asset classes and the 
potential for new types of swap products becoming available in the 
future. Therefore, the Commission is proposing new paragraph 
(4)(vii)(A) of the SD Definition, which sets out a mechanism for the 
Commission, on its own or upon written request by a person, to 
determine the methodology to be used to calculate the notional amount 
for any group, category, type, or class of swaps for purposes of 
whether a person exceeds the AGNA de minimis threshold. The Commission 
notes that the process for submitting a written request regarding the 
methodology for notional amount calculations would be consistent with 
the process described in Sec.  140.99 of the Commission's 
regulations.\153\ Further, the proposed rule requires that such 
methodology be economically reasonable and analytically supported, and 
that any such determination be made publicly available and posted on 
the CFTC website.\154\
---------------------------------------------------------------------------

    \152\ See, e.g., Letter from CEWG; Letter from Natural Gas 
Supply Association (Jan. 15, 2016), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60595&SearchText=.
    \153\ See 17 CFR 140.99.
    \154\ Pursuant to this proposed rule, it is possible that 
methodologies for calculating notional amounts for the de minimis 
calculation could be approved or established that differ from 
methodologies in the Technical Guidance. However, the purpose of the 
Technical Guidance was not to consider specific requirements that 
jurisdictions may have with respect to calculating notional amount 
for registration purposes. The Commission notes that the proposed 
approach is similar to one taken by the Canadian Securities 
Administrators. See Proposed National Instrument 93-102 Derivatives: 
Registration and Proposed Companion Policy 93-102 Derivatives: 
Registration (Apr. 19, 2018) (collectively, the ``Proposed 
Instrument''), available at http://www.albertasecurities.com/Regulatory%20Instruments/5399899%20_%20CSA%20Notice%2093-102.pdf. 
The Proposed Instrument includes an alternative notional calculation 
methodology--for the purpose of derivative dealer registration 
thresholds--that differs from the Technical Guidance. See Proposed 
Instrument at 6-7, 24-26.
---------------------------------------------------------------------------

    From time to time, DSIO issues interpretive guidance or no-action 
letters to registrants on a variety of issues, often to address 
uncertainty regarding the application of Commission regulations (e.g., 
the DSIO FAQ Guidance). Consistent with that practice, the Commission 
also believes it is important to provide clarity regarding calculation 
methodologies, as it relates to the AGNA de minimis threshold, to 
market participants on a timely basis. Doing so would ensure that 
persons are fully aware of whether their activities could lead to (or 
presently entail) SD registration requirements in the event of market 
or regulatory changes. Delegation by the Commission of this function to 
DSIO should help to provide clarity on a timely basis, and provide 
certainty that DSIO has the authority to make notional amount 
calculation determinations. Therefore, the Commission is proposing new 
paragraph (4)(vii)(B)(i) of the SD Definition, which delegates to the 
Director of DSIO, or such other employee(s) that the Director may 
designate, the authority to determine the methodology to be used to 
calculate the notional amount for any group, category, type, or class 
of swaps for purposes of whether a person exceeds the AGNA de minimis 
threshold. Additionally, the Director of DSIO would be able to submit 
any matter delegated pursuant to proposed paragraph (4)(vii)(A) to the 
Commission for its consideration. Further, as is the case with existing 
delegations to staff, the Commission would continue to reserve the 
right to exercise the delegated authority itself at any time. 
Consistent with the requirements of proposed paragraph (4)(vii)(A), any 
determination made pursuant to this proposed delegation must be 
economically reasonable and analytically supported, and be made 
publicly available and posted on the CFTC website. As is the case with 
staff interpretive letters, once a determination is made, either by the 
Commission or the Director of DSIO, all persons may rely on the 
determination.
    Rather than codifying all permitted notional amount calculation 
methodologies for purposes of the AGNA de minimis threshold, or 
requiring other Commission action each time new methodologies are 
approved, the Commission believes that providing delegated authority 
gives the Commission and staff appropriate flexibility to promptly 
respond to future market developments regarding notional amount 
calculation methodologies. The Commission expects that subsequent to 
adopting this delegation of authority, either the Commission or the 
Director of DSIO will determine methodologies for calculating notional 
amounts for certain categories of swaps.
2. Request for Comments
    The Commission welcomes comments on the following questions 
regarding the proposed process for determining methodologies for 
calculating notional amounts, and the proposed delegation of authority. 
To the extent possible, please quantify the impact of issues discussed 
in the comments, including costs and benefits, as applicable.
    (1) Is the proposed process to determine the methodology to be used 
to calculate the notional amount for any group, category, type, or 
class of swaps appropriate? Why or why not?
    (2) Is the proposed process too narrowly or broadly tailored?
    (3) Is the restriction that a methodology be economically 
reasonable and analytically supported appropriate? Why or why not? What 
other standards may be appropriate for this purpose?
    (4) How will the proposed process impact persons that enter into 
swaps where notional amount is not a stated contractual term?
    (5) Is the proposed delegation of authority too narrowly or broadly 
tailored?
    (6) How will the proposed delegation of authority impact persons 
that enter into swaps where notional amount is not a stated contractual 
term?
    (7) Is there a better alternative to this proposed process? If so, 
please describe.
    The Commission also welcomes comments on the following questions 
regarding calculation of notional amounts for purposes of the de 
minimis exception. Comments regarding the calculation of notional 
amounts should focus on the de minimis exception (rather than other 
Commission regulations, such as the reporting requirements in part 45). 
To the extent possible, please quantify the comments, including costs 
and benefits, as applicable.
    (1) Should the notional amount (either stated or calculated) for 
transactions with embedded optionality be delta-adjusted by the delta 
of the underlying options, provided that the methods are economically 
reasonable and analytically supported? Should delta-adjusted notional 
amounts be used for all asset classes and product types, or only some?
    (2) For swaps without stated contractual notional amounts, should 
``price times volume'' generally be used

[[Page 27466]]

as the basis for calculating the notional amount?
    (3) What other notional amount calculation methods, aside from 
``price times volume,'' could be used for swaps without a stated 
notional amount that renders a calculated notional amount equivalent 
more directly comparable to the stated contractual notional amount 
typically available in IRS, CDS, and FX swaps? \155\
---------------------------------------------------------------------------

    \155\ ``Price times volume'' is similar to a cash flow 
calculation, while ``stated contractual notional'' is usually the 
basis that forms a cash flow calculation when combined with price, 
strike, fixed rate, coupon, or reference index. Therefore, ``stated 
contractual notional amount'' may be described as more similar to 
``volume'' than ``price times volume.'' For example, for a $100 
million interest rate swap, the stated notional amount is typically 
the basis of the periodic calculated cash flows instead of the 
actual cash flows, which are calculated using the stated notional 
amount and the stated ``price'' per leg (such as a fixed or floating 
rate index).
---------------------------------------------------------------------------

    (4) For swaps without a stated contractual notional amount, does 
calculation guidance exist in other jurisdictions and/or regulatory 
frameworks, such as in banking, insurance, or energy market 
regulations? Should persons be permitted to use such guidance to 
calculate notional amounts for purposes of a de minimis threshold 
calculation?
    (5) What should be used for ``price'' when calculating notional 
amounts for swaps without a stated contractual notional? Contractual 
stated price, such as a fixed price, spread, or option strike? The spot 
price of the underlying index or reference? The implied forward price 
of the underlying? A different measure of price not listed here? Should 
the price of the last available transaction in the commodity at the 
time the swap is entered into be used for this calculation? Is it 
appropriate to use a ``waterfall'' of prices to calculate notional 
amount, depending on the availability of a price type? \156\
---------------------------------------------------------------------------

    \156\ For example, contractual stated fixed price might be 
required to be used first. Lacking a stated fixed price in the swap, 
spot price of the underlying would then be used instead.
---------------------------------------------------------------------------

    (6) What metric should be used for ``price'' for certain basis 
swaps with no fixed price or fixed spread?
    (7) How should the ``price'' of swaps be calculated for swaps with 
varying prices per leg, such as a predetermined rising or falling price 
schedule?
    (8) What metric should be used for ``volume'' when calculating 
notional amounts for swaps without a stated contractual notional 
amount? Should the Commission assume that swaps with volume optionality 
will be exercised for the full quantity or should volume options be 
delta-adjusted, too?
    (9) Should the total quantity for a ``leg'' be used, or an 
approximation for a pre-determined time period, such as a monthly or 
annualized quantity approximation? \157\
---------------------------------------------------------------------------

    \157\ For an example of ``monthly notional amount 
approximation'' rather than aggregated total notional quantity, see 
Proposed Instrument, supra note 154, at 24-26.
---------------------------------------------------------------------------

    (10) How should the ``volume'' of swaps be calculated for swaps 
with varying notional amount or volume per leg, such as amortizing or 
accreting swaps?
    (11) Should the U.S. dollar equivalent notional amount be 
calculated across all ``legs'' of a swap by calculating the U.S. dollar 
equivalent notional amount for each leg and then calculating the 
minimum, median, mean, or maximum notional amount of all legs of the 
swap?
    (12) Should the absolute value of a price times volume calculation 
be used, or should the calculation allow for negative notional amounts?
    (13) Given that a derivatives clearing organization (``DCO'') has 
to mark a swap to market on a daily basis, it may be possible to 
determine ``implied volatilities'' for swaptions and options that are 
regularly marked-to-market, such as cleared swaps, in order to delta-
adjust them. Should DCO evaluations be used when there are not better 
market prices available?

III. Other Considerations

    In addition to the proposed rule amendments discussed above, the 
Commission is seeking comment on other potential considerations for the 
de minimis threshold, including: (1) Adding a minimum dealing 
counterparty count and a minimum dealing transaction count threshold; 
(2) excepting from the de minimis threshold calculation swaps that are 
exchange-traded and/or cleared; and (3) excepting from the de minimis 
threshold calculation swaps that are categorized as non-deliverable 
forwards. The Commission may take into consideration comments received 
regarding any of these factors in formulating the final rule or may in 
the future consider proposing an amendment to the SD Definition to 
reflect any of these factors for purposes of the de minimis threshold 
calculation.

A. Dealing Counterparty Count and Dealing Transaction Count Thresholds

1. Background
    The Commission is re-considering the merits of using AGNA, by 
itself, to determine if an entity's swap dealing activity is de 
minimis. Specifically, the Commission is seeking comment on whether an 
entity should be able to qualify for the de minimis exception if its 
level of swap dealing activity is below any of the following three 
criteria: (1) An AGNA threshold, (2) a proposed dealing counterparty 
count threshold, or (3) a proposed dealing transaction count threshold.
    Section 1a(49)(D) of the CEA directs the Commission to exempt from 
designation as an SD an entity that engages in a de minimis quantity of 
swap dealing, and provides the Commission with broad discretion to 
promulgate regulations to establish factors with respect to the making 
of this determination to exempt.\158\ The SD Definition Proposing 
Release suggested three possible criteria for determining when an 
entity engaged in more than a de minimis quantity of dealing activity: 
AGNA of swap dealing activity, number of dealing transactions, and 
number of dealing counterparties.\159\ In selecting these three factors 
as possible appropriate measurements of an entity's ``quantity'' of 
swap dealing activity, the Commission also noted that ``a range of 
alternative approaches may be reasonable.'' \160\ The Commission stated 
that it selected the proposed factors in an effort to focus the de 
minimis exception on ``entities for which registration would not be 
warranted from a regulatory point of view in light of the limited 
nature of their dealing activities.'' \161\ The SD Definition Adopting 
Release did not include factors beyond an AGNA threshold in the de 
minimis exception.\162\
---------------------------------------------------------------------------

    \158\ 7 U.S.C. 1a(49)(D).
    \159\ SD Definition Proposing Release, 75 FR at 80180.
    \160\ Id. (``Thus, while the proposed factors discussed below 
reflect our attempt to delimit the de minimis exemption 
appropriately, we recognize that a range of alternative approaches 
may be reasonable, and we are particularly interested in commenters' 
suggestions as to the appropriate factors.'').
    \161\ Id.
    \162\ In reaching this conclusion, the Commissions considered 
concerns expressed by commenters that ``a standard based on the 
number of swaps . . . or counterparties can produce arbitrary 
results by giving disproportionate weight to a series of smaller 
transactions or counterparties.'' 77 FR at 30630.
---------------------------------------------------------------------------

    The Commission seeks comment on whether and how the inclusion of 
these additional factors might account for modest variations in an 
entity's level of dealing activity that occur over time and provide 
entities with enhanced flexibility to manage their dealing activity 
below the registration threshold. The Commission also seeks comment on 
whether these additional criteria could better assist the Commission in 
identifying those entities whose dealing activity is limited and reduce 
instances of ``false positives'' of any one measure of activity, such 
as where an entity's dealing activity may marginally exceed

[[Page 27467]]

the current $8 billion AGNA threshold, but still be so ``limited in 
nature'' that it does not warrant SD regulation.
    For example, the inclusion of dealing counterparty count and 
dealing transaction count thresholds in the de minimis exception could 
help account for differences in transaction sizes across asset classes. 
As commenters have noted, certain asset classes tend to have higher 
average notional amounts per swap than others.\163\ As a result, a 
market participant that executes a small number of dealing transactions 
with only a few counterparties in an asset classes for which the 
notional amount of each transaction is comparatively large may be 
required to register, whereas a market participant with the exact same 
number of dealing transactions and dealing counterparties in an asset 
class with a smaller average notional amount may not be required to 
register. Moreover, differences in the average tenor and frequency of 
swap transactions also exist across asset classes. For example, 
depending upon the underlying activity that the counterparty is trying 
to hedge, a person may prefer to enter into a single one-year, $1 
billion swap, or four consecutive three-month, $1 billion swaps. One 
hedging strategy results in a calculation of $1 billion for purposes of 
the de minimis threshold, the other in a calculation of $4 billion for 
purposes of the threshold. The Commission seeks comment on whether 
consideration of dealing counterparty count and dealing transaction 
count could address the impact of such differences and facilitate 
relatively equal amounts of de minimis dealing across asset classes.
---------------------------------------------------------------------------

    \163\ See, e.g., Preliminary Report, supra note 21, at 52; 
Letter from American Bankers Association (Jan. 19, 2016) (``Risk 
mitigating commodity swaps are . . . of a shorter tenor and a 
smaller average notional size as compared to other asset 
classes.''), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60596&SearchText=.
---------------------------------------------------------------------------

    In addition to differences across asset classes, the Commission 
recognizes that an entity's swap dealing volume may fluctuate over 
time. For example, as compared to the first quarter of 2017, during the 
first quarter of 2018, overall IRS notional amount activity rose by 
approximately 25 percent, while trade count grew by approximately 16 
percent.\164\ The Commission seeks comment on whether the inclusion of 
additional metrics in the de minimis exception could provide market 
participants with greater flexibility to serve their existing customer 
base during periods of volatility or economic stress, without the 
concern that such episodic increases in dealing activity may somehow 
trigger SD registration. The Commission notes this result could also 
further one of the policy goals of the de minimis exception, which is 
to enable end-user counterparties to execute hedging swaps with firms 
with whom they have ongoing business relationships, rather than forcing 
such entities to establish separate relationships with registered SDs. 
It could also potentially provide increased liquidity in the swap 
market during periods of financial stress.
---------------------------------------------------------------------------

    \164\ Based on historical information from archived CFTC Swaps 
Reports, available at https://www.cftc.gov/MarketReports/SwapsReports/Archive/index.htm.
---------------------------------------------------------------------------

