83_FR_56885 83 FR 56666 - De Minimis Exception to the Swap Dealer Definition

83 FR 56666 - De Minimis Exception to the Swap Dealer Definition

COMMODITY FUTURES TRADING COMMISSION

Federal Register Volume 83, Issue 219 (November 13, 2018)

Page Range56666-56693
FR Document2018-24579

The Commodity Futures Trading Commission (``Commission'' or ``CFTC'') is amending 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.

Federal Register, Volume 83 Issue 219 (Tuesday, November 13, 2018)
[Federal Register Volume 83, Number 219 (Tuesday, November 13, 2018)]
[Rules and Regulations]
[Pages 56666-56693]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-24579]



[[Page 56665]]

Vol. 83

Tuesday,

No. 219

November 13, 2018

Part IV





Commodity Futures Trading Commission





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17 CFR Part 1





De Minimis Exception to the Swap Dealer Definition; Final Rule

Federal Register / Vol. 83 , No. 219 / Tuesday, November 13, 2018 / 
Rules and Regulations

[[Page 56666]]


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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: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending 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.

DATES: This rule is effective November 13, 2018.

FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, mkulkin@cftc.gov, Rajal Patel, Associate Director, 202-418-5261, 
rpatel@cftc.gov, or Jeffrey Hasterok, Data and Risk Analyst, 646-746-
9736, jhasterok@cftc.gov, Division of Swap Dealer and Intermediary 
Oversight; Bruce Tuckman, Chief Economist, 202-418-5624, 
btuckman@cftc.gov or Scott Mixon, Associate Director, 202-418-5771, 
smixon@cftc.gov, Office of the Chief Economist; or Mark Fajfar, 
Assistant General Counsel, 202-418-6636, mfajfar@cftc.gov, 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 and Regulatory Background
    1. Statutory Authority
    2. Regulatory History
    3. Policy Considerations
    4. De Minimis Calculation
    B. The Proposal
II. Final Rule--$8 Billion Threshold
    A. Proposal
    B. Summary of Comments
    1. Set Threshold at $8 Billion
    2. Increase Threshold
    3. Allow Threshold to Decrease
    4. Other Comments
    C. Final Rule and Commission Response
    1. Rationale for Not Reducing AGNA Threshold to $3 Billion
    2. Rationale for Not Increasing AGNA Threshold
    3. Response to Other Comments
III. Proposed Rule Amendments Not Adopted
    A. Swaps Entered into by Insured Depository Institutions in 
Connection With Loans to Customers
    1. Proposal
    2. Summary of Comments
    3. Commission Response
    B. Swaps Entered Into to Hedge Financial or Physical Positions
    1. Proposal
    2. Summary of Comments
    3. Commission Response
    C. Swaps Resulting From Multilateral Portfolio Compression 
Exercises
    1. Proposal
    2. Summary of Comments
    3. Commission Response
    D. Methodology for Calculating Notional Amounts
    1. Proposal
    2. Summary of Comments
    3. Commission Response
IV. Other Matters Discussed in NPRM
    A. Dealing Counterparty Count and Dealing Transaction Count 
Thresholds
    B. Exception for Exchange-Traded and/or Cleared Swaps
    C. Exception for Non-Deliverable Forwards
V. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    1. General Costs and Benefits
    2. Direct Cost and Benefits
    3. Section 15(a)
    D. Antitrust Considerations

I. Background

A. Statutory and Regulatory Background

1. Statutory Authority
    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') \1\ established a statutory 
framework to reduce risk, increase transparency, and promote market 
integrity within the financial system by regulating the swap market. 
Among other things, the Dodd-Frank Act amended the Commodity Exchange 
Act (``CEA'') \2\ to provide for the registration and regulation of 
swap dealers (``SDs'').\3\ 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 things, 
the term ``swap dealer,'' \4\ and to exempt from designation as an SD a 
person that engages in a de minimis quantity of swap dealing.\5\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010), available at 
https://www.thefederalregister.org/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf.
    \2\ The CEA is found at 7 U.S.C. 1, et seq.
    \3\ See generally 7 U.S.C. 6s.
    \4\ 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.
    \5\ 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'').\6\ 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.\7\ CEA section 1a(49) further provides that 
in no event shall an insured depository institution (``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.\8\
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    \6\ 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. See also the definitions of ``swap'' in CEA section 1a(47) 
and Sec.  1.3 of Commission regulations. 7 U.S.C. 1a(47); 17 CFR 
1.3.
    \7\ 7 U.S.C. 1a(49)(D).
    \8\ 7 U.S.C. 1a(49)(A).
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2. Regulatory History
    Pursuant to the statutory requirements, in December 2010, the 
Commissions issued a proposing release (``SD Definition Proposing 
Release'') \9\ further defining, among other things, the term ``swap 
dealer.'' Subsequently, in May 2012, the Commissions issued an adopting 
release (``SD Definition Adopting Release'') \10\ further defining, 
among other things, the term ``swap dealer'' in Sec.  1.3 of the CFTC's 
regulations (``SD Definition'') and providing for a de minimis 
exception in paragraph (4) therein (``De Minimis Exception'').\11\ 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

