The Commodity Futures Trading Commission (CFTC) is scheduled Wednesday to consider the much-anticipated final rule defining “swap dealers” (SDs) and “major swap participants” (MSPs), as well as other market entities. The rule, the result of probably the most contentious rulemaking proceeding at the agency, will lay the groundwork for the CFTC to proceed with other regulatory reforms under the Dodd-Frank Wall Street Reform Act.

The final rule reportedly will raise the threshold for determining which derivatives traders should be classified as SDs, but the extent of that increase is in question. One unconfirmed report, which was first published by Bloomberg News, said the CFTC is considering setting the threshold for trading of swaps over a 12-month period at the aggregate notional amount of not more than $8 billion for SDs. But a spokeswoman for the International Swaps and Derivatives Association (ISDA) could not confirm this.

“Swap dealer thresholds reportedly went up from $100 million [which the CFTC initially proposed in December 2010] to $8 billion or $3 billion. We don’t really know much more at this time,” said ISDA spokeswoman Lauren Dobbs.

The final rule, which also will include definitions for a “security-based swap dealer” and “major security-based swap participant,” is a joint effort of the CFTC and the Securities and Exchange Commission (SEC).

A number of energy trade groups have hotly contested the joint CFTC-SEC proposed final rule, saying the definition of “swap dealer” is far too broad and would catch a number of otherwise exempt commercial entities (such as natural gas and electric utilities) in the swaps dealer net (see Daily GPI, Feb. 16). The groups sent letters of protest to the White House and the final rule, which had been scheduled for a vote at a CFTC meeting in late February, was pulled from the meeting agenda.

In subsequent testimony on Capitol Hill, CFTC Chairman Gary Gensler made clear the net would only catch a few big fish which had set up operations to cover swapping activities beyond their own direct needs (see Daily GPI, March 1).

The CFTC-SEC proposal defined an SD as an entity that 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 (see Daily GPI, Dec. 2, 2010).

The definition is critical because it will determine whether a company is subject to requirements under the Dodd-Frank Wall Street Reform Act. The law, which President Obama signed in July 2010, requires SDs and MSPs to clear their swaps, but it provides a de minimis exemption for companies that use over-the-counter derivatives to mitigate their commercial risk (see Daily GPI, July 22, 2010).

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