    The Commission seeks comment on whether including dealing 
counterparty count and dealing transaction count thresholds in the de 
minimis exception, in conjunction with an AGNA calculation, would 
further the policy goals underlying the exception. The Commission also 
seeks comment on whether adding minimum dealing counterparty count and 
dealing transaction count thresholds would be consistent with the 
Commission's goal of ensuring that person's engaged in more than a de 
minimis level of dealing are subject to SD regulation.
2. Potential Thresholds
    The Commission recognizes the importance of appropriately 
calibrating potential dealing counterparty count and dealing 
transaction count thresholds in order to further the Commission's 
interest in identifying and exempting de minimis dealing activity. As 
part of its preliminary consideration of this approach, the Commission 
performed an analysis of the counterparty counts and transaction counts 
of Likely SDs and registered SDs to determine at what thresholds 
certain entities might be required to register using a multi-factor 
approach. The Commission notes that it was unable to exclude non-
dealing counterparties and non-dealing trades.
    As discussed above in section II.A.2.ii, there were 108 Likely SDs 
at the $8 billion AGNA threshold with at least 10 counterparties (in 
IRS, CDS, FX swaps, and equity swaps). The median counterparty count 
for these 108 Likely SDs was 132 counterparties and the median 
transaction count was 5,233 trades. Of these 108 Likely SDs with at 
least 10 counterparties, 106 also had at least 100 transactions, and 
there were 88 Likely SDs that had at least 15 counterparties and 500 
transactions.
    There were 78 registered SDs that had at least $8 billion in AGNA 
of swaps activity. The median counterparty count for these 78 entities 
was 186 counterparties and the median transaction count was 12,004 
trades. Of these 78 registered SDs, 72 had at least 10 counterparties 
and at least 100 transactions. Additionally, 70 of the 78 registered 
SDs had at least 15 counterparties and 500 transactions.
    Based on this preliminary analysis, the Commission is seeking 
comment on whether it would be appropriate to establish a dealing 
counterparty count threshold of 10 counterparties and a dealing 
transaction count threshold of 500 transactions.
    For purposes of calculating a person's counterparty count under 
this approach, the Commission seeks comment on whether it should allow 
counterparties that are members of a single group of persons under 
common control to be treated as a single counterparty. In addition, the 
Commission seeks comment whether it should consider excluding 
registered SDs and MSPs from an entity's counterparty count. Similar to 
the current dealing AGNA threshold, the de minimis calculation for 
counterparty counts and transaction counts could also incorporate 
aggregation (after application of relevant de minimis calculation-
related exclusions) of the counterparty counts and transaction counts 
of affiliated entities that are not registered SDs.\165\
---------------------------------------------------------------------------

    \165\ See 17 CFR 1.3, Swap dealer, paragraph (4).
---------------------------------------------------------------------------

    The Commission understands that the use of additional criteria 
could lead to entities that engage in high levels of AGNA of swap 
dealing activity not having to register as SDs if they have low 
counterparty counts or low transaction counts. In order to account for 
this possibility, the Commission seeks comment on whether it would be 
appropriate to include an AGNA backstop above which entities would have 
to register as SDs, regardless of their counterparty counts or 
transaction counts. For example, under this approach, if an entity 
exceeds some level of AGNA of dealing activity greater than $8 billion, 
it would be required to register as an SD, regardless of its number of 
dealing counterparties or dealing transactions. With respect to a 
potential AGNA backstop, the Commission seeks comment on whether a $20 
billion AGNA threshold would be appropriate.
    A minimum dealing counterparty and dealing transaction threshold, 
in combination with an AGNA amount backstop, might provide a higher 
AGNA de minimis threshold to small dealers that only plan to 
occasionally deal swaps with a limited number of counterparties or 
execute a limited number of transactions. As noted above,

[[Page 27468]]

this higher effective threshold could also provide additional 
flexibility for small dealers to provide clients with dealing services 
without the costs of registration, as long as the dealer can structure 
the business to remain below the counterparty count and transaction 
count limits and the higher AGNA backstop. Generally, adding additional 
metrics could potentially serve to better identify the types of 
entities that are engaged in swap dealing activity. However, as 
commenters have noted previously, the use of additional metrics could 
make the de minimis calculation more complex.
    Given these considerations, the Commission welcomes comments on the 
following:
    (1) Taking into account the Commission's policy objectives, should 
minimum dealing counterparty counts and minimum dealing transaction 
counts be considered in determining an entity's eligibility for the de 
minimis exception?
    (2) Would a dealing counterparty count threshold of 10 dealing 
counterparties be appropriate? Why or why not? Is another dealing 
counterparty count threshold more appropriate?
    (3) Would a dealing transaction count threshold of 500 dealing 
transactions be appropriate? Why or why not? Is another dealing 
transaction count threshold more appropriate?
    (4) Under what circumstances might entities have a relatively high 
AGNA of swap dealing activity, but low dealing counterparty counts or 
low dealing transaction counts?
    (5) Would an AGNA backstop of $20 billion be appropriate? Why or 
why not? Is another AGNA backstop level more appropriate?
    (6) Would adding dealing counterparty count and dealing transaction 
count thresholds simplify the SD analysis for certain market 
participants, and if so, how and for which categories of participants?
    (7) Would adding dealing counterparty count and dealing transaction 
count thresholds complicate the SD analysis for certain market 
participants, and if so, how and for which categories of participants?
    (8) Should registered SDs or MSPs be counted towards the dealing 
counterparty count threshold?
    (9) Should dealing counterparty and dealing transaction counts be 
aggregated across multiple potential swap dealing entities, similar to 
the existing AGNA aggregation standard? \166\
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    \166\ 17 CFR 1.3, Swap dealer, paragraph (4); 78 FR at 45323.
---------------------------------------------------------------------------

    (10) For counterparty count purposes, should counterparties that 
are all part of one corporate family be counted as distinct 
counterparties, or as one counterparty?
    (11) Should a facts and circumstances analysis apply to determine 
if an amendment or novation to an existing swap is swap dealing 
activity that counts towards a person's dealing transaction count? Why 
or why not?
    (12) Would adding dealing counterparty count and dealing 
transaction count thresholds address the impact of differences in 
transaction sizes across asset classes?
    (13) Would it be more appropriate for a multi-factor threshold to 
only include a dealing counterparty count threshold or a dealing 
transaction count threshold, rather than adding both criteria?
    (14) Are there other criteria that should be included in the de 
minimis exception? If so, what are they and how could the Commission 
efficiently collect, calculate, and track them?

B. Exchange-Traded and/or Cleared Swaps

    The Commission is seeking comment on whether an exception from the 
de minimis calculation for swaps that are executed on an exchange 
(e.g., a swap execution facility (``SEF'') or designated contract 
market (``DCM'')) and/or cleared by a DCO is appropriate,\167\ and may 
take into consideration comments received regarding possible exceptions 
based on these factors in formulating the final rule. The Commission is 
mindful of the need to consider how the existing de minimis exception 
may be affecting the utilization of exchange trading \168\ and/or 
clearing in the swap market, as well as the extent to which the policy 
goals of SD registration and regulation may be advanced through 
exchange trading and clearing.
---------------------------------------------------------------------------

    \167\ The Commission notes that swap market participants have 
submitted comments that address this topic. See, e.g., Letters from 
FIA, FSR, Northern Trust, and SIFMA, supra note 58; Final Staff 
Report, supra note 24, at 14 (citing comment letters submitted in 
response to Preliminary Staff Report, supra note 21).
    \168\ For example, one of the CEA's objectives is to promote the 
trading of swaps on swap execution facilities and to promote pre-
trade price transparency in the swaps market. 7 U.S.C. 7b-3(e).
---------------------------------------------------------------------------

    The Commission believes that excepting such swaps from the de 
minimis calculation could improve utilization of exchanges and/or 
clearing.\169\ Generally, systemic risk considerations for SD 
regulation should be less significant for swaps that are cleared 
because risk management is handled centrally by the DCO. Counterparties 
to the swap post margin with the DCO and firms clearing swaps on behalf 
of customers are registered with the Commission as futures commission 
merchants and subject to capital requirements.\170\ In addition, 
clearing would potentially be encouraged if the Commission adds an 
exception for cleared swaps for purposes of the de minimis threshold 
calculation, furthering one of the key tenets of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \169\ Swaps subject to a clearing requirement pursuant to CEA 
section 2(h) must be executed on a SEF or DCM, unless no SEF or DCM 
makes the swap available to trade or a clearing exception under CEA 
section 2(h)(7) applies. 7 U.S.C. 2(h)(8).
    \170\ See CEA section 4d(f), 7 U.S.C. 6d(f); 17 CFR 1.17.
---------------------------------------------------------------------------

    Additionally, counterparty protection policy considerations for SD 
regulation may be less significant for exchange-traded swaps because 
the counterparty protections and trade terms would generally be 
provided by the exchange. Through execution of swaps on exchanges, 
counterparties benefit from viewing the prices of available bids and 
offers and from having access to transparent and competitive trading 
systems or platforms. Further, a number of the external business 
conduct standard requirements otherwise applicable to SDs do not apply 
when a swap is executed anonymously on an exchange. These requirements 
are either inapplicable to such transactions by their terms (because, 
for example, the counterparty is anonymous), or do not apply to the SD 
because the exchange fulfills the requirements.\171\ However, 
counterparties could receive reduced levels of protection if trades 
previously executed over-the-counter move to anonymous trading on 
exchanges, though this concern is partially mitigated because products 
traded on exchanges are generally standardized and non-negotiated.
---------------------------------------------------------------------------

    \171\ See, e.g., 17 CFR 23.402 (``know your counterparty'' 
requirements only apply when the counterparty's identity is known to 
the SD prior to execution); 17 CFR 23.430 (requirements to verify 
counterparty eligibility are not applicable when the swap is 
executed on a DCM, or on a SEF if the identity of the counterparty 
is not known to the SD), 17 CFR 23.431 (disclosure of material 
information and scenario analysis is not required when the SD does 
not know the identity of counterparty prior to initiation of a 
transaction on a SEF or DCM).
---------------------------------------------------------------------------

    In addition to the benefits described above, the market efficiency, 
orderliness, and transparency goals of SD regulation would also 
potentially be enhanced since the obligations of, for example, 
reporting trade information and engaging in portfolio reconciliation 
and compression exercises would be centrally (and more efficiently) 
managed by the exchange and/or DCO, as applicable.

[[Page 27469]]

    The Commission notes that an exclusion exists in paragraph (6)(iv) 
of the SD Definition for certain exchange-traded and cleared swaps 
entered into by floor traders (``Floor Trader Exclusion''). In the SD 
Definition Adopting Release, the Commission declined to distinguish 
exchange-traded swaps under the SD Definition, noting, among other 
things, that:

    [A] variety of exchanges, markets, and other facilities for the 
execution of swaps are likely to evolve in response to the 
requirements of the Dodd-Frank Act, and there is no basis for any 
bright-line rule excluding swaps executed on an exchange, given the 
impossibility of obtaining information about how market participants 
will interact and execute swaps in the future, after the 
requirements under the Dodd-Frank Act are fully in effect.\172\
---------------------------------------------------------------------------

    \172\ See 77 FR at 30610.

    Nonetheless, the Commission created a carve-out for exchange-traded 
and cleared swaps executed by floor traders. Subject to certain 
conditions, the Floor Trader Exclusion allows registered floor traders 
who trade swaps solely using proprietary funds for their own account to 
exclude exchange-traded and cleared swaps from their de minimis 
calculation. Therefore, while execution and clearing are factors in the 
Floor Trader Exclusion, they are not the sole basis for it. The Floor 
Trader Exclusion enables floor traders to provide liquidity to 
exchanges in non-dealing capacities, such as proprietary trading, 
without potentially triggering SD regulation. However, the Commission 
notes that the market benefits of the Floor Trader Exclusion may be 
complemented if the de minimis exception also applied to all exchange-
traded and/or cleared swaps.
    The CFTC has not conducted robust data analysis regarding the 
potential impact of an exception from the de minimis calculation for 
swaps that are exchange-traded and/or cleared. However, excepting such 
swaps from the de minimis calculation would also likely lead to 
adjustments in how the swap market operates; therefore, it is difficult 
to forecast what percentage of transactions would ultimately be 
exchange-traded and/or cleared if such an exception were implemented. 
The Commission also notes that clearing is a post-execution activity 
and is not tied to the pre-execution swap dealing activities that 
determine whether a person needs to register as an SD. Therefore, 
adding a clearing-related factor to the de minimis exception may cause 
conflation between swap dealing and clearing.
    The Commission understands that this exception could result in 
entities that engage in a significant amount of swap dealing activity 
in exchange-traded and/or cleared swaps not having to register as SDs. 
In order to account for this possibility, the Commission seeks comment 
on whether it would be appropriate to establish a AGNA backstop such 
that once an entity's swap dealing activity in exchange-traded and/or 
cleared swaps exceeds a certain notional amount, it would be required 
to register as an SD. Alternatively, the Commission is also considering 
whether it may be appropriate to apply a haircut to the notional 
amounts of exchange-traded and/or cleared swaps for purposes of the de 
minimis calculation. Under this approach, persons would only need to 
count a certain percentage of their total notional amount of exchange-
traded and/or cleared swaps towards their de minimis threshold. These 
alternatives would ensure that persons with significant amounts of 
exchange-traded and cleared swaps would still likely be required to 
register as SDs.
    Given these considerations, the Commission welcomes comments on the 
following:
    (1) How would an exception for exchange-traded swaps from a 
person's de minimis calculation impact the policy considerations 
underlying SD regulation and the de minimis exception?
    (2) How would an exception for cleared swaps from a person's de 
minimis calculation impact the policy considerations underlying SD 
regulation and the de minimis exception?
    (3) How would an exception for exchange-traded and cleared swaps 
from a person's de minimis calculation impact the policy considerations 
underlying SD regulation and the de minimis exception?
    (4) Should all exchange-traded swaps be excepted from the de 
minimis calculation, or only certain transactions? If so, which 
transactions? Should only those trades that are anonymously executed be 
excepted? How would the Commission judiciously differentiate, monitor, 
and track such transactions apart from other exchange-traded swaps?
    (5) Should all cleared swaps be excepted from the de minimis 
calculation, or only certain transactions? If so, which transactions? 
Should the Commission differentiate between trades that are intended to 
be cleared and trades that are actually cleared? How would the 
Commission judiciously differentiate, monitor, and track such 
transactions apart from other cleared swaps?
    (6) Should all exchange-traded and cleared swaps be excepted from 
the de minimis calculation, or only certain transactions? If so, which 
transactions? How would the Commission judiciously differentiate, 
monitor, and track such transactions apart from other exchange-traded 
and cleared swaps?
    (7) If exchange-traded swaps are excepted from a person's de 
minimis calculation, what other conditions, if any, should apply for 
the trade to qualify for the exception?
    (8) If cleared swaps are excepted from a person's de minimis 
calculation, what other conditions, if any, should apply for the trade 
to qualify for the exception?
    (9) If exchange-traded and cleared swaps are excepted from a 
person's de minimis calculation, what other conditions, if any, should 
apply for the trade to qualify for the exception?
    (10) If exchange-traded swaps are excepted from the de minimis 
calculation, should the Commission establish a notional backstop above 
which an entity must register? If so, what is the appropriate level for 
the backstop?
    (11) If cleared swaps are excepted from the de minimis calculation, 
should the Commission establish a notional backstop above which an 
entity must register? If so, what is the appropriate level for the 
backstop?
    (12) If exchange-traded and cleared swaps are excepted from the de 
minimis calculation, should the Commission establish a notional 
backstop above which an entity must register? If so, what is the 
appropriate level for the backstop?
    (13) Should persons be able to haircut the notional amounts of 
their exchange-traded swaps for purposes of the de minimis calculation? 
If so, would a 50 percent haircut be appropriate? Why or why not?
    (14) Should persons be able to haircut the notional amounts of 
their cleared swaps for purposes of the de minimis calculation? If so, 
would a 50 percent haircut be appropriate? Why or why not?
    (15) Should persons be able to haircut the notional amounts of 
their exchange-traded and cleared swaps for purposes of the de minimis 
calculation? If so, would a 50 percent haircut be appropriate? Why or 
why not?
    (16) Would an exception for exchange-traded swaps increase the 
volume of swaps executed on SEFs or DCMs?
    (17) Would an exception for cleared swaps increase the volume of 
swaps that are cleared?