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threshold is set at $8 billion.\12\ The phase-in period was originally 
scheduled to terminate on December 31, 2017, and the AGNA threshold was 
scheduled to decrease to $3 billion at that time. However, as discussed 
below, pursuant to paragraph (4)(ii)(C)(1) of the De Minimis Exception, 
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.\13\
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    \9\ 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).
    \10\ 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).
    \11\ 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 De Minimis Exception. See 17 CFR 1.3, Swap 
dealer, paragraph (4)(v); 77 FR at 30634 n.464.
    \12\ 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 De Minimis Exception) as defined in CEA 
section 4s(h)(2)(C), 7 U.S.C. 6s(h)(2)(C). This final rule would not 
change the AGNA threshold for swaps with special entities.
    \13\ 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 AGNA 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 De Minimis Exception and to revise it 
as appropriate.\14\ 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 De Minimis Exception 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.\15\ Paragraph (4)(ii)(C) of 
the De Minimis Exception 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.\16\
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    \14\ See SD Definition Adopting Release, 77 FR 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.
    \15\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(B).
    \16\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(C).
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    In November 2015, staff issued a preliminary report concerning the 
De Minimis Exception (``Preliminary Staff Report'').\17\ After 
consideration of the public comments received in response to the 
Preliminary Staff Report,\18\ and further data analysis, in August 2016 
staff issued a final staff report \19\ concerning the De Minimis 
Exception (``Final Staff Report,'' and together with the Preliminary 
Staff Report, ``Staff Reports''). 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,\20\ 
which is indicative of the extent to which swaps are subject to SD 
regulation at the current $8 billion AGNA threshold. Data reviewed for 
the Final Staff Report indicated that approximately 96 percent of swap 
transactions analyzed involved at least one registered SD.
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    \17\ 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. For the 
Preliminary Staff Report, staff analyzed data from April 1, 2014 
through March 31, 2015.
    \18\ The comment letters are available on the Commission website 
at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1634.
    \19\ 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. For the Final 
Staff Report, staff analyzed data from April 1, 2015 through March 
31, 2016.
    \20\ 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).
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    To provide additional time for more information to become available 
to study the De Minimis Exception, in October 2016 the Commission 
issued an order, pursuant to paragraph (4)(ii)(C)(1) of the De Minimis 
Exception, establishing December 31, 2018, as the new termination date 
for the $8 billion phase-in period.\21\ To enable staff to conduct 
additional analysis, in October 2017 the Commission further extended 
the phase-in period to December 31, 2019.\22\ Generally, the extensions 
provided additional time for Commission staff to conduct further data 
analysis regarding the De Minimis Exception, and gave market 
participants additional time to begin preparing for a change, if any, 
to the AGNA threshold.
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    \21\ 81 FR 71605.
    \22\ 82 FR 50309.
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3. Policy Considerations
(i) Swap Dealer Registration Policy Considerations
    The policy goals underlying SD registration and regulation 
generally 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.\23\ 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.\24\
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    \23\ 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). See 
also De Minimis Exception to the Swap Dealer Definition, 83 FR 
27444, 27446 (proposed June 12, 2018).
    \24\ 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.\25\ 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.\26\
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    \25\ For example, registered SDs are subject to external 
business conduct standard regulations designed to provide 
counterparty protections. See, e.g., 17 CFR 23.400-23.451.
    \26\ SD Definition Adopting Release, 77 FR 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.''). See also 83 FR 27446.
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    Increasing market efficiency, orderliness, and transparency: 
Increasing swap market efficiency, orderliness, and transparency is 
another goal of SD regulation.\27\ Regulations

