Reuters: Regulatory News: UPDATE 1-U.S. CFTC finalizes swap dealer definition rule

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UPDATE 1-U.S. CFTC finalizes swap dealer definition rule Apr 18th 2012, 21:36 Wed Apr 18, 2012 5:36pm EDT April 18 (Reuters) - The U.S. Commodity Futures Trading Commission voted 4-to-1 on Wednesday to approve its final rule outlining the definitions of swap dealers and major swap participants. Here are the details: DISTINGUISHING CHARACTERISTICS OF A SWAP DEALER: * Holds itself out as a dealer in swaps, * Makes a market in swaps, * Regularly enters into swaps with counterparties as an ordinary course of business for its own account, or * Engages in activity causing itself to be commonly known in the trade as a dealer or market maker in swaps. DE MINIMIS EXEMPTION FROM DEALER DEFINITION: * An entity must meet both of the following criteria to receive this exemption: * During a phase-in period, the aggregate effective notional amount, measured on a gross basis, of the swaps that the person enters into over the previous 12 months in connection with dealing activities must not exceed $8 billion. After the phase-in period expires, regulators expect to decrease the threshold to $3 billion. * Aggregate gross notional amount of swaps with "special entities" (including governmental entities) over the prior 12 months must not exceed $25 million during either phase-in or final periods. * TIMING: Two-and-a-half years after data starts to be reported to swap data repositories, CFTC staff will prepare a study of the swap markets. Nine months after the study, the CFTC may put in place the $3 billion threshold or propose new rules to change the threshold. If the CFTC does not take action five years after data starts being reported to swap data repositories, the $3 billion threshold will automatically kick in. HEDGING EXCLUSION * The determination of whether an entity is a swap dealer excludes swaps that it enters into for the purpose of offsetting or mitigating risk. EXCLUSION OF SWAPS IN CONNECTION WITH BANK LOANS * The rule excludes swaps that are connected to loans originated for a customer by an insured depository institution. * Swap must be entered into within 90 days before or 180 days after the date of the loan agreement, among other restrictions. EXCLUSION OF SWAPS BETWEEN AFFILIATES * The determination of whether a person is a swap dealer excludes swaps between majority-owned affiliates, and swaps between a cooperative and its members, including agricultural and financial cooperative institutions. DEFINITION OF MAJOR SWAP PARTICIPANT * Meets any one of the following criteria: * An entity that maintains a "substantial position" in any of the major swap categories, excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans, * An entity whose outstanding swaps create "substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets," or * Any "financial entity" that is "highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking agency" and that maintains a "substantial position" in any of the major swap categories. DEFINITION OF SUBSTANTIAL POSITION * The rules lay out two tests that can be used to determine if a firm maintains a "substantial position" in swaps. * TEST 1: The firm would need to have a daily average uncollateralized exposure of $1 billion (or $3 billion for the rate-swaps category). * TEST 2: The firm would need to have $2 billion in daily average current uncollateralized exposure, plus potential future exposure (the threshold for rate swaps would be $6 billion). * Test lays out a method to be used by firms for calculating their "potential future exposure." DEFINITION OF SUBSTANTIAL COUNTERPARTY EXPOSURE * For a person's swap positions to pose "substantial counterparty exposure," the final rules require positions that present a current uncollateralized exposure of $5 billion or more, or a sum of current uncollateralized exposure plus potential future exposure of $8 billion or more. DEFINITION OF "HIGHLY LEVERAGED" * The final rules adopt a ratio of total liabilities to equity of 12 to 1. Link this Share this Digg this Email Reprints

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