[[Page 27470]]

    (18) Would an exception for exchange-traded and cleared swaps 
increase the volume of swaps executed on SEFs or DCMs and the volume of 
swaps that are cleared?
    (19) Are there any unique costs or benefits associated with 
excepting exchange-traded swaps from an entity's de minimis 
calculation?
    (20) Are there any unique costs or benefits associated with 
excepting cleared swaps from an entity's de minimis calculation?
    (21) Are there any unique costs or benefits associated with 
excepting exchange-traded and cleared swaps from an entity's de minimis 
calculation?
    (22) Has the Floor Trader Exclusion encouraged additional trading 
on SEFs and DCMs?
    (23) Has the Floor Trader Exclusion encouraged additional clearing 
of swaps?
    (24) Should the Commission consider additional modifications to the 
Floor Trader Exclusion in lieu of a broader exception for all exchange-
traded and/or cleared swaps?
    (25) How should transactions executed on exempt multilateral 
trading facilities, exempt organized trading facilities, and/or exempt 
DCOs be treated?

C. Non-Deliverable Forwards

    Section 1a(47) of the CEA defines the term ``swap,'' \173\ and 
establishes that foreign exchange swaps \174\ and foreign exchange 
forwards \175\ shall be considered swaps unless the Secretary of the 
Treasury makes a written determination that either foreign exchange 
swaps or foreign exchange forwards or both should be not be regulated 
as swaps \176\ (to avoid confusion with the term ``FX swap'' as 
otherwise used in this release, the terms ``foreign exchange swap'' and 
``foreign exchange forward'' as used in this section III.C refer only 
to those products as defined by CEA sections 1a(25) and 1a(24), 
respectively).
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    \173\ 7 U.S.C. 1a(47).
    \174\ As defined in CEA section 1a(25). 7 U.S.C. 1a(25) (The 
term ``foreign exchange swap'' is defined to mean a transaction that 
solely involves an exchange of two different currencies on a 
specific date at a fixed rate that is agreed upon on the inception 
of the contract covering the exchange; and a reverse exchange of 
those two currencies at a later date and at a fixed rate that is 
agreed upon on the inception of the contract covering the 
exchange.).
    \175\ As defined in CEA section 1a(24). 7 U.S.C. 1a(24) (The 
term ``foreign exchange forward'' is defined to mean a transaction 
that solely involves the exchange of two different currencies on a 
specific future date at a fixed rate agreed upon on the inception of 
the contract covering the exchange.).
    \176\ 7 U.S.C. 1a(47)(E).
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    In November 2012, the Secretary of the Treasury signed a 
determination that exempts both foreign exchange swaps and foreign 
exchange forwards from the definition of ``swap,'' in accordance with 
the CEA (``Treasury Determination'').\177\ The Treasury Determination 
further explained that foreign exchange options, currency swaps, and 
non-deliverable forwards (``NDFs'') may not be exempted from the CEA's 
definition of ``swap'' because they do not satisfy the statutory 
definitions of a foreign exchange swap or foreign exchange 
forward.\178\ The Treasury Determination explained that:
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    \177\ 77 FR 69694.
    \178\ Id. at 69695.

    [A]n NDF is a swap that is cash-settled between two 
counterparties, with the value of the contract determined by the 
movement of exchange rates between two currencies. On the contracted 
settlement date, the profit to one party is paid by the other based 
on the difference between the contracted NDF rate (set at the 
trade's inception) and the prevailing NDF fix (usually a close 
approximation of the spot foreign exchange rate) on an agreed 
notional amount. NDF contracts do not involve an exchange of the 
agreed-upon notional amounts of the currencies involved. Instead, 
NDFs are cash settled in a single currency, usually a reserve 
currency. NDFs generally are used when international trading of a 
physical currency is relatively difficult or prohibited.\179\
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    \179\ Id. at 69703 (citing 77 FR at 48254-55).

    The Commission understands from market participants that NDFs 
provide an important market function because they are used to hedge 
exposures to restricted currencies when the exposure is held by someone 
outside of the home jurisdiction. The Commission also understands that 
NDFs are economically and functionally similar to deliverable foreign 
exchange forwards in that the same net value is transmitted in either 
structure.
    Further, the Commission has learned from market participants that 
markets continue to treat both NDFs and deliverable foreign exchange 
forwards as the same functional product. Like deliverable foreign 
exchange forwards, NDFs settle on a net rather than gross basis, which 
significantly mitigates counterparty risk in this context. In some 
cases, market participants that previously had settled deliverable 
foreign exchange forwards on a net basis (whether to minimize 
counterparty risk or for other reasons) now take steps so as to ensure 
they are able to avail themselves of the exemption from swap status 
afforded by the Treasury Determination, including settlement of foreign 
exchange forwards on a gross basis.
    The Commission could determine to amend the de minimis exception in 
paragraph (4) of the ``swap dealer'' definition in Sec.  1.3 of the 
Commission's regulations by excepting NDFs from consideration when 
calculating the AGNA of swap dealing activity for purposes of the de 
minimis threshold. Excepting NDFs would result in a more comparable 
regulatory treatment for these transactions when compared with foreign 
exchange swaps and foreign exchange forwards pursuant to the Treasury 
Determination.
    Given these considerations, the Commission welcomes comments on the 
following:
    (1) Should the Commission except NDFs from consideration when 
calculating the AGNA of swap dealing activity for purposes of the de 
minimis exception? Why or why not?
    (2) Are there other foreign exchange derivatives that the 
Commission should except from consideration for counting towards the de 
minimis threshold?
    (3) Do NDFs pose any particular systemic risk in a manner distinct 
from foreign exchange swaps and foreign exchange forwards?
    (4) If the Commission were to except NDFs from consideration when 
calculating the AGNA for purposes of the de minimis exception, are 
there particular limits that the Commission should consider in 
connection with this exception?
    (5) What would be the market liquidity impact if the Commission 
were to except NDFs from counting towards the de minimis threshold?
    (6) Is there material benefit to the market in requiring 
participants that transact in NDFs to register with the Commission, 
while not imposing similar obligations on participants that transact in 
deliverable foreign exchange forwards? If so, what benefits accrue from 
imposing such registration obligations?
    (7) Please provide any relevant data that may assist the Commission 
in evaluating whether to except NDFs from counting towards the de 
minimis threshold.
    (8) Please provide any additional comments on other factors or 
issues the Commission should consider when evaluating whether to except 
NDFs from counting towards the de minimis threshold.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider

[[Page 27471]]

whether the regulations they propose will have a significant economic 
impact on a substantial number of small entities.\180\ This Proposal 
only affects certain entities that are close to the de minimis 
threshold in the SD Definition. For example, the Proposal would affect 
entities with a relevant AGNA of swap dealing activity between $3 
billion and $8 billion. Moreover, it also would affect entities that 
engage in swap dealing activity above an AGNA of $3 billion that also 
enter into hedging swaps, or, in the case of IDIs, that enter into 
loan-related swaps. That is, the Proposal is relevant to entities that 
engage in swap dealing activity with a relevant AGNA measured in the 
billions of dollars. The Commission does not believe that these 
entities would be small entities for purposes of the RFA. Therefore, 
the Commission believes that this Proposal will not have a significant 
economic impact on a substantial number of small entities, as defined 
in the RFA.
---------------------------------------------------------------------------

    \180\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that this Proposal will not have 
a significant economic impact on a substantial number of small 
entities. The Commission invites comment on the impact of this Proposal 
on small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1955 (``PRA'') \181\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. The Commission may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid Office of Management 
and Budget (``OMB'') control number. The proposed rules will not impose 
any new recordkeeping or information collection requirements, or other 
collections of information that require approval of OMB under the PRA.
---------------------------------------------------------------------------

    \181\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Commission notes that all reporting and recordkeeping 
requirements applicable to SDs result from other rulemakings, for which 
the CFTC has sought OMB approval, and are outside the scope of 
rulemakings related to the SD Definition.\182\ The CFTC invites public 
comment on the accuracy of its estimate that no additional 
recordkeeping or information collection requirements, or changes to 
existing collection requirements, would result from the Proposal.
---------------------------------------------------------------------------

    \182\ Parties wishing to review the CFTC's information 
collections on a global basis may do so at www.reginfo.gov, at which 
OMB maintains an inventory aggregating each of the CFTC's currently 
approved information collections, as well as the information 
collections that presently are under review.
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C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\183\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. In this section, the Commission considers the costs and 
benefits resulting from its determinations with respect to the Section 
15(a) factors, and seeks comments from interested persons regarding the 
nature and extent of such costs and benefits.
---------------------------------------------------------------------------

    \183\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Proposal amends the de minimis exception in paragraph (4) of 
the SD Definition in Sec.  1.3 by: (1) Setting the de minimis exception 
threshold at $8 billion in AGNA of swap dealing activity, the same as 
the current phase-in level, and removing the phase-in process; (2) 
adding an exception from the de minimis threshold calculation for swaps 
entered into by IDIs in connection with originating loans to customers; 
(3) adding an exception from the de minimis threshold calculation for 
swaps entered into by a person for purposes of hedging financial or 
physical positions; (4) codifying prior DSIO guidance regarding the 
treatment of swaps that result from multilateral portfolio compression 
exercises; and (5) providing that the Commission may determine the 
methodology to be used to calculate the notional amount for any group, 
category, type, or class of swaps, and delegating to the Director of 
DSIO the authority to make such determinations.
    As part of this cost-benefit consideration, the Commission will: 
(1) Discuss the costs and benefits of each of the proposed changes; and 
(2) analyze the proposed amendments as they relate to each of the 15(a) 
factors.
1. $8 Billion De Minimis Threshold
    As discussed above, the SD Definition provides an exception from 
the SD Definition for persons who engage in a de minimis amount of swap 
dealing activity. Currently, a person shall not be deemed to be an SD 
unless swaps entered into in connection with swap dealing activity 
exceed an AGNA threshold of $3 billion (measured over the prior 12-
month period), subject to a phase-in period that is currently in 
effect, during which the AGNA threshold is set at $8 billion. The 
Commission is proposing to amend the de minimis exception to the SD 
Definition to set the de minimis threshold at the current $8 billion 
phase-in level.
    There are general policy-related costs and benefits associated with 
the proposal to set the de minimis threshold at $8 billion. In addition 
to these policy considerations, the proposal to set the de minimis 
threshold at $8 billion would also have specific monetary costs and 
benefits as compared to a lower or higher threshold. The current $8 
billion phase-in level threshold, along with the prospect that the 
threshold would decrease to $3 billion after December 31, 2019 in the 
absence of further Commission action, sets the baseline for the 
Commission's consideration of the costs and benefits of the proposed 
alternatives. Accordingly, the Commission considers the costs and 
benefits that would result from maintaining the current $8 billion 
phase-in level threshold, or alternatively, a threshold level below or 
above the current $8 billion threshold. The status quo baseline also 
includes other aspects of existing rules related to the de minimis 
exception. The analysis also takes into account any no-action relief, 
to the extent such relief is being relied upon. As the Commission is of 
the preliminary belief that the existing no-action relief related to 
the de minimis exception is being fully relied upon by market 
participants, the cost-benefit discussion that follows also considered 
the effects of that relief.
(i) Policy-Related Costs and Benefits
    There are several policy objectives underlying SD regulation and 
the de minimis exception to SD registration. As discussed above in 
section I.C, the primary policy objectives of SD regulation include 
reducing systemic risk, increasing counterparty protections, and 
increasing market efficiency, orderliness, and transparency.\184\ To 
achieve these policy

[[Page 27472]]

objectives, registered SDs are subject to a broad range of 
requirements, including, among other things, registration, internal and 
external business conduct standards, reporting, recordkeeping, risk 
management, posting and collecting margin on uncleared swaps, and chief 
compliance officer designation and responsibilities. The Commission 
also considers policy objectives furthered by a de minimis exception, 
which include increasing efficiency, allowing limited ancillary 
dealing, encouraging new participants to enter the swap dealing market, 
and focusing regulatory resources.\185\ These policy considerations 
have general costs and benefits associated with them depending on the 
level of the de minimis threshold.
---------------------------------------------------------------------------

    \184\ See 77 FR at 30628-30, 30707-08.
    \185\ See id.
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    As noted in the SD Definition Adopting Release, generally, the 
lower the de minimis threshold, the greater the number of entities that 
are subject to the SD-related regulatory requirements, which could 
decrease systemic risk, increase counterparty protections, and promote 
swap market efficiency, orderliness, and transparency.\186\ However, a 
lower threshold could have offsetting effects that might decrease the 
policy benefits of lowering the de minimis exception threshold. For 
example, it is likely that a lower threshold would lead to reduced 
ancillary dealing activity and discourage new participants from 
entering into the swap market.
---------------------------------------------------------------------------

    \186\ See id. at 30628-30, 30703, 30707.
---------------------------------------------------------------------------

(a) Maintaining the $8 Billion De Minimis Phase-In Threshold
    At the $8 billion threshold, the 2017 Transaction Coverage and 2017 
AGNA Coverage ratios indicate that nearly all swaps were covered by SD 
regulation, giving rise to the benefits from the policy objectives of 
SD regulation discussed above. Specifically, as seen in Table 1 in 
section II.A.2.i, almost all swap transactions involved at least one 
registered SD as a counterparty, approximately 99 percent or greater 
for IRS, CDS, FX swaps, and equity swaps. For NFC swaps, approximately 
86 percent of transactions involved at least one registered SD as a 
counterparty. Overall, approximately 98 percent of all swap 
transactions involved at least one registered SD. As seen in Table 2, 
almost all AGNA of swaps activity included at least one registered SD, 
approximately 99 percent or greater for IRS, CDS, FX swaps, and equity 
swaps.
    Further, the Commission notes that the 6,440 entities that did not 
enter into any transactions with a registered SD had limited activity 
overall. As discussed in section II.A.2.i, the 6,440 entities entered 
into 77,333 transactions, representing approximately 1.7 percent of the 
overall number of transactions during the review period. Additionally, 
collectively, the 6,440 entities had $68 billion in AGNA of swaps 
activity, representing approximately 0.03 percent of the overall AGNA 
of swaps activity during the review period. The Commission believes 
that this limited activity indicates that to the extent these entities 
are engaging in swap dealing activities, such activity is likely 
ancillary and in connection with other client services, potentially 
indicating that the policy rationales behind a de minimis exception are 
being advanced at the current $8 billion threshold.
    Additionally, with respect to NFC swaps, Table 13 in section 
II.A.2.iv indicates that registered SDs still entered into the 
significant majority (86 percent) of the overall market's total 
transactions and faced 83 percent of counterparties in at least one 
transaction, indicating that the existing $8 billion de minimis 
threshold has helped extend the benefits of SD registration to much of 
the NFC swap market. The trading activity of the 42 unregistered 
entities with 10 or more NFC swap counterparties represents 
approximately 13 percent of the overall NFC swap market by transaction 
count. However, as compared to the existing 44 registered SDs with at 
least 10 counterparties, these 42 In-Scope Entities have significantly 
lower mean transaction and counterparty counts, indicating that they 
may only be providing ancillary dealing services to accommodate 
commercial end-user clients, also potentially indicating that the 
policy rationales behind a de minimis exception are being advanced at 
the current $8 billion threshold.
(b) $3 Billion De Minimis Threshold
    The Commission is of the view that the systemic risk mitigation, 
counterparty protection, and market efficiency benefits of SD 
regulation would be enhanced in only a very limited manner if the de 
minimis threshold decreased from $8 billion to $3 billion, as would be 
the case if the current regulation and the existing Commission order 
establishing an end to the phase-in period on December 31, 2019 were 
left unchanged. As seen in Table 4 in section II.A.2.ii, the Estimated 
AGNA Coverage would increase from approximately $221,020 billion (99.95 
percent) to $221,039 billion (99.96 percent), an increase of $19 
billion (a 0.01 percentage point increase). As seen in Table 5, the 
Estimated Transaction Coverage would increase from 3,795,330 trades 
(99.77 percent) to 3,797,734 trades (99.83 percent), an increase of 
2,404 trades (a 0.06 percentage point increase). As seen in Table 6, 
the Estimated Counterparty Coverage would increase from 30,879 
counterparties (88.80 percent) to 31,559 counterparties (90.75 
percent), an increase of 680 counterparties (a 1.96 percentage point 
increase). The effect of these limited increases is further mitigated 
by the fact that at the current $8 billion phase-in threshold, the 
substantial majority of transactions are already covered by SD 
regulation--and related counterparty protection requirements--because 
they include at least one registered SD as a counterparty.
    For NFC swaps, as discussed in section II.A.2.iv, without notional-
equivalent data, it is unclear how many of the 42 In-Scope Entities 
with 10 or more counterparties that are not registered SDs would 
actually be subject to SD registration at a $3 billion de minimis 
threshold. It is possible that a portion of the swaps activity for some 
or all of these entities qualifies for the physical hedging exclusion 
in paragraph (6)(iii) of the SD Definition, and therefore would not be 
considered swap dealing activity, regardless of the de minimis 
threshold level.\187\
---------------------------------------------------------------------------