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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.\28\
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    \27\ 77 FR 30629 (``The statutory requirements that apply to 
swap dealers . . . include requirements . . . aimed at helping to 
promote effective operation and transparency of the swap . . . 
markets.''). See id. at 30703 (``Those who engage in swaps with 
entities that elude swap dealer 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. . . .''). See also 83 FR 27446.
    \28\ See, e.g., 17 CFR 23.200-23.205; 17 CFR parts 43 and 45; 17 
CFR 23.502-23.503.
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(ii) De Minimis Exception Policy Considerations
    Consistent with Congressional intent, ``an appropriately calibrated 
de minimis exception has the potential to advance other interests.'' 
\29\ 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.\30\ 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.\31\
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    \29\ See 77 FR 30628. See also 83 FR 27446.
    \30\ See 77 FR 30628-30, 30707-08. See also 83 FR 27446-47.
    \31\ In considering the appropriate de minimis threshold, 
``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.'' 77 FR 30629-30. See also 83 FR 27446-47.
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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 would require registration.\32\ 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 
Commission is mindful that objective, predictable standards in the de 
minimis exception increase efficiency by establishing a simple test for 
whether a person's swaps connected with swap dealing activity must be 
included in the de minimis calculation. On the other hand, more 
complexity in the de minimis calculation potentially results in less 
efficiency.\33\
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    \32\ 77 FR 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 . . . .''). See also 83 
FR 27446-47.
    \33\ 77 FR 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.''). See also 83 FR 27446-47.
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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.\34\ This enables end-users 
to continue transacting within existing business relationships, for 
example to hedge interest rate or currency risk.
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    \34\ 77 FR 30629, 30707-08. See also 83 FR 27447.
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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.\35\ 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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    \35\ 77 FR 30629. See also 83 FR 27447.
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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.\36\
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    \36\ 77 FR 30628-29. See also 83 FR 27447.
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    As noted in the SD Definition Adopting Release, ``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.'' \37\ 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 narrow could, for example, discourage persons from engaging 
in limited swap dealing activity in order to avoid the burdens 
associated with SD regulation.
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    \37\ 77 FR 30628. See SD Definition Proposing Release, 75 FR 
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.''). See also 83 FR 27447.
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4. De Minimis Calculation
    Generally, a person must count towards its AGNA threshold all swaps 
it enters into for dealing purposes over the preceding 12-month period. 
In addition, each person whose own swaps do not exceed the AGNA 
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'').\38\
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    \38\ 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). See also 83 FR 
27447.
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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 IDI with a 
customer in connection with originating a loan to that customer; \39\ 
(2) swaps between affiliates; \40\ (3) swaps entered into by a 
cooperative with its members; \41\ (4) swaps hedging physical 
positions; \42\ (5) swaps entered into by floor traders; \43\ (6) 
certain foreign exchange (``FX'') swaps and FX forwards; \44\ and (7) 
commodity trade options.\45\ In addition, the Commission understands 
that persons have applied CFTC interpretive guidance and staff letters 
so as not to count towards the AGNA threshold, subject to certain 
conditions, certain cross-border swaps \46\ and swaps resulting from

