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CFTC to Delay De Minimis Decision Another Year, Giancarlo Says

Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo said Wednesday he will request the regulatory agency postpone a decision on the de minimis threshold by a year, effectively delaying implementation until the end of 2018.

In testimony before the House Committee on Agriculture, Giancarlo said he wants CFTC to "not just resolve" the de minimis threshold, "but get it right, using the latest and most complete data to make a determination based upon true risk to the financial system.

"Yet it's hard to get something as complicated as this right when we are under a time crunch. On one hand, we're less than 90 days away from the new year, when market participants will have to start counting the notional amount of their swaps transactions for de minimis purposes. On the other hand, we have two new commissioners and a new division director who are just seeing internal agency trading data for the first time. I'm reluctant to ask them to make such an important decision in a rush."

"I have therefore decided to request that the commission delay this decision for one further year. We will follow the same procedural steps that Chairman Massad used last year to implement this one-year delay. It will give the new commissioners and division staff adequate time to analyze extensive quantitative data, ask questions, analyze the answers and arrive at a final decision. The goal is to get the right result, not a rushed result."

Giancarlo said he intends to propose in the first half of next year a final resolution of the swap dealer de minimis issues, and does not intend to roll the decision over again beyond 2018.

In April 2012, the CFTC and the Securities and Exchange Commission set the de minimis level at $8 billion that was expected to remain in effect during a phase-in period and then fall to $3 billion after CFTC conducted a study on the swap markets.

The de minimis rules were included in Dodd-Frank Wall Street regulatory reforms that became effective at the end of 2012.

All swaps in the interest rate and credit asset classes, executed on or under the rules of designated contract markets (exchanges), as well as swaps executed "off-facility" in which at least one party to the swap is a registered swap dealer (SD), were the first to report their transactions.

Reporting started two months later for swap transactions in the remaining three asset classes: equity, foreign exchange and other commodities (i.e., agricultural, energy and metals swaps). All other market participants that are required to report their transactions were to begin reporting in April 2013.

Affected parties had in October, the first month in which the SD registration requirement applied, exceeded the $8 billion de minimis level of swap dealing activity that triggered the registration requirements.

"Some have described the current de minimis threshold of $8 billion in notional value as a 'loophole,'" said CFTC Commissioner Brian Quintenz. "In reality, its scheduled reduction to $3 billion would create a 'black hole,' sucking in community banks and end-users who pose zero systemic risk. For far too long, too much uncertainty has surrounded the de minimis threshold's reduction and its damaging economic consequences. While we should always consider new data in the ongoing evaluation of public policy, it is well past time to address this issue head-on, finalize a rational and effective threshold, and provide the market with clarity."

Commissioner Rostin Behnam spoke out against the proposed delay.

"Additional delays of the swap dealer de minimis threshold will only serve to prolong uncertainty for market participants and create market risk," said Behnam. "Instead of kicking this critical issue into the future again, the commission should take further action now or let the current rule take effect."

There are two empty seats at CFTC. In August, the Senate confirmed Giancarlo's nomination as CFTC chairman and both Quintenz, who is a Republican, and Behnam, a Democrat, as commissioners.

Giancarlo, a Republican, had served as acting CFTC chairman since January. Sharon Bowen, who announced in June that she would resign her position, left CFTC Sept. 29.

"We agree that getting the de minimis threshold right is a critical issue for market health and liquidity and it makes sense to wait until there is a better body of data before implementing something this complicated," Natural Gas Supply Association spokeswoman Daphne Magnuson told NGI.

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