    \187\ Hypothetically, if all 42 entities registered, the 
percentage of all NFC swaps facing at least one registered SD would 
rise from approximately 86 percent to 98 percent.
---------------------------------------------------------------------------

    As discussed in section II.A.2.ii with respect to IRS, CDS, FX 
swaps, and equity swaps, and section II.A.2.iv with respect to NFC 
swaps, the Commission also notes that it is possible that a lower de 
minimis threshold could lead to certain entities reducing or ceasing 
swaps activity to avoid registration and its related costs. Although 
the magnitude of this effect is unclear, reduced swap dealing activity 
could lead to increased concentration in the swap dealing market, 
reduced availability of potential swap counterparties, reduced 
liquidity, increased volatility, higher fees, wider bid/ask spreads, or 
reduced competitive pricing. The end-user counterparties of these 
smaller swap dealing entities may be adversely impacted by the above 
consequences and could face a reduced ability to use swaps to manage 
their business risks.
(c) Higher De Minimis Threshold
    Conversely, a higher de minimis threshold would potentially 
decrease the number of registered SDs, which could have a negative 
impact on

[[Page 27473]]

achieving the SD regulation policy objectives. For example, a higher de 
minimis threshold would allow a greater amount of swap dealing to be 
undertaken without certain counterparty protections. This might impact 
the integrity of swap market to some extent. However, the Commission is 
unable to quantify how the integrity of swap market might be harmed. On 
the other hand, the higher the de minimis threshold, the greater the 
number of entities that are able to engage in dealing activity without 
being required to register, which could increase competition and 
liquidity in the swap market. A higher threshold could also allow the 
Commission to expend its resources on entities with larger swap dealing 
activities warranting more oversight.
    As seen in Table 9 in section II.A.2.iii, in comparison to an $8 
billion threshold, a $100 billion threshold would reduce the Estimated 
AGNA Coverage from approximately $221,020 billion (99.95 percent) to 
$220,877 billion (99.88 percent), a decrease of $143 billion (a 0.06 
percentage point decrease). As seen in Table 10, in comparison to an $8 
billion threshold, a $100 billion threshold would reduce the Estimated 
Transaction Coverage from 3,795,330 trades (99.77 percent) to 3,773,440 
trades (99.20 percent), a decrease of 21,890 trades (a 0.58 percentage 
point decrease). The decreases would be more limited at higher 
thresholds of $20 billion or $50 billion. The data also indicates that 
at higher thresholds, there is a more pronounced decrease in Estimated 
Counterparty Coverage. As seen in Table 11, the Estimated Counterparty 
Coverage would decrease from 30,879 counterparties (88.80 percent) to 
28,234 counterparties (81.19 percent), a decrease of 2,645 
counterparties (a 7.61 percentage point decrease). The decrease would 
be lower at thresholds of $20 billion and $50 billion, at 2.80 
percentage points and 5.71 percentage points, respectively.
    Although it has not conducted an analysis of AGNA activity in NFC 
swaps, the Commission is of the preliminary view that increasing the de 
minimis threshold could potentially lead to fewer registered SDs 
participating in in the NFC swap market, similar to its observations 
with respect to IRS, CDS, FX swaps, and equity swaps discussed above in 
section II.A.2.iii. This could reduce the number of entities 
transacting with registered SDs.
    The cost of reduced protections for counterparties would be 
realized to the extent a higher threshold would result in fewer swaps 
involving at least one registered SD. Additionally, depending on how 
the swap market adapts to a higher threshold, it is also possible that 
the reduction in Estimated Regulatory Coverage would be greater than 
the data indicates to the extent that a higher de minimis threshold 
leads to an increased amount of swap dealing activity between entities 
that are not registered SDs. In such a scenario, Estimated Regulatory 
Coverage could potentially decrease more than the data indicates, 
negatively impacting the policy goals of SD regulation.
(d) Preliminary Entity-Netted Notional Amounts Analysis
    As previously discussed, analysis indicates that the Estimated AGNA 
Coverage is not very sensitive to changes in de minimis threshold 
level. Staff also conducted a preliminary analysis of the sensitivity 
of entity-netted notional amounts (``ENNs'') \188\ of Likely SDs in the 
IRS market to changes in the de minimis threshold level. The ENNs 
analysis normalizes notional amounts to five-year risk equivalents and 
nets long and short positions within counterparty pairs in the same 
currency.\189\
---------------------------------------------------------------------------

    \188\ See Introducing ENNs: A Measure of the Size of Interest 
Rate Swap Markets, supra note 65.
    \189\ Each entity is net long or net short ENNs against each of 
its counterparties, and each entity's total long and short ENNs are 
the sums of its long and short ENNs, respectively, across all of its 
counterparties. See id.
---------------------------------------------------------------------------

    The preliminary analysis indicates that IRS ENNs are generally not 
overly sensitive to the de minimis threshold levels between $3 billion 
and $50 billion, providing additional support for staff's preliminary 
consideration of the policy-related costs and benefits discussed above. 
Table 15 shows the results of an analysis of the de minimis threshold 
in terms of ENNs for the IRS market.

                                                            Table 15--ENNs for IRS Likely SDs
                                                               [Minimum 10 counterparties]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      IRS ENNs totals  ($Bn)                    Change in ENNs totals vs. $8 Bn (%)
        Notional threshold  ($Bn)            Number of   -----------------------------------------------------------------------------------------------
                                            likely SDs         Long            Short            Net            Long            Short            Net
--------------------------------------------------------------------------------------------------------------------------------------------------------
3.......................................             121           9,812           8,307           1,505             0.6             1.1           (1.8)
8.......................................             108           9,750           8,219           1,532  ..............  ..............  ..............
20......................................              93           9,707           8,191           1,516           (0.4)           (0.3)           (1.0)
50......................................              81           9,617           8,105           1,512           (1.4)           (1.4)           (1.3)
100.....................................              72           9,464           8,026           1,439           (2.9)           (2.3)           (6.1)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The 108 Likely SDs at $8 billion identified by the AGNA analysis in 
section II.A.2.ii above represented approximately $9.8 trillion of long 
ENNs and $8.2 trillion of short ENNs on December 15, 2017. A reduction 
in the de minimis threshold from $8 billion to $3 billion would have 
only a modest effect on the coverage of risk transfer as measured by 
IRS ENNs, adding only 0.6 percent of additional long ENNs and 1.1 
percent of additional short ENNs. Similarly, an increase in the de 
minimis threshold from $8 billion to $50 billion would modestly 
decrease long ENNs by 1.4 percent and short ENNs by 1.4 percent. The 
decrease would be more limited at a threshold of $20 billion.\190\
---------------------------------------------------------------------------

    \190\ IRS ENNs totals for a hypothetical de minimis threshold of 
$100 billion, however, begin to show increased sensitivities 
compared to other de minimis thresholds examined.
---------------------------------------------------------------------------

(ii) Direct Cost and Benefits of Setting an $8 Billion Threshold
    It is likely that for any de minimis threshold, some firms will 
have AGNA of swap dealing activity sufficiently close to the threshold 
so as to require analysis to determine whether their AGNA qualifies as 
de minimis. Hence, with a $3 billion threshold, some set of entities 
will likely have to incur the direct costs of analyzing whether they

[[Page 27474]]

would exceed the de minimis threshold, and with an $8 billion 
threshold, a (mostly) different set of entities would have to continue 
to incur costs of analyzing their activity.
    Based on the available data, the Commission estimates that if the 
de minimis threshold were set at $3 billion, approximately 22 currently 
unregistered entities would need to conduct an initial analysis of 
whether they would be above the threshold.\191\ The Commission 
estimates that the potential total direct cost of conducting the 
initial analysis for the 22 entities would average approximately 
$79,000 per entity, or approximately $1.7 million in the 
aggregate.\192\ Certain of those entities with ongoing swap dealing 
activity that is near a $3 billion threshold may also need to conduct 
periodic de minimis calculation analyses to assess whether they qualify 
for the exception. The Commission estimates that approximately 11 
entities may need to conduct such analyses.\193\ Further, the 
Commission estimates that the potential annual direct cost of 
conducting these ongoing analyses for those 11 entities would be 
approximately $40,000 per entity, or $440,000 in the aggregate.\194\
---------------------------------------------------------------------------

    \191\ Commission staff analyzed the swaps activity of market 
participants over a one-year period to develop this estimate. The 
estimate includes 22 In-Scope Entities that had 10 or more 
counterparties and between $1 billion and $5 billion in AGNA of 
swaps activity in IRS, CDS, FX swaps, and equity swaps. Entities 
that were already registered SDs were excluded. The estimate does 
not account for entities that primarily are entering into NFC swaps 
because notional amount information was not available for that asset 
class.
    \192\ This estimate is based on the following staff requirements 
for this determination: 25 hours for an OTC principal trader at 
$695/hour, 40 hours for a compliance attorney at $335/hour, 35 hours 
for a chief compliance officer at $556/hour, 80 hours for an 
operations manager at $290/hour, and 20 hours for a business analyst 
at $273/hour. These individuals would be responsible for 
identifying, analyzing, and aggregating the swap dealing activity of 
a firm and its affiliates. The estimates of the number of personnel 
hours required have been updated from the SD Definition Adopting 
Release in light of the Commission's experience in implementing the 
SD Definition.
    The estimates of the hourly costs for these personnel are from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013 survey, modified to account for an 1,800-hour work-
year and multiplied by 5.35 to account for firm size, employee 
benefits, and overhead, which is the same multiplier that was used 
when the SD Definition was adopted. See 77 FR at 30712 n.1347.
    The Commission recognizes that particular entities may, based on 
their circumstances, incur costs substantially greater or less than 
the estimated averages.
    \193\ The estimate of 11 entities is approximately 50 percent of 
the 22 entities that would need to undertake an initial analysis. 
This estimate assumes that many entities would, following the 
initial analysis, determine that they would either need to register 
or choose not to engage in enough dealing activity to require 
ongoing monitoring.
    \194\ The Commission estimates that the ongoing analysis would 
be streamlined as a result of the initial analysis, and therefore 
would be less costly. For purposes of this calculation, the 
Commission preliminarily estimates that the cost of the ongoing 
analysis would be approximately 50 percent of the cost of the 
initial analysis.
---------------------------------------------------------------------------

    Conversely, the Commission assumes that a higher threshold would 
permit certain entities to no longer incur ongoing costs of assessing 
whether they are above the threshold. The Commission estimated the 
savings that would result from a higher de minimis threshold of $20 
billion. Based on the available data, the Commission estimates that if 
the de minimis threshold were set at $20 billion, approximately 29 
entities would no longer need to conduct an ongoing analysis of whether 
they would be above the new threshold, while 4 entities may begin 
conducting such an analysis.\195\ The Commission estimates that the 
ongoing cost savings for the net 25 entities that would no longer be 
conducting periodic de minimis threshold analyses would average 
approximately $40,000 per entity, or $1 million in the aggregate per 
year.\196\
---------------------------------------------------------------------------

    \195\ Commission staff analyzed the swaps activity of market 
participants over a one-year period to develop this estimate. The 
estimate includes 29 In-Scope Entities that had between $3 billion 
and $15 billion, and 4 In-Scope Entities that had between $15 
billion and $25 billion, in AGNA of swaps activity in IRS, CDS, FX 
swaps, and equity swaps, and at least 10 counterparties. The 
estimate does not account for entities that primarily are entering 
into NFC swaps because notional amount information was not available 
for that asset class.
    \196\ The Commission estimates that the ongoing analysis would 
be streamlined as a result of the initial analysis, and therefore 
would be less costly. For purposes of this calculation, the 
Commission preliminarily estimates that the cost of the ongoing 
analysis would be approximately 50 percent of the cost of the 
initial analysis.
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(iii) Section 15(a)
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
(a) Protection of Market Participants and the Public
    Providing regulatory protections for swap counterparties who may be 
less experienced or knowledgeable about the swap products offered by 
SDs (particularly end-users who use swaps for hedging or investment 
purposes) is a fundamental policy goal advanced by the regulation of 
SDs.
    The Commission is proposing to maintain the current de minimis 
phase-in threshold of $8 billion in AGNA of swap dealing activity. As 
discussed above, the Commission recognizes that a $3 billion de minimis 
threshold may result in more entities being required to register as SDs 
compared to the proposed (and currently in-effect) $8 billion 
threshold, thereby extending counterparty protections to a greater 
number of market participants. However, this benefit is relatively 
small because, at the current $8 billion phase-in threshold, the 
substantial majority of transactions are already covered by SD 
regulation--and related counterparty protection requirements--since 
they include at least one registered SD as a counterparty.\197\
---------------------------------------------------------------------------

    \197\ As discussed in section II.A.2.i, the 2017 Transaction 
Coverage was approximately 98 percent.
---------------------------------------------------------------------------

    On the other hand, as noted above, a threshold above $8 billion may 
result in fewer entities being required to register as SDs, thus 
extending counterparty protections to a fewer number of market 
participants. Although the Estimated Transaction Coverage and Estimated 
AGNA Coverage would not decrease much at higher thresholds of up to 
$100 billion, the decrease in Estimated Counterparty Coverage is more 
pronounced at higher de minimis thresholds, potentially indicating that 
the benefit of SD counterparty protections requirements could be 
reduced at higher thresholds.
    SD regulation is also intended to reduce systemic risk in the swap 
market. Pursuant to the Dodd-Frank Act, the Commission has proposed or 
adopted regulations for SDs, including margin and risk management 
requirements, designed to mitigate the potential systemic risk inherent 
in the swap market. Therefore, the Commission recognizes that a lower 
de minimis threshold may result in more entities being required to 
register as SDs, thereby potentially further reducing systemic risk. 
Conversely, a higher de minimis threshold may result in fewer entities 
being required to register an SD and, thus, possibly increase 
systematic risk.
    However, the Commission's data appears to indicate that the 
additional entities that would need to register at the $3 billion de 
minimis threshold are engaged in a comparatively smaller amount of swap 
dealing activity. Many of these entities might be expected to have 
fewer counterparties and smaller overall risk exposures as compared to 
the SDs that engage in swap dealing in excess of the $8 billion level. 
Accordingly, the Commission believes that that the incremental 
reduction in systemic risk that may be achieved by registering dealers 
that engage in dealing between the $3 billion and $8 billion thresholds 
is limited.
    The data also indicates that at higher thresholds of $20 billion, 
$50 billion, or $100 billion, fewer entities would be