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multilateral portfolio compression exercises.\47\ Further, certain 
inter-governmental or quasi-governmental international financial 
institutions are not included within the term ``swap dealer.'' \48\
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    \39\ See 17 CFR 1.3, Swap dealer, paragraph (5); 77 FR at 30620-
24. See also 83 FR 27447.
    \40\ See 17 CFR 1.3, Swap dealer, paragraph (6)(i); 77 FR at 
30624-25. See also 83 FR 27447.
    \41\ See 17 CFR 1.3, Swap dealer, paragraph (6)(ii); 77 FR at 
30625-26. See also 83 FR 27447.
    \42\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); 77 FR at 
30611-14. See also 83 FR 27447.
    \43\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iv); 77 FR at 
30614. See also 83 FR at 27447. 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.
    \44\ 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).
    \45\ See 17 CFR 32.3; Commodity Options, 77 FR 25320, 25326 n.39 
(Apr. 27, 2012).
    \46\ See 78 FR 45292; CFTC Letter No. 18-13, No-Action Position: 
Relief for Certain Non-U.S. Persons from Including Swaps with 
International Financial Institutions in Determining Swap Dealer 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; 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; 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.
    \47\ 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.
    \48\ See SD Definition Adopting Release, 77 FR 30693.
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B. The Proposal
    On June 12, 2018, the Commission published for public comment a 
Notice of Proposed Rulemaking (``NPRM'') to amend the De Minimis 
Exception by: (1) Setting the AGNA threshold for the De Minimis 
Exception at $8 billion in swap dealing activity entered into by a 
person over the preceding 12 months; (2) adding new factors to the De 
Minimis Exception that would lead to excepting from the AGNA 
calculation: (a) Certain swaps entered into with a customer by an IDI 
in connection with originating a loan to that customer, (b) certain 
swaps entered into to hedge financial or physical positions, and (c) 
certain swaps resulting from multilateral portfolio compression 
exercises; and (3) 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'').\49\
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    \49\ 83 FR 27444.
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    In addition, the Commission sought comment on the following 
additional potential changes to the De Minimis Exception: (1) Adding as 
a factor a minimum dealing counterparty count threshold and/or a 
minimum dealing transaction count threshold; (2) adding as a factor 
whether a swap is exchange-traded and/or cleared; and (3) adding as a 
factor whether a swap is categorized as a non-deliverable forward 
transaction.
    The various aspects of the NPRM are discussed in further detail 
below. The Commission received 43 letters and Commission staff 
participated in four ex parte meetings \50\ concerning the NPRM.\51\
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    \50\ Comments were submitted by the following entities: 360 
Trading Networks Inc. (``360 Trading''); American Bankers 
Association (``ABA'') (ABA also attached a report prepared by NERA 
Economic Consulting); American Gas Association (``AGA''); Americans 
for Financial Reform (``AFR''); Associated Foreign Exchange, Inc. 
and GPS Capital Markets, Inc. (``AFEX/GPS''); Association of Global 
Custodians (``AGC''); Better Markets, Inc. (``Better Markets''); 
Bond Dealers of America (``BDA''); Capital One Financial Corporation 
(``Capital One''); Cboe SEF, LLC (``Cboe SEF''); Citizens Financial 
Group, Inc. (``Citizens''); CME Group Inc. and Intercontinental 
Exchange, Inc. (``CME/ICE''); Coalition for Derivatives End-Users 
(``CDEU''); Coalition of Physical Energy Companies (``COPE''); 
Commercial Energy Working Group (``CEWG''); Commodity Markets 
Council (``CMC'') (CMC also expressed support for the CEWG comment 
letter); Covington & Burling LLP (``Covington''); Daiwa Securities 
Co. Ltd. (``Daiwa''); Edison Electric Institute and Electric Power 
Supply Association (``EEI/EPSA''); Foreign Exchange Professionals 
Association (``FXPA''); Frost Bank; Futures Industry Association and 
FIA Principal Traders Group (``FIA''); Institute for Agriculture and 
Trade Policy (``IATP''); Institute of International Bankers 
(``IIB''); International Energy Credit Association (``IECA'') (IECA 
also expressed support for the EEI/EPSA comment letter); 
International Swaps and Derivatives Association and Securities 
Industry and Financial Markets Association (``ISDA/SIFMA''); 
Japanese Bankers Association (``JBA''); M&T Bank (``M&T''); Managed 
Funds Association (``MFA''); National Council of Farmer Cooperatives 
(``NCFC''); National Rural Electric Cooperative Association and 
American Public Power Association (``NRECA/APPA''); Natural Gas 
Supply Association (``NGSA''); NEX Group plc (``NEX''); Northern 
Trust; Optiver US LLC (``Optiver'') (Optiver also expressed support 
for the FIA comment letter); Regions Financial Corp. (``Regions''); 
State Street; SVB Financial Group (``SVB''); Thomson Reuters (SEF) 
LLC (``TR SEF''); six U.S. Senators (``Senators''); Virtu Financial 
Inc. (``Virtu''); Western Union Business Solutions (USA), LLC and 
Custom House USA, LLC (``Western Union''); and XTX Markets Limited 
(``XTX''). Additionally, there were three meetings with Delta 
Strategy Group, DRW, Jump Trading, and Optiver, and one meeting with 
Better Markets. The comment letters and notice of the ex parte 
meetings are available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2885.
    \51\ 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 (``Project KISS''). 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. 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. A 
number of responses submitted pursuant to the Project KISS Request 
for Information supported modifications to the De Minimis Exception. 
Project KISS, 82 FR 21494 (May 9, 2017), amended by 82 FR 23765 (May 
24, 2017). The suggestion letters filed by the public are available 
at https://comments.cftc.gov/KISS/KissInitiative.aspx.
---------------------------------------------------------------------------

II. Final Rule--$8 Billion Threshold

    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, five years of implementation 
experience, and comments received in response to the NPRM, in this 
adopting release the Commission is amending the De Minimis Exception by 
setting the AGNA threshold at $8 billion in swap dealing activity. The 
CFTC may in the future separately propose or adopt rules addressing any 
aspect of the NPRM that is not finalized in this release.\52\
---------------------------------------------------------------------------

    \52\ 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)).
---------------------------------------------------------------------------

    This change to the De Minimis Exception is being adopted pursuant 
to the Commission's authority under CEA section 1a(49)(D), which 
requires the Commission to exempt from designation as an SD an entity 
that engages in a de minimis quantity of swap dealing in connection 
with transactions with or on behalf of its customers, and to promulgate 
regulations to establish factors with respect to the making of this 
determination to exempt.\53\ 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.\54\ The Commission notes that it has consulted with 
the SEC and prudential regulators regarding the change to the De 
Minimis Exception adopted herein.\55\
---------------------------------------------------------------------------

    \53\ 7 U.S.C. 1a(49)(D). See also 17 CFR 1.3, Swap dealer, 
paragraph (4)(v).
    \54\ 77 FR 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.'').
    \55\ As required by Sec.  712(a)(1) of the Dodd-Frank Act.
---------------------------------------------------------------------------

A. Proposal

    The Commission proposed to amend paragraph (4)(i)(A) of the De 
Minimis Exception by setting the AGNA threshold at $8 billion. For 
added clarity, the Commission also proposed

