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CFTC Clarifies Rules for Swap Registration

The Commodity Futures Trading Commission (CFTC) last week clarified its regulations with respect to when a swap dealer will be required to register with the agency under the new Dodd-Frank Wall Street reforms.

The swap dealer registration regulations, which will go into effect on Oct. 12, will require entities that have entered into more than the de minimis level of swap transactions after that date (Oct. 12) to register by no later than two months after the end of the month in which they exceeded the de minimis level. By way of example, if an entity reaches $8 billion in swap dealing the day after Oct. 12, then the entity would have to register as a swap dealer within two months after the end of October, or by Dec. 31.

The relevant de minimis threshold levels for aggregate swaps are $8 billion in the phase-in period, which would fall to $3 billion later, and $25 million with regard to swaps in which a counterparty is a "special entity," such as publicly owned utilities (see NGI, April 23). Companies that trade less than an aggregate of $8 billion in swaps annually during an initial phase-in period would not be caught up in many of the Commission's regulations issued as a result of the Dodd-Frank.

The de minimis level of $8 billion is expected to remain in effect during the phase-in period, and then fall to $3 billion after the CFTC conducts a study on the swap markets. It said it plans to prepare the study two and a half years after data starts to be reported to swap data repositories. Nine months following the study, the Commission may end the phase-in period. If not, it will terminate automatically five years after data starts to be reported to the repositories, according to the agency rule.

The CFTC set the swaps threshold for "special entities," such as municipal utilities, at a significantly lower level ($25 million). Critics contend this will drive non-bank firms out of the natural gas and electricity markets, leaving trading to big banks like J.P. Morgan, Bank of America and Goldman Sachs. The current special entity de minimis threshold would label a nonbank firm a swap dealer if it engages in a transaction of more than $25 million with a public utility, making it subject to the regulations under Dodd-Frank. This could cause an exodus of non-banks from the natural gas and electricity markets, some claim.

With the understanding that new swaps regulations would be taking effect over the next couple of months, trading exchanges have been actively tailoring their operations. On Monday CME Group launched a broad suite of new natural gas and power contracts that will be listed as futures on CME Globex, the New York Mercantile Exchange (Nymex) trading floor and CME ClearPort, and will be available for trading on CME Direct, a platform offering side-by-side trading and straight-through processing and clearing of exchange-listed and OTC energy markets.

The move follows rival IntercontinentalExchange's (ICE) announcement in late July that all cleared OTC products listed on its OTC energy market will be transitioned to futures products. Cleared North American natural gas, electric power, environmental products and natural gas liquids swaps will be listed as futures on the energy division of ICE Futures U.S. Cleared oil products, freight and iron ore swaps will be listed as futures on ICE Futures Europe. Traders have varying opinions on how the changes at the exchange will affect energy markets (see related story).

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