[[Page 27475]]

required to register as SDs, though the change in regulatory coverage 
as measured by Estimated AGNA Coverage and Estimated Transaction 
Coverage would be small. Thus, the Commission preliminarily believes 
that the increase in systemic risk that may occur due to a higher 
threshold would not be significant. However, depending on how the 
market adapts to a higher threshold, the level of regulatory coverage 
could potentially decrease more than the data indicates.
    Additionally, as discussed above, the ENNs analysis suggests that 
the change in the extent to which market risk is held by persons 
identified as Likely SDs is not very sensitive to the changes in the 
thresholds considered here.
    The Commission preliminarily believes that setting the de minimis 
threshold at $8 billion will not substantially diminish the protection 
of market participants and the public as compared to a $3 billion 
threshold. Further, as discussed, the Commission does not expect that 
an increase in the threshold would increase the protection of market 
participants and the public.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    Another goal of SD regulation is swap market efficiency, 
orderliness, and transparency. These market benefits are achieved 
through regulations requiring, for example, SDs to keep detailed daily 
trading records, report trade information, provide counterparty 
disclosures about swap risks and pricing, and engage in portfolio 
reconciliation and compression exercises.
    As compared to a $3 billion de minimis threshold, an $8 billion 
threshold may have a negative effect on the efficiency and integrity of 
the markets as fewer entities are required to register as SDs and fewer 
transactions become subject to SD-related regulations. However, the 
Commission also recognizes that the efficiency and competitiveness of 
the swap market may be negatively impacted if the de minimis threshold 
is set too low, by potentially increasing barriers to entry that may 
stifle competition and reduce swap market efficiency. For example, if 
entities choose to reduce or cease their swap dealing activities in 
response to the $3 billion de minimis threshold, the number or 
availability of market makers for swaps may be reduced, which could 
lead to increased costs for potential counterparties and end-users. 
Conversely, a higher threshold may increase market liquidity, 
efficiency, and competition as more entities engage in swap dealing 
without SD registration as a barrier to entry. However, a higher 
threshold may also result in fewer swaps being subject to SD-related 
regulations requiring, for example, disclosures, portfolio 
reconciliation, portfolio, compression, potentially reducing the 
financial integrity of markets.
    Considering these countervailing factors, the Commission believes 
that setting the de minimis threshold at $8 billion will not 
significantly diminish the efficiency, competitiveness, and financial 
integrity of markets as compared to a $3 billion threshold. Further, as 
discussed, an increase in the threshold would potentially have both 
positive and negative effects to the efficiency, competitiveness, and 
financial integrity of the markets.
(c) Price Discovery
    All else being equal, the Commission preliminarily believes that 
price discovery will not be harmed and might be improved if there are 
more entities engaging in ancillary dealing due to increased 
competitiveness among swap counterparties. The Commission is 
preliminarily of the view that, as compared to a $3 billion threshold, 
an $8 billion de minimis threshold would encourage participation of new 
SDs and promote ancillary dealing because those entities engaged in 
swap dealing activities below the threshold would not need to incur the 
direct costs of registration until they exceeded a higher threshold.
    Similarly, raising the threshold above $8 billion could lead to 
even more entities engaging in ancillary dealing.
(d) Sound Risk Management
    The Commission notes that a higher de minimis threshold could lead 
to impaired risk management practices because a lower number of 
entities would be required by regulation to: (1) Develop and implement 
detailed risk management programs; (2) adhere to business conduct 
standards that reduce operational and other risks; and (3) satisfy 
margin requirements for uncleared swaps. For the same reason, a lower 
threshold could positively impact risk management since more entities 
would be required to comply with the above mentioned risk-related SD 
regulations.
(e) Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations with respect to setting the de minimis threshold at $8 
billion in AGNA of swap dealing activity.
2. Swaps Entered Into by Insured Depository Institutions in Connection 
With Loans to Customers
    The proposed IDI De Minimis Provision would require that the loans 
and related swaps generally meet requirements that, as compared to the 
requirements of the IDI Swap Dealing Exclusion in paragraph (5) of the 
SD Definition, reflect: (1) A revised timing requirement for when the 
swap must be entered into; (2) an expansion of the types of swaps that 
are eligible; (3) a reduced syndication percentage requirement; (4) an 
elimination of the notional amount cap; and (5) a refined explanation 
of the types of loans that would qualify. Any swap that meets the 
requirements of the IDI Swap Dealing Exclusion in paragraph (5) of the 
SD Definition would also meet the requirements of this new IDI De 
Minimis Provision.
(i) Policy-Related Costs and Benefits
    Similar to the IDI Swap Dealing Exclusion in paragraph (5) of the 
SD Definition, the IDI De Minimis Provision allows IDIs to tailor the 
risks of a loan to the loan customer's and the lender's needs and 
promotes the risk-mitigating effects of swaps. The IDI De Minimis 
Provision, however, allows more flexibility, which should expand the 
universe of swaps that do not have to be counted towards the de minimis 
threshold, as well as decrease concentration in the markets for swaps 
and loans. For example, the different requirements for both timing and 
the relationship of the swap to the loan will increase the ability of 
IDIs to enter into certain swaps and not be concerned that they would 
have to be counted towards the de minimis threshold. This should 
enhance market liquidity, which is helpful for customers of IDIs that 
may not have access to larger SDs. Conversely, expanding the universe 
of swaps not required to be counted towards the de minimis threshold 
also expands the number of swaps potentially not subject to SD 
regulation and consequently, could decrease customer protections. As 
mentioned in section II.B.1, however, the proposed IDI De Minimis 
Provision will likely benefit mostly small and mid-sized IDIs, which 
mitigates the concern that systemic risk will increase as a result of 
the proposed change.
    As indicated by Table 14 in section II.B.1, the level of activity 
between unregistered IDIs and other unregistered persons is between 
only approximately 0.003 percent and 0.007 percent of the total AGNA of 
swaps activity, depending on the range of AGNA of

[[Page 27476]]

swaps activity being examined (at AGNAs of between $1 billion and $50 
billion). Given those low percentages, the Commission is of the view 
that the policy benefits of SD regulation likely would not be 
significantly diminished if the proposed IDI De Minimis Provision is 
adopted and some unregistered IDIs marginally expand the number and 
AGNA of swaps they enter into with customers in connection with loans 
to those customers. Further, though these entities are active in the 
swap market, the Commission is of the view that their activity poses 
less systemic risk as compared to larger IDIs because of their limited 
AGNA of swaps activity as compared to the overall size of the market.
    The Commission believes that the benefits of added market liquidity 
may be more significant than the costs of potentially reduced customer 
protections. The cost of reduced customer protections is mitigated 
because such swaps would still be required to be reported to the CFTC 
and IDIs would still be subject to prudential regulatory requirements, 
thereby providing oversight with respect to such swaps.
(ii) Section 15(a)
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
(a) Protection of Market Participants and the Public
    The IDI De Minimis Provision proposed amendment may expand the 
universe of swaps that fall outside the scope of SD regulations, 
potentially increasing systemic risk and reducing counterparty 
protections. However, the IDIs would still be subject to prudential 
regulatory requirements, potentially mitigating this concern.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    The efficiency, competitiveness, and financial integrity of the 
markets may also be affected by the addition of the IDI De Minimis 
Provision since it provides IDIs more flexibility to enter into swaps 
in connection with loans without registering as SDs. With the added 
flexibility, the number of IDIs offering swaps in connection with loans 
may increase, which might have a positive impact on the efficiency and 
competiveness of the market for swaps and loans. However, the added 
flexibility may also result in fewer swaps being subject to SD-related 
regulations.
(c) Price Discovery
    The IDI De Minimis Provision could lead to better price discovery 
as small and mid-sized banks increase their level of ancillary dealing 
activity, which might increase the frequency of swap transaction 
pricing.
(d) Sound Risk Management
    The proposed IDI De Minimis Provision should increase the usage of 
swaps for risk mitigation, which might reduce the risk resulting from 
the defaulting of loan customers. Additionally, having more IDIs 
offering swaps in connection with loans might decrease concentration in 
the market for loan-related swaps and thereby decrease risk as well.
(e) Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations with respect to the proposed IDI De Minimis Provision.
3. Swaps Entered Into To Hedge Financial or Physical Positions
    The Commission is proposing new paragraph (4)(D), which provides a 
general exception from the SD de minimis threshold calculation for 
certain hedging swaps. To meet the requirements of the Hedging De 
Minimis Provision, a swap must be entered into by a person for the 
primary purpose of reducing or otherwise mitigating one or more of its 
specific risks, including, but not limited to, market risk, commodity 
price risk, rate risk, basis risk, credit risk, volatility risk, 
correlation risk, foreign exchange risk, or similar risks arising in 
connection with existing or anticipated identifiable assets, 
liabilities, positions, contracts, or other holdings of the person or 
any affiliate. Additionally, the entity entering into the hedging swap 
must not: (1) Be the price maker of the hedging swap; (2) receive or 
collect a bid/ask spread, fee, or commission for entering into the 
hedging swap; and (3) receive other compensation separate from the 
contractual terms of the hedging swap in exchange for entering into the 
hedging swap.
(i) Policy-Related Costs and Benefits
    Generally, the proposed Hedging De Minimis Provision is not 
expected to impact how such swaps are treated for purposes of the de 
minimis threshold calculation, but rather provides additional clarity 
to market participants, which allows them to determine more easily 
whether swaps entered into for purposes of hedging financial or 
physical positions are counted towards the de minimis threshold. The 
Commission believes that the clarity will benefit certain entities by 
encouraging economically-appropriate risk mitigation, potentially 
reducing systemic risk broadly. The proposed exception should reduce 
costs that persons engaging in such swaps would incur in determining if 
they are SDs. Such added clarity may also improve market liquidity as 
entities feel more comfortable entering into a swap for the purpose of 
hedging, knowing that the swap would not necessarily constitute swap 
dealing. In addition to increased market liquidity, the additional 
clarity should encourage economically appropriate risk mitigation.
    Conversely, it is possible that improper application of the Hedging 
De Minimis Provision could lead to certain swap dealing activity being 
treated as hedging activity that does not need to be counted towards 
the de minimis threshold. This may reduce the level of the Commission's 
regulatory coverage of the swap market. However, the Commission 
believes that the requirements of the proposed Hedging De Minimis 
Provision limit the likelihood that dealing activity would be treated 
as hedging activity by market participants.
(ii) Section 15(a)
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
(a) Protection of Market Participants and the Public
    The Commission notes that certain swaps that are now currently 
counted towards the de minimis threshold could now be hedging swaps 
that would not be counted, which could potentially mean less regulatory 
coverage and protection for market participants. However, as discussed, 
the Commission believes that the proposed exception for swaps entered 
into to hedge financial or physical positions has a number of 
requirements that greatly reduce the likelihood that swap dealing 
activity would improperly not be counted towards an entity's de minimis 
threshold calculation, reducing the potential impact to systemic risk 
and counterparty protections.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    With respect to the Hedging De Minimis Provision, market liquidity 
may improve as entities would be able to execute hedging swaps knowing 
that the swaps would not necessarily constitute swap dealing that 
counts towards the de minimis threshold.

[[Page 27477]]

(c) Price Discovery
    The Hedging De Minimis Provision could lead to better price 
discovery as more entities gain certainty that hedging swaps are not 
considered dealing activity, and therefore increase their hedging-
related activity because they are less likely to have to register as an 
SD.
(d) Sound Risk Management
    The added clarity that certain hedging swaps need not be counted 
towards an entity's de minimis calculation could lead to improved risk 
management as certain entities increase their hedging activities.
(e) Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations with respect to the proposed Hedging De Minimis 
Provision.
4. Swaps Resulting From Multilateral Portfolio Compression Exercises
(i) Policy-Related Costs and Benefits
    The Commission believes that swaps which result from multilateral 
portfolio compression exercises and which meet the requirements of the 
existing Staff Letter No. 12-62 would also meet the requirements of the 
proposed rule amendment, and are already not considered swaps that have 
to count towards a person's de minimis threshold. The Commission is of 
the preliminary belief that the existing no-action relief is being 
fully relied upon by market participants, and therefore, this proposed 
change could lead to increased certainty for market participants, 
without any significant policy-related costs for the swap market.
(ii) Section 15(a)
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
(a) Protection of Market Participants and the Public
    Multilateral portfolio compression exercises help to better align 
initial margin between appropriate counterparties when, for example, a 
swap with a compression exercise participant has been backed-to-backed 
between two SD affiliates in the same holding company. In such cases, 
the original outward facing swap with the first affiliate and the back-
to-back affiliate swap may be replaced with an outward facing swap with 
the second affiliate. Thus, having SDs engage in compression exercises 
may increase the protections that posting initial margin provides 
market participants and the public, namely, a counterparty has a senior 
claim to posted initial margin and may not have to become a general 
creditor in a bankruptcy. To the extent that a provision explicitly 
excepting multilateral portfolio compression exercise swaps from the de 
minimis calculation encourages more participation in compression 
exercises, market participants and the public may be better protected.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    The increased certainty that swaps resulting from multilateral 
portfolio compression exercises do not need to be counted towards a 
person's de minimis threshold could encourage persons to enter into 
multilateral portfolio compression exercises on a more regular basis, 
potentially increasing the financial integrity of the markets.
(c) Price Discovery
    Prices from swap compression exercises are not publicly reported 
because they are not price-forming trades. As such, the Commission has 
not identified any price discovery considerations with respect to the 
MPCE De Minimis Provision.
(d) Sound Risk Management
    The increased certainty that swaps resulting from multilateral 
portfolio compression exercises do not need to be counted towards a 
person's de minimis threshold could encourage persons to enter into 
multilateral portfolio compression exercises on a more regular basis, 
potentially reducing risk.
(e) Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations with respect to the MPCE De Minimis Provision.
5. Methodology for Calculating Notional Amounts
(i) Policy-Related Costs and Benefits
    To allow for more timely clarity to market participants, the 
Commission is proposing new paragraph (4)(vii) of the SD Definition, 
which provides that the Commission may determine the methodology to be 
used to calculate the notional amount for any group, category, type, or 
class of swaps, and delegates to the Director of DSIO the authority to 
determine methodologies for calculating notional amounts. Additionally, 
any such methodology shall be economically reasonable and analytically 
supported, and be made publicly available on the CFTC website. The 
Commission believes that this proposed amendment would facilitate 
timely clarity regarding notional amount calculation methodologies for 
purposes of the de minimis threshold, and help ensure that persons are 
fully aware of whether their activities could lead to (or presently 
entail) SD registration requirements in the event of market or 
regulatory changes. As is the case with existing delegations to staff, 
the Commission would continue to reserve the right to exercise the 
delegated authority itself at any time.
(ii) Section 15(a)
(a) Protection of Market Participants and the Public
    The Commission has not identified any protection of market 
participants and the public considerations with respect to the proposed 
rule for determining the methodology for calculating notional amounts 
and the delegation of authority.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission has not identified any efficiency, competitiveness, 
and financial integrity of the markets considerations with respect to 
the proposed rule for determining the methodology for calculating 
notional amounts and the delegation of authority.
(c) Price Discovery
    The Commission has not identified any price discovery 
considerations with respect to the proposed rule for determining the 
methodology for calculating notional amounts and the delegation of 
authority.
(d) Sound Risk Management
    The Commission believes that most market participants understand 
the risks of the swaps they engage in. To the extent that the proposed 
amendment compels SDs to assess the deltas of embedded options in 
swaps, however, the proposed amendment could lead to an audit trail for 
SDs that might ultimately improve risk management (if estimated deltas 
did not exist already).
(e) Other Public Interest Considerations
    The Commission believes that the proposed rule for determining the 
methodology for calculating notional amounts and the delegation of 
authority will ensure that persons are fully aware of whether their 
activities could lead to (or presently entail) SD registration 
requirements in the event of market or regulatory changes.
6. Request for Comment
    The Commission invites comments from the public on all aspects of 
its

[[Page 27478]]

preliminary consideration of costs and benefits associated with this 
Proposal. The questions below relate to areas that the Commission 
preliminarily believes may be relevant. In addressing these or any 
other aspect of the Commission's preliminary assessment, commenters are 
encouraged to submit any data or other information that they may have 
quantifying or qualifying the costs and benefits of the proposed 
alternatives.
    (1) What are the costs and benefits to market participants 
associated with each proposed change? Please explain and, to the extent 
possible, quantify these costs and benefits.
    (2) What are the direct costs associated with SD registration and 
compliance? What is the smallest notional amount of dealing swaps that 
an entity must enter into in order for the profitability of its swap 
dealing activity to exceed SD registration and compliance costs?
    (3) Are there indirect benefits to registering as an SD? For 
example, does being a registered SD make an entity a more desirable 
counterparty? Are many of the benefits of transacting with an SD not 
relevant because many requirements are part of standard ISDA 
agreements?
    (4) Besides the direct costs of registration and compliance, are 
there any indirect costs to becoming a registered SD? What are these 
costs?
    (5) Would the entities with dealing activity between $3 billion and 
$8 billion incur similar registration and compliance costs as compared 
to entities with dealing activity above $8 billion? Would those dealers 
be impacted differently by those costs?
    (6) What are the costs and benefits to the public associated with 
each proposed change? Please explain and, to the extent possible, 
quantify these costs and benefits.
    (7) How does each proposed change affect the efficiency, 
competitiveness, and financial integrity of markets?
    (8) How does each proposed change affect price discovery for the 
swap market?
    (9) How does each proposed change affect sound risk management for 
swap market participants?
    (10) How does each proposed change affect other public interests 
that the Commission may elect to consider?
    (11) Has the Commission identified all of the relevant categories 
of costs and benefits in its preliminary consideration of the costs and 
benefits? Please describe any additional categories of costs or 
benefits that the Commission should consider.
    (12) The Commission preliminarily believes that cross-border 
aspects of this rulemaking are similar to domestic applications. Do the 
costs and benefits of the proposed changes, as applied in cross-border 
contexts, differ from those costs and benefits resulting from their 
domestic application, and, if so, in what ways and to what extent?