[[Page 56670]]

to change the term ``swap positions'' to ``swaps'' in paragraph 
(4)(i)(A). Additionally, the Commission proposed 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 De Minimis Exception, which 
addresses the phase-in procedure and staff report requirements of the 
De Minimis Exception (discussed above in section I.A.2), since both of 
those provisions would no longer be applicable.
    The Commission proposed to maintain the AGNA threshold at $8 
billion, and also solicited comment on whether to reduce the threshold 
to $3 billion, or increase the threshold. The Commission cited as 
relevant an analysis of SDR data from January 1, 2017, through December 
31, 2017 (the ``review period'').\56\ Given improvements in the quality 
of data being reported to SDRs since the Staff Reports were issued, 
Commission staff analyzed the AGNA of swaps activity for interest rate 
swaps (``IRS''), credit default swaps (``CDS''), FX swaps,\57\ and 
equity swaps (whereas the analysis of AGNA data in the Staff Reports 
was limited to IRS and CDS).\58\ 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.\59\
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    \56\ See 83 FR 27448-58. The data was sourced from data reported 
to the four registered SDRs: BSDR LLC, Chicago Mercantile Exchange 
Inc., DTCC Data Repository, and ICE Trade Vault. The analysis 
excluded inter-affiliate and non-U.S. transactions. 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 non-financial 
commodity swaps), approximately 4.4 million transactions, and 39,107 
counterparties. The Proposal includes additional discussion 
regarding the methodology utilized to conduct the analysis. 83 FR 
27449-50.
    \57\ The term ``FX swaps'' is used in this release 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 48253.
    \58\ See 83 FR 27449-50; Preliminary Staff Report, supra note 
19, at 21-22; Final Staff Report, supra note 17, at 19.
    \59\ As discussed in the Proposal, certain data restrictions 
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. See 83 FR 
27449-50.
---------------------------------------------------------------------------

    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. 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.\60\ Accordingly, staff 
applied filters to the data to exclude from the analysis certain 
transactions and entities that were less likely to be connected to 
potential swap dealing activity. Entities such as funds, insurance 
companies, cooperatives, government-sponsored entities, most commercial 
end-users, and international financial institutions were excluded as 
potential SDs for the purpose of the analysis because these entities 
generally use swaps for investing, hedging, or proprietary trading, or 
otherwise enter into swaps that would not be included in determining 
whether the entity is an SD.\61\ Further, additional filters allowed 
for the exclusion of inter-affiliate \62\ and non-U.S. to non-U.S. swap 
transactions.\63\
---------------------------------------------------------------------------

    \60\ See 17 CFR part 45 app.1.
    \61\ See supra section I.A.4 (discussing the de minimis 
threshold calculation). The Commission notes that the entity-based 
exclusions and transaction filters are not a determinative means of 
assessing whether any particular entity is engaged in swap dealing. 
See also 83 FR 27449 n.73.
    \62\ See 17 CFR 1.3, Swap dealer, paragraph (6)(i).
    \63\ See generally 78 FR 45292.
---------------------------------------------------------------------------

    With the benefits of improved data quality and analytical tools, 
staff conducted a more granular analysis (as compared to the Staff 
Reports) to more accurately identify those entities that, based on 
their observable business activities, were potentially engaging in swap 
dealing activity (``In-Scope Entities'') \64\ versus those likely to be 
engaging in other kinds of transactions (e.g., entering into swaps for 
investment purposes). Further, for the purposes of the 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. 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.\65\
---------------------------------------------------------------------------

    \64\ The majority of In-Scope Entities are banks, broker-
dealers, non-bank financial entities, and affiliates thereof.
    \65\ See 83 FR 27449.
---------------------------------------------------------------------------

    With respect to NFC swaps, Commission staff encountered a number of 
challenges in calculating notional amounts, including: (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.\66\ Given the 
limitations in the AGNA data, counterparty counts and transaction 
counts were used as proxies to analyze likely swap dealing activity for 
participants in the NFC swap market.
---------------------------------------------------------------------------

    \66\ See 83 FR 27449-50.
---------------------------------------------------------------------------

    The analysis conducted for the Proposal largely confirmed the 
analysis conducted for the Staff Reports; \67\ 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 AGNA threshold, staff's 
analysis was based on a person's AGNA of swaps activity, as opposed to 
AGNA of swap dealing activity.
---------------------------------------------------------------------------

    \67\ See generally 83 FR 27449-58; Final Staff Report, supra 
note 19; Preliminary Staff Report, supra note 17.
---------------------------------------------------------------------------

    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''). Specifically, with regard to 2017 
Regulatory Coverage, staff identified the extent to which: (1) Swaps 
activity, measured in terms of AGNA or transaction count, was subject 
to SD regulation during the review period because at least one 
counterparty to a swap was a registered SD (``2017 AGNA Coverage'' or 
``2017 Transaction Coverage,'' as applicable); and (2) counterparties 
in the swap market transacted with at least one registered SD during 
the review period (``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 AGNA 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''