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of the CEA.\198\
---------------------------------------------------------------------------

    \198\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether this Proposal implicates any other specific 
public interest to be protected by the antitrust laws.
    The Commission has considered this Proposal to determine whether it 
is anticompetitive and has preliminarily identified no anticompetitive 
effects. The Commission requests comment on whether this Proposal is 
anticompetitive and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that this 
Proposal is not anticompetitive and has no anticompetitive effects, the 
Commission has not identified any less anticompetitive means of 
achieving the purposes of the CEA. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the CEA that would otherwise be served by adopting this 
Proposal.

List of Subjects in 17 CFR Part 1

    Commodity futures, Definitions, De minimis exception, Insured 
depository institutions, Swaps, Swap dealers.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 1 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 
(2012).

0
2. In Sec.  1.3, amend the definition of the term ``Swap dealer'' as 
follows:
0
a. Revise paragraph (4)(i)(A);
0
b. Add paragraphs (4)(i)(C), (D), and (E);
0
c. Remove and reserve paragraph (4)(ii); and
0
d. Add paragraph (4)(vii).
    The revisions and additions read as follows:


Sec.  1.3   Definitions.

* * * * *
    Swap Dealer. * * *
    (4) De minimis exception--(i)(A) In general. Except as provided in 
paragraph (4)(vi) of this definition, a person that is not currently 
registered as a swap dealer shall be deemed not to be a swap dealer as 
a result of its swap dealing activity involving counterparties, so long 
as the swaps connected with those dealing activities into which the 
person--or any other entity controlling, controlled by or under common 
control with the person--enters over the course of the immediately 
preceding 12 months have an aggregate gross notional amount of no more 
than $8 billion, and an aggregate gross notional amount of no more than 
$25 million with regard to swaps in which the counterparty is a 
``special entity'' (as that term is defined in section 4s(h)(2)(C) of 
the Act, 7 U.S.C. 6s(h)(2)(C), and Sec.  23.401(c) of this chapter), 
except as provided in paragraph (4)(i)(B) of this definition. For 
purposes of this definition, if the stated notional amount of a swap is 
leveraged or enhanced by the structure of the swap, the calculation 
shall be based on the effective notional amount of the swap rather than 
on the stated notional amount.
* * * * *
    (C) Insured depository institution swaps in connection with 
originating loans to customers. Solely for purposes of determining 
whether an insured depository institution has exceeded the aggregate 
gross notional amount threshold set forth in paragraph (4)(i)(A) of 
this definition, an insured depository institution may exclude swaps 
entered into by the insured depository institution with a customer in 
connection with originating a loan to that customer, subject to the 
requirements of paragraphs (4)(i)(C)(1) through (4)(i)(C)(6) of this 
definition.
    (1) Timing of execution of swap. The insured depository institution 
enters into the swap with the customer no

[[Page 27479]]

earlier than 90 days before execution of the applicable loan agreement, 
or no earlier than 90 days before transfer of principal to the customer 
by the insured depository institution pursuant to the loan, unless an 
executed commitment or forward agreement for the applicable loan 
exists, in which event the 90 day restriction does not apply;
    (2) Relationship of swap to loan. (i) The rate, asset, liability or 
other term underlying such swap is, or is related to, a financial term 
of such loan, which includes, without limitation, the loan's duration, 
rate of interest, the currency or currencies in which it is made and 
its principal amount; or
    (ii) Such swap is required as a condition of the loan, either under 
the insured depository institution's loan underwriting criteria or as 
is commercially appropriate, in order to hedge risks incidental to the 
borrower's business (other than for risks associated with an excluded 
commodity) that may affect the borrower's ability to repay the loan;
    (3) Duration of swap. The duration of the swap does not extend 
beyond termination of the loan;
    (4) Level of funding of loan. (i) The insured depository 
institution is committed to be, under the terms of the agreements 
related to the loan, the source of at least 5 percent of the maximum 
principal amount under the loan; or
    (ii) If the insured depository institution is committed to be, 
under the terms of the agreements related to the loan, the source of 
less than 5 percent of the maximum principal amount under the loan, 
then the aggregate notional amount of all swaps entered by the insured 
depository institution with the customer in connection with the 
financial terms of the loan cannot exceed the principal amount of the 
insured depository institution's loan;
    (5) The swap is considered to have been entered into in connection 
with originating a loan with a customer if the insured depository 
institution:
    (i) Directly transfers the loan amount to the customer;
    (ii) Is a part of a syndicate of lenders that is the source of the 
loan amount that is transferred to the customer;
    (iii) Purchases or receives a participation in the loan; or
    (iv) Under the terms of the agreements related to the loan, is, or 
is intended to be, the source of funds for the loan;
    (6) The loan to which the swap relates shall not include:
    (i) Any transaction that is a sham, whether or not intended to 
qualify for the exception from the de minimis threshold in this 
definition; or
    (ii) Any synthetic loan.
    (D) Swaps entered into for the purpose of hedging. Solely for 
purposes of determining whether a person has exceeded the aggregate 
gross notional amount threshold set forth in paragraph (4)(i)(A) of 
this definition, the person may exclude swaps that are entered into for 
the purpose of hedging, subject to the requirements of paragraphs 
(4)(i)(D)(1) through (4)(i)(D)(6) of this definition.
    (1) The person is entering into the swap for the primary purpose of 
reducing or otherwise mitigating one or more specific risks for the 
person, which includes, without limitation, market risk, price risk, 
rate risk, basis risk, credit risk, volatility risk, foreign exchange 
risk, liquidity risk, or similar risks arising in connection with 
existing or anticipated identifiable assets, liabilities, positions, 
contracts, or other holdings of the person or any affiliate of the 
person;
    (2) For that swap, the person is not the price maker and does not 
receive or earn a bid/ask spread, fee, commission, or other 
compensation for entering into the swap;
    (3) The swap is economically appropriate to the reduction of risks 
that may arise in the conduct and management of an enterprise engaged 
in the type of business in which the person is engaged;
    (4) The swap is entered into in accordance with sound business 
practices; and
    (5) The person does not enter into the swap in connection with 
activity structured to evade designation as a swap dealer.
    (E) Swaps resulting from multilateral portfolio compression 
exercises. Solely for purposes of determining whether a person has 
exceeded the aggregate gross notional amount threshold set forth in 
paragraph (4)(i)(A) of this definition, the person may exclude swaps 
that result from multilateral portfolio compression exercises, as 
defined in Sec.  23.500 of this chapter, to the extent the person does 
not enter into the multilateral portfolio compression exercise in 
connection with activity structured to evade designation as a swap 
dealer.
    (ii) [Reserved]
* * * * *
    (vii) Methodology for calculation of notional amounts. (A) For 
purposes of paragraph (4) of this definition, the Commission may on its 
own, or upon written request by a person, determine the methodology to 
be used to calculate the notional amount for any group, category, type, 
or class of swaps. Such methodology shall be economically reasonable 
and analytically supported. Each such determination shall be made 
publicly available and posted on the Commission website.
    (B) Delegation. (i) The Commission hereby delegates to the Director 
of the Division of Swap Dealer and Intermediary Oversight, or such 
other employee or employees as the Director may designate from time to 
time, the authority in paragraph (4)(vii)(A) of this definition to 
determine the methodology to be used to calculate the notional amount 
for any group, category, type, or class of swaps.
    (ii) The Director of the Division of Swap Dealer and Intermediary 
Oversight may submit any matter which has been delegated to him or her 
under paragraph (4)(vii)(B)(i) of this definition to the Commission for 
its consideration.
    (iii) Nothing in this paragraph (4)(vii)(B) may prohibit the 
Commission, at its election, from exercising the authority delegated to 
the Director of the Division of Swap Dealer and Intermediary Oversight 
under paragraph (4)(vii)(A) of this definition.
* * * * *

    Issued in Washington, DC, on June 5, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to De Minimis Exception to the Swap Dealer Definition--
Commission Voting Summary, Chairman's Statement, and Commissioners' 
Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioner Quintenz 
voted in the affirmative. Commissioner Behnam voted in the negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    Since becoming Chairman, I have committed to resolving this 
outstanding issue and giving market participants the regulatory 
certainty they need. Still, as you know, last year I requested that 
the Commission postpone a decision on the de minimis threshold for a 
year. That decision was understandably disappointing to some, 
including my fellow Commissioners, who said they were then ready to 
vote on it.
    Yet, as I told Congress at the time, I did not just want to 
address the de minimis threshold; I wanted to get it right.
    Today, I believe the staff has had adequate time to analyze the 
most current and comprehensive trading data and arrive at a 
recommendation for the best path forward in terms of managing risk 
to the financial system. The staff has provided

[[Page 27480]]

Commissioners with full access to the data they have used in their 
analysis. They have also conducted additional and specific data 
analyses requested by Commissioners.
    The data shows quite clearly that a drop in the de minimis 
definition from $8 billion to $3 billion would not have an 
appreciable impact on coverage of the marketplace. In fact, any 
impact would be less than one percent--an amount that is truly de 
minimis.
    On the other hand, the drop in the threshold would pose 
unnecessary burdens for non-financial companies that engage in 
relatively small levels of swap dealing to manage business risk for 
themselves and their customers. That would likely cause non-
financial companies to curtail or terminate risk-hedging activities 
with their customers, limiting risk-management options for end-users 
and ultimately consolidating marketplace risk in only a few large, 
Wall Street swap dealers.
    In my travels around the country over the past four years on the 
Commission, I have met numerous small swaps trading firms that make 
markets in local markets or in select asset classes. These firms are 
often housed in small community banks, local energy utilities or 
commodity trading houses. They all trade below the $8 billion 
threshold. Almost all of them say that if the de minimis threshold 
were to drop to $3 billion, they would reduce their trading 
accordingly. They just cannot afford to be registered as swap 
dealers.
    Who are the winners if these small firms reduce their market 
making activities? Big Wall Street banks. Who are the losers if 
these small firms reduce their market making activities? Small 
regional lenders, energy hedgers and Ag producers, who become more 
dependent on Wall Street trading liquidity. Who is the really big 
loser? The U.S. economy, which becomes more financially concentrated 
and less economically diverse.
    That is why I think the proposed rule rightly balances the 
mandate to register swap dealers whose activity is large enough in 
size and scope to warrant oversight without detrimentally affecting 
community banks and agricultural co-ops that engage in limited swap 
dealing activity and do not pose systemic risk. Leaving the 
threshold at the $8 billion level allows firms to avoid incurring 
new costs for overhauling their existing procedures for monitoring 
and maintaining compliance with the threshold. It fosters increased 
certainty and efficiency in determining swap dealer registration by 
utilizing a simple objective test with a limited degree of 
complexity. And it ensures that smaller market makers and the 
counterparties with which they trade can engage in limited swap 
dealing without the high costs of registration and compliance as 
intended by Congress when it established the de minimis dealing 
exception to begin with.
    The changes proposed today will also not count swaps of Insured 
Depository Institutions (IDIs) made in connection with loans. They 
would allow, for example, an insured depository institution swap 
dealer to write a swap with a customer 181 days after entering into 
a loan without counting it towards the $8 billion threshold. These 
types of changes will allow small and regional banks to further 
serve customers' needs without the added burden of unnecessary 
regulation and associated compliance costs.
    This proposal incorporates feedback and input from my two fellow 
Commissioners and their fine staffs. We now look forward to feedback 
from the public and market participants. We ask numerous questions 
about whether any additional exceptions or calculations should be 
included in the final rule. Three years ago, I raised the question 
of whether there should be an exclusion from counting cleared swaps 
towards the registration threshold and that question is asked again. 
Your response to questions regarding adding other potential 
components will help the Commission assess whether further 
adjustments to the de minimis exception may be appropriate in the 
final rule.
    As discussed in the adopting release, staff continues to consult 
with the SEC and prudential regulators regarding the changes in the 
proposal in particular some of the questions regarding exclusions. I 
remain committed to working with Chair Jay Clayton and the SEC in 
areas where harmonization is necessary and appropriate.
    I also remain committed to finalizing this rule before the end 
of the year. I recognize that market participants need certainty. 
Today's proposal is a major step forward in doing just that. I 
applaud staff for this proposal and look forward to feedback.

Appendix 3--Supporting Statement of Commissioner Brian D. Quintenz

    I support this proposed rulemaking governing swap dealer 
registration, which is fundamental to the Commission's effective 
oversight of the swaps market.
    Swap dealers are subject to extensive and costly regulatory 
requirements: Registration fees; minimum capital requirements; 
posting margin for uncleared swaps; IT costs for trade processing, 
reporting, confirmation, and reconciliation activities; costs to 
create and send clients daily valuation reports; costs for 
recordkeeping obligations; third party audit expenses; legal fees to 
develop and implement business conduct rules and many, many more. If 
that sounds like a big bill, it is. A prominent economic research 
firm estimated the present value of the cost for swap dealer 
registration compliance at $390 million per firm.\1\
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    \1\ See National Economic Research Associates, Cost-Benefit 
Analysis of the CFTC's Proposed Swap Dealer Definition 1 (Dec. 20, 
2011) (``NERA Report''), http://www.nera.com/content/dam/nera/publications/archive2/PUB_SwapDealer_1211.pdf. It is difficult to 
estimate the initial and incremental, ongoing costs of swap dealer 
regulation. NERA's report regarding the costs of registration for 
non-financial energy firms remains one of the only comprehensive 
analyses produced.
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    Those significant requirements and costs are imposed to advance 
equally significant policy objectives, such as the reduction of 
systemic risk, increased counterparty protections, and enhanced 
market efficiency and integrity. Therefore, the registration 
threshold, as the trigger mechanism for those costs and objectives, 
must be appropriately and specifically calibrated to ensure that the 
correct market group shoulders the burdens of swap dealer 
regulations because they are best situated to realize the 
corresponding policy goals of that registration.
    I have stated previously, in great detail and with considerable 
evidence, the importance of appropriately calibrating the de minimis 
threshold so that entities posing no systemic risk and with a 
relatively small market footprint are not regulated under a regime 
that is more appropriate for the world's largest, most complex 
financial institutions.\2\ If we fail to calibrate this threshold 
appropriately, firms at the margin will likely reduce their activity 
to avoid registration as opposed to serving their clients' interests 
and accepting the burdens of registration. A public policy choice 
which drives away market participants and reduces market activity is 
undeniably flawed.
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    \2\ Keynote Address of Commissioner Brian Quintenz before the 
Smart Financial Regulation Roundtable (Nov. 2017), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz3.
---------------------------------------------------------------------------

    From my first confirmation hearing in 2016 to the present 
day,\3\ including meetings with elected representatives, my second 
confirmation hearing,\4\ interviews with the press,\5\ discussions 
with market participants, and in public remarks at event forums, \6\ 
I have been adamant that notional value is a poor measure of 
activity and a meaningless measure of risk, and therefore, by 
itself, is a deficient metric by which to impose large costs and 
achieve substantial policy objectives.\7\ Therefore, I have some 
reservations about this proposal's continued reliance on a one-size-
fits-all notional value test for swap dealer registration.
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    \3\ Transcript, ``Hearing to Consider Pending CFTC 
Nominations,'' Senate Agriculture, Nutrition, and Forestry 
Committee, September 15, 2016, 2016 WL 4938280 p.12.
    \4\ Transcript, ``Hearing to Consider Pending CFTC 
Nominations,'' Senate Agriculture, Nutrition, and Forestry 
Committee, July 27, 2017, 2017 WL 3215667 p.14 (``With regard to the 
de minimis threshold level, I think when this threshold was set 
originally it was really done without the benefit of a lot of data. 
I think if there is a scenario where this shortfall reduces from $8 
billion to $3 billion [that] instead of increasing registration, it 
would drive participants out of the market or force them to reduce 
their activity because of the cost that would be imposed upon 
them.'').
    \5\ Bain, Benjamin, ``CFTC Swaps Dealer Threshold Criticized by 
Its Newest Republican,'' Bloomberg (Oct. 9, 2017); and DeFrancesco, 
Dan, ``CFTC's Quintenz: Dealer Threshold Could Exclude Cleared 
Swaps--Commissioner Suggests Risks should be Better Considered in De 
Minimis Reappraisal,'' Risk.Net (Oct. 24, 2017).
    \6\ ``Fireside Chat: CFTC Commissioners,'' FIA Expo Chicago (Oct 
19, 2017) available at: https://expo2017.fia.org/articles/fireside-chat-cftc-commissioners, at 9'30'' through 10'25''.
    \7\ For further discussion, see comment letter to CFTC from 
Financial Services Roundtable dated January 19, 2016 (``We do not 
see a benefit to requiring an entity that enters into a small number 
of swaps with a large notional amount but little exposure to choose 
between exiting the market or registering as a swap dealer, nor 
should entities that are taking on very large exposures without 
crossing a notional threshold, or a trade or counterparty count 
metric, be unregulated because they have concentrated risk in a 
small number of trades.'').
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    I still, and will continue to, believe that the criteria for 
determining swap dealer registration should be more closely 
correlated to risk. However, if any final rule is going to

[[Page 27481]]

settle for an activity-based threshold, a notional value metric 
should at least be combined with additional measures (such as 
dealing counterparty count and dealing transaction count) to 
determine what constitutes a de minimis quantity of swap dealing 
activity. Including additional measures should mitigate instances of 
``false positives'' that could result from the use and deficiencies 
of any one activity-based metric.\8\
---------------------------------------------------------------------------

    \8\ For further discussion, see letter from Institute of 
International Bankers dated January 19, 2016.
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    While it would have been my preference that this concept appear 
in this proposal's rule text as the operative standard, I am very 
grateful to the Chairman and the Division of Swap Dealer and 
Intermediary Oversight (DSIO) for including a robust discussion in 
the preamble on the merits of replacing the current notional value 
de minimis threshold with a three-prong test. Specifically, the 
preamble suggests an entity could qualify for the de minimis 
exception if its dealing activity is below any of the following 
three criteria: (i) A notional threshold, (ii) a proposed dealing 
counterparty count threshold, or (iii) a proposed dealing 
transaction count threshold. In other words, an entity would have to 
surpass all three hurdles collectively in order to lose the de 
minimis exception's safe harbor.
    I have included several questions in the proposal that ask for 
feedback on this approach, particularly with respect to the dealing 
counterparty and transaction count thresholds which I believe would 
provide market participants with additional flexibility to serve 
their clients' needs without triggering a very costly and burdensome 
registration process. I thank the staff of DSIO for including my 
questions in the proposal and welcome market participant's feedback 
on this potential approach.
    I also welcome comments on the Proposed Rule's preamble 
discussion on accounting for exchange-traded or cleared swaps in an 
entity's de minimis calculation. Many of the policy goals of swap 
dealer regulation are accomplished when a swap is exchange-traded 
and cleared. For example, systemic risk concerns are diminished with 
respect to cleared swaps: The swaps are standardized, the executing 
counterparties do not incur counterparty credit risk because they 
face the clearinghouse and not each other, and each side is required 
to post margin that helps guarantee performance and prevent unfunded 
losses from accumulating. Removing such swaps from the de minimis 
calculation would better align the registration threshold with risk 
and would also, I believe, encourage additional liquidity on SEFs. I 
am hopeful that with the benefit of additional industry comment and 
further Commission analysis, the Commission will either adopt an 
exclusion for exchange-traded and cleared swaps or adjust their 
notional weighting in an entity's de minimis calculation.
    We must remember, the Commission is not establishing the de 
minimis exception in a vacuum. Subsequent to the adoption of the 
swap dealer definition, other regulatory requirements have gone into 
effect which also advance the goals of swap dealer registration, 
such as mandatory clearing, SEF trading, reporting swap data to 
repositories, and margin requirements for uncleared swaps. For 
example, regardless of whether an entity is registered as a swap 
dealer, its swap activity is transparent to the Commission because 
of the swap data and real-time reporting requirements that apply to 
all market participants.
    When the Commission first established the $8 billion de minimis 
threshold in 2012, it did so without the benefit of swap data.\9\ 
Now almost six years later, staff has conducted a comprehensive 
analysis of the available swap data collected by Commission-
registered SDRs and presented estimates about the impact that lower 
or higher notional amount thresholds would have on swap dealer 
registration. Although much work remains to be done to further 
refine the data, particularly with respect to the non-financial 
commodity asset class, I commend staff for their hard work, 
progress, and thoughtful analysis. I believe the data in the 
Proposed Rule clearly supports maintaining the de minimis threshold 
at $8 billion or potentially increasing it. For example, at a $20 
billion notional threshold, the estimated amount of notional swap 
activity that would no longer be covered by swap dealer regulation 
is approximately only 1/100th of 1 percent of the $221 trillion 
market analyzed. I am interested to hear from commenters about the 
policy and market implications of maintaining or raising the de 
minimis threshold.
---------------------------------------------------------------------------

    \9\ See Hearing to Review the 2016 Agenda of the Commodity 
Futures Trading Commission Before the H. Comm. on Agric., 114th 
Cong. 17 (2016) (response of Timothy Massad, former CFTC Chairman, 
to question posed by Congressman David Scott (D-GA)), https://agriculture.house.gov/uploadedfiles/114-40_-_98680.pdf.
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    Finally, I would like to commend the Chairman and DSIO for 
including many important improvements to the de minimis exception in 
this proposal which I fully support. For instance, I support an 
appropriate Insured Depository Institution exception that will allow 
for banks to serve their clients' needs. By removing unnecessary 
timing restrictions and expanding the types of credit extensions 
that qualify for the exception, the proposal should improve the 
ability of IDIs to help their customers hedge loan-related risks as 
the statute intended. I also support the proposed rule's 
clarification that swaps that hedge financial risks may be excluded 
from an entity's de minimis count. Market participants should be 
able to use swaps to manage their financial and physical risks 
without concern that such activity may trigger swap dealer 
registration.
    I will vote in favor of issuing this proposal to the public for 
feedback and look forward to hearing from market participants about 
how these proposed amendments may be further refined or calibrated 
to increase the efficacy of the de minimis threshold to meet the 
goals of swap dealer registration.

Appendix 4--Dissenting Statement of Commissioner Rostin Behnam 
Introduction

    I respectfully dissent from the Commodity Futures Trading 
Commission's (the ``Commission'' or ``CFTC'') notice of proposed 
rulemaking addressing the de minimis exception to the swap dealer 
definition (the ``Proposal''). I have a number of concerns with 
specific criteria of the various exceptions proposed and 
contemplated in the Proposal. However, my gravest concern is that 
the Commission is moving far beyond the task before it--setting the 
aggregate gross notional amount threshold for the de minimis 
exception--to redefine swap dealing activity absent meaningful 
collaboration with the Securities and Exchange Commission (``SEC''), 
as required by the Dodd-Frank Act,\1\ and to the detriment of market 
participants eager for regulatory certainty. Equally concerning, the 
Proposal's various ancillary components not only detract from its 
core purpose, but may signify the Commission's willingness to 
exploit the de minimis exception to undermine the swap dealer 
definition and circumvent Congressional intent.
---------------------------------------------------------------------------

    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, section 712(d), 124 Stat. 1376, 1644 (2010) 
(the ``Dodd-Frank Act''). Additionally, with respect to rulemakings 
and orders regarding swap dealers, among other things, section 
712(a) requires the CFTC to consult and coordinate to the extent 
possible with the SEC and the prudential regulators to ensure 
consistency and comparability, to the extent possible. Such 
consultation must occur before the CFTC commences such rulemaking or 
order issuance. The Proposal indicates only that the Commission ``is 
consulting with the SEC and prudential regulators regarding the 
changes to the SD Definition discussed in this Proposal,'' 
indicating that the Commission may not have adhered to the letter or 
spirit of section 712(a) or (d) of the Dodd-Frank Act with respect 
to the Proposal.
---------------------------------------------------------------------------

    As discussed in the preamble to the Proposal, the regulatory 
history sets forth a clear path towards--and a deadline to 
complete--today's determination to propose an amendment that would 
set the aggregate gross notional amount (``AGNA'') threshold for the 
de minimis exception at $8 billion in swap dealing activity entered 
into by a person over the preceding 12 months prior to the 
termination of the phase-in period on December 31, 2019.\2\ Since 
the Commission's

[[Page 27482]]

first Order Establishing a New De Minimis Threshold Phase-in 
Termination Date in 2016,\3\ market participants have endured undue 
and prolonged uncertainty because the Commission has not acted 
decisively on the de minimis threshold. When the Commission punted 
again in October 2017, I urged the Commission to take further action 
now or let the current rule take effect.\4\
---------------------------------------------------------------------------

    \2\ Since the initial establishment of the AGNA at $3 billion in 
May 2012, and initial five year phase-in period during which the 
AGNA threshold was set at $8 billion, the Commission issued two 
successive orders extending the phase-in, and issued preliminary and 
final staff reports concerning the de minimis threshold, as required 
by paragraph 4(ii)(B) of the swap dealer definition. Additionally, 
the Commission has more than five years of swap dealer oversight 
experience; given that the first swap dealers submitted applications 
for preliminarily registration in December 2017. See Further 
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' 
``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant,'' 77 FR 30596 
(May 23, 2012) (``SD Definition Adopting Release''); Order 
Establishing De Minimis Threshold Phase-In Termination Date, 81 FR 
71605 (Oct. 18, 2016) (``Initial Phase-In Termination Date Order''); 
Order Establishing a New De Minimis Threshold Phase-In Termination 
Date, 82 FR 50309 (Oct. 31, 2017) (``Second Phase-In Termination 
Date Order''); Swap Dealer De Minimis Exception Preliminary Report 
(Nov. 18, 2015), available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis_1115.pdf; Swap Dealer De 
Minimis Exception Final Staff Report (Aug. 15, 2016), available at 
http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis081516.pdf.
    \3\ Initial Phase-In Termination Date Order, supra note 2.
    \4\ Second Phase-In Termination Date Order, supra note 2; Rostin 
Behnam, Statement on De Minimis Threshold (Oct. 11, 2017), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement101117a.
---------------------------------------------------------------------------

    It is now June 2018. Given the twelve month lookback for 
calculating the AGNA, absent Commission action, market participants 
will need to start tracking their swap dealing activity on January 
1, 2019 to determine whether their dealing activity would require 
registration when the phase-in period ends on December 31, 2019. The 
Commission has less than six months to either finalize the Proposal 
or kick it down the road again by issuing a third order establishing 
yet another phase-in termination date sometime in the future.
    Six months is an ambitious time frame for even a simple rule. 
While CFTC-specific data is not available, at least one study 
concluded that the average amount of time for federal regulatory 
agencies to finalize rules is generally between 14 and 20 months.\5\ 
The Part 49 amendments that we also voted on today, for example, 
took over 16 months between the Commission proposal and a final 
rule, and that rule only addressed a single industry comment letter 
that was nine pages long. However, given our extensive history with 
the AGNA for the de minimis exception, I believe that had the 
Commission observed the course it was on, and focused on the task at 
hand, it could have crafted the Proposal to address the issues most 
critical to market participants (the de minimis threshold, the 
exclusion for insured depository institution swaps in connection 
with originating loans to customers or ``IDI Swap Dealing 
Exclusion,'' and the hedging swap exclusion), consistent with 
requirements of the Commodity Exchange Act (the ``CEA'' or ``Act'') 
and Congressional intent and within the six month window we are now 
in.
---------------------------------------------------------------------------

    \5\ Jason Webb Yackee and Susan Webb Yackee, Delay in Notice and 
Comment Rulemaking: Evidence of Systemic Regulatory Breakdown?, in 
Regulatory Breakdown: The Crisis of Confidence in U.S. Regulation 
169 (Cary Coglianese ed., 2012).
---------------------------------------------------------------------------

    Instead, the Commission, having waited too long to address these 
critical issues jointly with the SEC, veered off course, and relies 
too heavily on an alternative means to reach its destination: The de 
minimis exception.\6\ Though this alternative path is within the 
Commission's authority, I believe that in utilizing the de minimis 
exception to address longstanding concerns with the IDI and physical 
hedging exclusions, the Commission stopped respecting the difference 
between what is permissible and what is proper. As a consequence, 
the Proposal morphed into a loophole for the Commission to explore 
the extent to which it may unilaterally alter the swap dealer 
definition. Such overreach not only may call into question the 
integrity of this agency, but it could prolong the uncertainty 
currently plaguing market participants as they (and the general 
public) sort through the matters ancillary to the de minimis AGNA 
threshold, which alone raise over 50 individual questions in 
requests for comments.
---------------------------------------------------------------------------

    \6\ See 17 CFR 1.3, Swap dealer, paragraph (4)(v), providing 
that the Commission may by rule or regulation change the 
requirements of the de minimis exception described in paragraphs 
(4)(i) through (iv).
---------------------------------------------------------------------------

Commission Authority Under Regulation 1.3, Swap Dealer, Paragraph 
(4)(v)

    Under paragraph 4(v) of the swap dealer definition, the 
Commission may change the requirements of the de minimis exception 
by rule or regulation, and may do so independent of the SEC (``De 
Minimis Exception Authority'').\7\ While this authority permits the 
Commission to revisit the de minimis threshold, in the SD Definition 
Adopting Release, the Commission stated that in determining whether 
to revisit the threshold, it intended to focus on whether the de 
minimis exception (1) results in a swap dealer definition that 
encompasses too many entities whose activities are not significant 
enough to warrant full Title VII regulation; (2) results in an undue 
amount of dealing activity to fall outside of the regulatory 
framework; or (3) leads to inappropriate reductions in counterparty 
protections.\8\
---------------------------------------------------------------------------