[[Page 56671]]

refers to an In-Scope Entity that exceeded a specified AGNA threshold 
level, and traded with at least 10 unique counterparties. With regard 
to Estimated Regulatory Coverage, staff identified the extent to which: 
(1) Swaps activity, measured in terms of AGNA or transaction count, 
would have been subject to SD regulation during the review period, at a 
specified AGNA threshold, because at least one counterparty to a swap 
was identified as a Likely SD at that AGNA threshold (``Estimated AGNA 
Coverage'' or ``Estimated Transaction Coverage,'' as applicable); and 
(2) counterparties in the swap market would have transacted with at 
least one Likely SD during the review period, at a specified AGNA 
threshold (``Estimated Counterparty Coverage'').

B. Summary of Comments

1. Set Threshold at $8 Billion
    Most commenters that addressed this aspect of the Proposal stated 
that the AGNA threshold should not decrease to $3 billion, and/or 
supported setting the threshold at $8 billion.\68\ Some of those 
commenters also stated that the Commission could or should consider a 
higher threshold, as discussed in more detail in section II.B.2 
below.\69\ Commenters generally stated that the policy goals for SD 
registration--reducing systemic risk, increasing counterparty 
protections, and/or increasing market efficiency, orderliness, and 
transparency--and the policy goals for a de minimis exception--
increasing efficiency, allowing limited ancillary dealing, encouraging 
new participants, and/or focusing regulatory resources--would be better 
advanced if the threshold did not decrease to $3 billion.\70\
---------------------------------------------------------------------------

    \68\ See ABA, AGA, AFEX/GPS, BDA, Capital One, Cboe SEF, 
Citizens, CDEU, COPE, CEWG, CMC, EEI/EPSA, FXPA, Frost Bank, FIA, 
IIB, IECA, ISDA/SIFMA, JBA, M&T, NCFC, NRECA/APPA, NGSA, Regions, 
SVB, Virtu, Western Union, and XTX comment letters.
    \69\ See ABA, AFEX/GPS, BDA, Capital One, Citizens, FIA, IIB, 
IECA, JBA, Regions, and SVB comment letters.
    \70\ Additionally, CDEU and CEWG referenced the Congressional 
Directive stating that the Commission should establish a threshold 
of $8 billion or greater within 60 days of enactment of the 
Appropriations Act (i.e., by February 16, 2016), while CEWG also 
cited to the recent recommendation from the U.S. Department of the 
Treasury to set the threshold at $8 billion. See CDEU and CEWG 
comment letters; 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; U.S. Department of the Treasury, A 
Financial System That Creates Economic Opportunities--Capital 
Markets (available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf).
---------------------------------------------------------------------------

    Specifically, commenters stated that a reduced AGNA threshold could 
lead to some entities reducing or ceasing swaps activity to avoid 
registration and its related costs, which could lead to negative 
impacts for swap market participants. For example, fewer de minimis 
dealers could mean that small and mid-sized end-users and commercial 
entities who utilize swaps for hedging purposes, as well as NFC swap 
market participants, would have fewer dealers available to them.\71\ 
The potential negative impacts could include: (1) Increased 
concentration in the swap dealing market; (2) reduced availability of 
potential swap counterparties; (3) reduced liquidity; (4) increased 
volatility; (5) increased systemic risk; and/or (6) higher fees or 
reduced competitive pricing.\72\
---------------------------------------------------------------------------

    \71\ See ABA, AGA, AFEX/GPS, BDA, Capital One, Citizens, CDEU, 
COPE, CEWG, CMC, EEI/EPSA, Frost Bank, IIB, IECA, ISDA/SIFMA, JBA, 
M&T, NCFC, NRECA/APPA, NGSA, SVB, Virtu, and Western Union comment 
letters.
    \72\ See id.
---------------------------------------------------------------------------

    Several commenters also noted that the current $8 billion threshold 
already subjects the vast majority of transactions to SD regulation, or 
that a reduced threshold would not capture significant additional 
dealing activity.\73\
---------------------------------------------------------------------------

    \73\ See AGA, BDA, Capital One, CDEU, CMC, Frost Bank, IECA, 
M&T, SVB, and Western Union comment letters.
---------------------------------------------------------------------------

    Some commenters stated that the nature of the swaps activity 
entered into by certain entities poses less systemic risk--e.g., 
commercial banks that have swap dealing activity below $8 billion and 
may be subject to prudential banking rules, and entities that primarily 
enter into NFC swaps.\74\ More specifically, Citizens noted that 
prudential regulators examine the safety and soundness of middle-market 
banks' swap businesses, and the swaps offered by these banks are 
structured conservatively to assist customers with hedging activities. 
Further, with respect to counterparty protections, Citizens stated that 
many middle-market banks that would potentially have to register at a 
lower threshold likely already perform, under applicable prudential 
banking rules, know-your-counterparty and suitability analyses of their 
counterparties prior to entering into swaps with them.\75\
---------------------------------------------------------------------------