    \7\ Id.; see also SD Definition Adopting Release, 77 FR at 
30634, n. 464.
    \8\ SD Definition Adopting Release, 77 FR at 30634-5.
---------------------------------------------------------------------------

    While the Commission's authority with respect to the de minimis 
exception is broad, the Commission cannot lose sight of its purpose, 
as set forth in the CEA,\9\ and the underlying Congressional 
intent.\10\ As well, this authority is not intended to provide a de 
facto means to alter the swap dealer definition, by for example, 
excepting from consideration swaps that are exchange-traded and/or 
cleared when calculating the AGNA for purposes of the de minimis 
threshold, or excepting from such consideration entire categories of 
swaps.
---------------------------------------------------------------------------

    \9\ See CEA section 1a(49)(D), 7 U.S.C. 1a(49)(D).
    \10\ See SD Definition Adopting Release, 77 FR at 30629, n. 413 
(``Congress incorporated a de minimis exception to the swap dealer 
definition to ensure that smaller institutions that are responsibly 
managing their commercial risk are not inadvertently pulled into 
addition regulations.'') (quoting 156 Cong. Rec. S6192 (daily ed. 
July 22, 2010) (letter from Senators Dodd and Lincoln to 
Representatives Frank and Paterson).
---------------------------------------------------------------------------

Exclusions vs. Exceptions

IDI De Minimis Provision

    Turning to the Proposal, and the critical issues, I am concerned 
with the Commission's use of its De Minimis Exception Authority to 
address longstanding concerns that the IDI Swap Dealing Exclusion, 
which was jointly adopted with the SEC as paragraph (5) to the swap 
dealer definition (``SD Definition), is unnecessarily restrictive, 
lacks clarity, and limits the ability of IDIs to serve customers in 
connection with their lending activity--which is inconsistent with 
the CEA.\11\ As explained in the Proposal, ``rather than proposing 
to revise the scope of activity that constitutes swap dealing,'' 
which would require a joint rulemaking with the SEC, the Commission 
is proposing to amend paragraph (4) of the SD Definition, which 
addresses only the de minimis exception. Accordingly, the Proposal 
is to include both the IDI Swap Dealing Exclusion and a separate, 
slightly broader IDI De Minimis Provision in the SD Definition.
---------------------------------------------------------------------------

    \11\ See CEA 1a(49)(A), 7 U.S.C. 1a(49)(A) (providing that ``in 
no event shall an insured depository institution be considered to be 
a swap dealer to the extent it offers to enter into a swap with a 
customer in connection with originating a loan with that 
customer'').
---------------------------------------------------------------------------

    Conducting a side-by-side comparison of the current text of 
paragraph (5) and proposed paragraph (4)(i)(C) of the SD Definition, 
it is difficult to understand what hurdles may have prevented the 
CFTC and SEC from engaging in a joint rulemaking to address these 
relatively modest differences, which are generally well supported by 
the record. It's especially noteworthy given the close working 
relationship between the two agencies and ongoing harmonization 
efforts.\12\ The end result is that, if finalized, instead of simply 
disregarding or ``excluding'' all swap activity that meets a single 
set of criteria, IDIs will have to develop an additional analysis to 
address swap activity that cannot be excluded from their 
determinations for purposes of the SD Definition, but might 
nevertheless be excepted from their AGNAs when calculating dealing 
activity for the purpose of the de minimis threshold. It is 
difficult to understand why the Commission would want to create 
additional regulatory burdens in the context of this Proposal, and 
the document provides no explanation other than that the Commission 
has discretion under its De Minimis Exception Authority.
---------------------------------------------------------------------------

    \12\ See, e.g. CFTC (@CFTC), @CFTC & @SEC_News teams are hard at 
work on Title VII harmonization, Twitter (Feb. 27, 2018, 4:53 p.m.), 
https://twitter.com/CFTC/status/968605066889515009; Chris Giancarlo 
(@giancarloCFTC), Twitter (Feb. 27, 2018, 9:18 p.m.) https://twitter.com/giancarloCFTC/Status/968671749737992192.
---------------------------------------------------------------------------

Hedging De Minimis Provision

    I am similarly concerned that the Commission's use of its De 
Minimis Exception Authority to provide greater regulatory certainty 
with respect to swaps entered to hedge physical or financial 
exposures (the ``Hedging De Minimis Provision'') will--out of an 
abundance of caution--be utilized by market participants

[[Page 27483]]

as a limitation on the universe of hedging swaps they consider to be 
outside their swap dealing activity. In this instance, instead of 
amending the Physical Hedging Exclusion,\13\ which is in the nature 
of a safe harbor and provides that, subject to certain requirements, 
swaps entered into by a person for hedging physical positions are 
not considered for purposes of determining whether that person is a 
swap dealer, the Commission is proposing an exception with respect 
to a person's AGNA for the de minimis threshold for swaps entered to 
hedge financial or physical positions. While this exception will, if 
finalized, exist in the Commission regulations alongside the 
Physical Hedging Exclusion, it is not truly a safe-harbor and could 
end up limiting the discretion inherent in the SD Definition.
---------------------------------------------------------------------------

    \13\ 17 CFR 1.3, Swap dealer, paragraph (6)(iii).
---------------------------------------------------------------------------

    An exception, as proposed for the Hedging De Minimis Provision, 
ostensibly creates a precise rule, leaving compliance staff or even 
regulatory enforcement agencies with limited discretion when 
evaluating difficult scenarios. As the Commission has stated, ``In 
general, entering into a swap for the purpose of hedging is 
inconsistent with swap dealing.'' \14\ The Commission also has 
emphasized that all relevant facts and circumstances about a swap 
ought to be considered when determining whether a person is a swap 
dealer.\15\ It seems that an exception limited solely to determining 
whether a person has exceeded the AGNA de minimis threshold may 
prove unduly limiting and inconsistent with the SD Definition.\16\
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    \14\ SD Definition Adopting Release, 77 FR at 30611.
    \15\ See, e.g., CFTC Fact Sheet: Final Rules Regarding Further 
Defining ``Swap Dealer,'' ``Major Swap Participant and ``Eligible 
Contract Participant'' (Apr. 18, 2012), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/msp_ecp_factsheet_final.pdf.
    \16\ See Frequently Asked Questions (FAQ)--[DSIO] Responds to 
FAQs About Swap Entities (Oct. 12, 2012), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf.
---------------------------------------------------------------------------

Premature Delegation

    The Proposal purports to create Commission authority to 
determine the methodology to be used to calculate the notional 
amount for any group, category, type, or class of swaps for purposes 
of the AGNA de minimis threshold calculation and immediately 
delegates that authority to the Director of the Division of Swap 
Dealer and Intermediary Oversight (``DSIO''). The Commission has, to 
my knowledge, not released public guidance on this issue since 
2012.\17\ The Proposal cites two letters, one responding to the 
Chairman's recent Project KISS initiative, and the other responding 
to the request for comments on the Swap Dealer De Minimis Exception 
Preliminary Report,\18\ in support of the inherent need to empower 
the Director of DSIO to independently--and without limitation--
provide clarity about the appropriate notional amount calculation 
methodologies for purposes of the de minimis threshold in a timely 
manner. As well, both the public guidance and requests cited in the 
Proposal address or respond to the need for clarity regarding 
commodity swaps, further calling into question the breadth of the 
proposed delegation.
---------------------------------------------------------------------------

    \17\ Id.
    \18\ See n.152 of the Proposal, Letter from CEWG; Letter from 
Natural Gas Supply Association (Jan. 15, 2016), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=60595&SearchText=.
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    For most swaps, calculation of notional amount is a matter of 
standard industry practice. There is not any controversy as to how 
notional amount is calculated. Giving the Director of DSIO broad 
authority to determine how this calculation is made for all 
categories of swaps is a remedy that is not commensurate to the 
limited issue of how to determine the notional value of commodity 
swaps. It also provides an opportunity for mischief. This provision 
could subsume the entire de minimis threshold by giving the Director 
of DSIO broad authority to determine what swaps count toward the 
threshold--and perhaps more importantly, what swaps do not.
    I'm concerned that the Commission is proposing to both establish 
its authority and immediately delegate such authority without any 
internal discussion, without any public deliberation, and within 
this Proposal. The Commission has simply not articulated a sound 
rationale for moving abruptly forward on this rule proposal without 
fulsome consideration of its legal authority, potential risks, and 
possible alternatives. Indeed, upon review of the Proposal, it came 
to my attention that the Commission's proposed delineation of 
authority to determine the methodology for calculating notion 
amounts in proposed paragraph (D)(vii)(A) of the SD Definition may 
contradict its De Minimis Exception Authority.
    The De Minimis Exception Authority provides that the Commission 
may by rule or regulation change the requirements of the de minimis 
exception. Given that the methodology for calculating notional 
amounts for purposes of the AGNA for the de minimis threshold would 
be a ``requirement'' of that exception, one could assume that the 
authority to alter it resides with the Commission, and that the 
Commission would need to engage in rulemaking to establish a 
methodology. Of course, the De Minimis Exception Authority includes 
a ``may'' versus a ``shall,'' and therefore the Commission has 
discretion to engage in rulemaking, but I believe the ``may'' 
applies more generally to suggest that the Commission may change the 
requirements of the de minimis exception, and if it chooses to do 
so, rulemaking is the vehicle. My point is that the Commission's 
precise authority and attendant parameters are unclear, and it would 
therefore be more prudent to first, define the parameters of the 
notional amount calculation issue, conduct additional research and 
explore our options to address it, and then propose a more cogent 
solution in a separate rulemaking so as not to further detract from 
the more salient and critical issues before the Commission as part 
of this Proposal.

Ancillary Matters

    Having become comfortable with using its De Minimis Exception 
Authority, the Commission appears to have determined to use this 
Proposal to seek comment on ``other potential considerations for the 
de minimis threshold.'' These considerations run the gamut from re-
considering the merits of using AGNA by itself by seeking comment on 
adding alternative criteria in the form of a dealing counterparty or 
dealing transaction count threshold to excepting from consideration 
when calculating the AGNA for purposes of the de minimis threshold 
(1) swaps that are exchange-traded and/or cleared and (2) swaps that 
are categorized as non-deliverable forward transactions. These 
``considerations'' result in the combined inclusion of more than 50 
individual requests for comment, detracting from any reasonable 
market participant's (or the public's) ability to provide comments 
on the more critical issues raised by this Proposal. Moreover, each 
``potential consideration'' raises individual concerns as to whether 
the Commission is attempting to undermine the swap dealer definition 
and circumvent Congressional intent.

Dealing Counterparty Count and Dealing Transaction Count Thresholds

    The Commission is seeking comment on whether an entity should be 
able to qualify for the de minimis exception if its level of swap 
dealing activity is below any one of three criteria: (1) An AGNA 
threshold; (2) a proposed dealing counterparty count threshold; or 
(3) a proposed dealing transaction count threshold. In support of 
its request for comment, already limited Commission staff resources 
were utilized to construct an alternative to the proposal aimed at 
suggesting that, despite its analysis in the Proposal in support of 
setting the AGNA threshold for the de minimis exception at $8 
billion, a $20 billion AGNA ``backstop'' threshold was appropriate. 
This analysis and attendant request for comment suddenly appeared in 
the Proposal after hours on May 31, 2018, providing my office less 
than 17 hours to respond before DSIO intended to submit a final 
voting copy to the Commission's Office of the Secretariat.
    Not only is the inclusion of this request for comment in this 
Proposal overwhelmingly misplaced, but its inclusion at such a late 
hour in the process undermines the inherent fairness of the 
rulemaking process. Foremost, the Commission already rejected the 
use of counterparty and transaction count thresholds as 
determinative criteria for the de minimis threshold.\19\ Moreover, 
the Commission is required to take the Swap Dealer De Minimis 
Exception Final Staff Report (``Final Staff Report'') and comments 
into account when weighing further action on the de minimis 
exception at the end of the phase-in.\20\ According to the Final 
Staff Report, ``many of the commenters stated that the Commission 
should not use the alternative factors of Counterparty and/or 
Transaction Count as part of a de minimis exception because they are 
misleading or

[[Page 27484]]

arbitrary indicators of dealing activity.'' \21\ The footnote cites 
11 comment letters representing at least 12 entities including major 
industry and trade organizations.\22\ In comparison, only two 
commenters supported the use of the alternative factors.\23\
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    \19\ SD Definition Adopting Release, 77 FR at 30630.
    \20\ Id. at 30634.
    \21\ Swap Dealer De Minimis Exception Final Staff Report, supra 
note 2 at 15.
    \22\ Id. at note 45.
    \23\ Id. at note 49.
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    While I believe it may be appropriate for the Commission to 
explore other factors or criteria in defining the scope of the de 
minimis threshold, inclusion of even a request for comments on 
dealing counterparty count and dealing transaction count thresholds 
should be out of scope--even as a request for comment--for this 
Proposal, which speaks directly to the end of the phase-in, and is 
proceeding on a constrained time schedule such that even providing 
Commissioners the courtesy of ample opportunity to evaluate the 
merits of including this line of questioning was dispensed with.

Exchange-Traded and/or Cleared Swaps

    Similar to the dealing counterparty and transaction count 
threshold, the Commission has already rejected arguments that swaps 
executed on an exchange should not be considered in determining if a 
person is a swap dealer.\24\ However, beyond that, the breadth of 
the request for comment suggests that a discussion regarding how the 
utilization of exchange trading and/or clearing in the swap market 
may address the underlying policy goals of swap dealer registration 
is significant and raises issues that should be considered in the 
context of a joint discussion with the SEC and prudential regulators 
regarding the SD Definition. Even further, it may require 
Congressional action to amend the statutory swap dealer definition, 
which does not distinguish exchange traded and/or cleared swaps from 
over-the-counter swaps, and in fact, may suggest that there is no 
distinction given the focus on market making, which significantly 
occurs on exchanges.\25\ In responding to this request for comment, 
I hope that commenters address whether an exception for exchange-
traded and/or cleared swaps--even if limited to consideration when 
calculating the AGNA for purposes of the de minimis threshold--would 
be consistent with the statutory definition of ``swap dealer'' in 
CEA section 1a(49) and Congressional intent.
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    \24\ See SD Definition Adopting Release, 77 FR at 30610.
    \25\ See, e.g., Id. at 30608.
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Non-Deliverable Forwards

    Similarly, I believe that the issue of whether the Commission 
should consider an exception for NDFs from consideration when 
calculating the AGNA of swap dealing activity for purposes of the de 
minimis threshold is inappropriate. Such an exception ignores that 
the SD Definition is activities-based.\26\ The real issue that 
should be addressed is whether NDFs are swaps and, if so, whether 
they ought to be excluded from consideration in the SD 
Definition.\27\ Instead of attempting to begin a conversation 
through use of its De Minimis Exception Authority, the Commission 
should use its relationships with the Secretary of the Treasury, the 
SEC and prudential regulators and engage in a meaningful dialog 
regarding the appropriate categorization and consideration of NDFs 
outside of this Proposal.
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    \26\ Id.
    \27\ As noted in the Proposal, the Secretary of the Treasury, 
pursuant to authority in section 1a(47)(E) of the CEA, 7 U.S.C. 
1a(47)(E), declined to exempt NDFs from the CEA's definition of 
``swap.''
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Conclusion

    I am disappointed with today's Proposal and would have liked to 
been able to support the portions that were well supported by the 
data and analysis and could lead to a clear and legally sound 
resolution of the de minimis threshold, providing much needed 
regulatory certainty for a critical cohort of market participants. I 
am hopeful that market participants have sufficient time to evaluate 
and respond to the most critical aspects of this Proposal and do not 
get overwhelmed or overly optimistic with regard to lines of 
questioning that take us further afield from Congressional intent 
and therefore are less likely to come to fruition. I understand that 
messaging creates expectations; sometimes, we must focus on what's 
right and not what seems easy.

[FR Doc. 2018-12362 Filed 6-11-18; 8:45 am]
 BILLING CODE 6351-01-P