    \74\ See Citizens, IECA, NRECA/APPA, NGSA, and SVB comment 
letters.
    \75\ See Citizens comment letter.
---------------------------------------------------------------------------

    Several commenters stated that maintaining the $8 billion threshold 
provides regulatory stability or alleviates the uncertainty currently 
experienced by market participants with an AGNA of swap dealing 
activity between $3 billion and $8 billion.\76\
---------------------------------------------------------------------------

    \76\ See AFEX/GPS, Capital One, COPE, EEI/EPSA, FXPA, FIA, IECA, 
ISDA/SIFMA, JBA, M&T, NGSA, and Regions comment letters.
---------------------------------------------------------------------------

    Some commenters suggested that maintaining the $8 billion threshold 
would enable the Commission to focus its limited resources on entities 
whose swap dealing is sufficient in size and scope to warrant 
oversight.\77\ Two commenters also noted that Commission regulations 
not related to SD registration (e.g., part 43 and 45 reporting 
requirements, and mandatory clearing and swap execution facility 
(``SEF'') trading requirements) already apply to unregistered entities, 
and therefore, many of the policy goals of SD registration are already 
being advanced with respect to swaps entered into by these unregistered 
entities.\78\
---------------------------------------------------------------------------

    \77\ See Citizens, Virtu, and Western Union comment letters.
    \78\ See Citizens and Virtu comment letters.
---------------------------------------------------------------------------

    With respect to NFC swaps, EEI/EPSA and NGSA expressed concern that 
a lower AGNA threshold would provide less accommodation for increasing 
NFC prices, which could lead to market participants reducing their swap 
dealing activity to remain below the threshold.\79\ To address concerns 
regarding volatility in NFC prices, EEI/EPSA also suggested that the 
AGNA threshold be adjusted annually, consistent with the consumer price 
index.\80\ NGSA also stated that the lower regulatory coverage for NFC 
swaps is appropriate given the characteristics of that market.\81\
---------------------------------------------------------------------------

    \79\ See EEI/EPSA and NGSA comment letters. As stated by EEI/
EPSA, if NFC prices increase, the same level of swaps activity will 
potentially have a higher notional amount.
    \80\ See EEI/EPSA comment letter.
    \81\ See NGSA comment letter.
---------------------------------------------------------------------------

    A few commenters addressed the compliance costs associated with SD 
registration,\82\ stating that: (1) Establishing an $8 billion 
threshold results in aggregate recurring compliance costs over a 10-
year period, on a net present value basis, of approximately $373 
million; \83\ and (2) the cost of SD registration (e.g., systems build-
out, external advisors, National Futures Association membership dues, 
compliance with margin rules) is underestimated,\84\ with one commenter

[[Page 56672]]

estimating that the initial cost would be approximately $8 to $10 
million per entity, with ongoing costs to meet regulatory requirements 
of $2 million per year thereafter.\85\
---------------------------------------------------------------------------

    \82\ See ABA, IECA, and SVB comment letters. Although addressed 
by ABA and SVB, the costs associated with SD regulatory requirements 
(e.g., margin, reporting, technology, etc.) are not considered in 
the cost-benefit analysis below. See infra notes 249 and 286.
    \83\ See ABA comment letter.
    \84\ See IECA and SVB comment letters. Although outside of the 
scope of this rulemaking, IECA also asserted that the Commission 
underestimates the negative impact on market development due to its 
failure to provide a workable capital rule for non-bank SDs.
    \85\ See SVB comment letter.
---------------------------------------------------------------------------

    BDA stated that the CFTC should clarify whether changes to the De 
Minimis Exception would be applicable to activity that occurred in the 
preceding 12 months.\86\
---------------------------------------------------------------------------

    \86\ See BDA comment letter.
---------------------------------------------------------------------------

2. Increase Threshold
    Some commenters stated that the Commission should also consider a 
higher AGNA threshold, maintaining generally that the policy goals for 
SD registration and a de minimis exception would be better advanced if 
the threshold was higher than $8 billion.\87\
---------------------------------------------------------------------------

    \87\ See ABA, AFEX/GPS, BDA, Capital One, Citizens, FIA, IIB, 
IECA, JBA, Regions, and SVB comment letters.
---------------------------------------------------------------------------

    Specifically, several commenters stated that an increased threshold 
would not lead to a significant decrease in regulatory coverage of swap 
dealing activity.\88\ ABA and AFEX/GPS asserted that a $20 billion 
threshold would result in a trivial or non-consequential reduction in 
Estimated Regulatory Coverage,\89\ and JBA stated that at a $100 
billion threshold, Estimated AGNA Coverage would be almost the 
same.\90\ AFEX/GPS also asserted that the cumulative swaps activity 
conducted by SDs between $8 billion and $20 billion does not pose 
systemic risk, and entities would still be subject to reporting rules 
and recordkeeping requirements.\91\ Additionally, AFEX/GPS and Citizens 
asserted that a decrease in the number of registered SDs would focus 
the Commission's resources on SDs whose dealing activity is sufficient 
in size and scope to warrant greater oversight.\92\
---------------------------------------------------------------------------

    \88\ See ABA, AFEX/GPS, BDA, Citizens, IIB, and SVB comment 
letters.
    \89\ See ABA and AFEX/GPS comment letters.
    \90\ See JBA comment letter.
    \91\ See AFEX/GPS comment letter.
    \92\ See AFEX/GPS and Citizens comment letters.
---------------------------------------------------------------------------

    Further, a few commenters stated that given the costs of SD 
registration, a higher threshold would encourage new participants to 
engage in swap dealing activity, which SVB noted as important given the 
highly concentrated nature of the SD market, where the nation's largest 
banks control the vast majority of swap market share.\93\
---------------------------------------------------------------------------

    \93\ See AFEX/GPS, BDA, Citizens, and SVB comment letters.
---------------------------------------------------------------------------

    Additionally, ABA indicated that an increased threshold would 
result in aggregate compliance cost savings for market participants. 
For example, AGNA thresholds of $15 billion and $50 billion would 
result in potential aggregate savings of $81 million and $170 million, 
respectively, on a net present value basis, as compared to an $8 
billion threshold.\94\
---------------------------------------------------------------------------

    \94\ See ABA comment letter.
---------------------------------------------------------------------------

3. Allow Threshold to Decrease
    Better Markets and the Senators stated that the Commission should 
permit the AGNA threshold to decrease to $3 billion, contending 
generally that the data insufficiently or misleadingly justifies 
maintaining the threshold at $8 billion,\95\ and arguing that the 
Proposal did not follow necessary administrative procedures or exceeded 
statutory authority.\96\
---------------------------------------------------------------------------

    \95\ See Better Markets and Senators comment letters.
    \96\ See Better Markets comment letter.
---------------------------------------------------------------------------

    The Senators stated that though notional amount data for NFC swaps 
was not used in considering the Proposal, the data that was available 
for NFC swaps shows significantly less regulatory coverage under an $8 
billion threshold than in other asset classes. The Senators commented 
that though the Proposal notes the ``unique characteristics'' of NFC 
swaps, the analysis provided to justify the $8 billion threshold 
indicates a series of assumptions and possibilities rather than 
concrete data. The Senators also questioned why, given the lack of 
relevant notional amount data for NFC swaps, it is necessary to 
maintain the $8 billion threshold for SDs involved with energy-related 
swaps.\97\
---------------------------------------------------------------------------

    \97\ See Senators comment letter.
---------------------------------------------------------------------------

    Better Markets claimed that the regulatory coverage statistics are 
incomplete, misleading, and irrelevant to the Dodd-Frank Act's 
activities-based standard for SD registration, stating that the high 
AGNA and transaction coverage percentages are not indicative of the 
absolute level of swap dealing activities relevant to SD registration 
under CEA section 1a(49)(A). Further, in connection with the 680 
additional counterparties that would potentially benefit from SD 
regulations under a lower $3 billion threshold, Better Markets asserted 
that expanding counterparty protections to hundreds of market 
participants would have more than a ``limited'' effect on counterparty 
protection once relative statistics are abandoned.\98\
---------------------------------------------------------------------------

    \98\ See Better Markets comment letter.
---------------------------------------------------------------------------

    Better Markets also asserted that the data filtering methodology 
was flawed and inadequately explained. Better Markets explained that, 
with respect to the 10 counterparty count filter, if a commodities 
affiliate of a large firm held itself out as an SD or stood ready to 
accommodate the demand of nine counterparties, that affiliate should 
have been treated, for purposes of the analysis, as an SD on account of 
its swap dealing activities, unless those activities did not exceed the 
AGNA threshold or otherwise were excluded from the SD registration 
analysis. Further, Better Markets argued that: (1) The CFTC should have 
provided an opportunity for public comment on the assumptions that were 
made in the CFTC's analysis; (2) there was some ambiguity in the terms 
used in the CFTC's analysis; (3) the CFTC's reliance upon a 10 unique 
counterparty filter was based on fatally flawed logic; (4) the data 
limitations demonstrate the benefits of better field-level and 
affiliate reporting of swaps, which would give the CFTC an informed 
basis to consider changes to the $3 billion threshold; and (5) the CFTC 
must first amend its swap data and chief compliance officer reporting 
regulations to ensure it has sufficient data to provide an informed 
basis for administrative action.\99\
---------------------------------------------------------------------------

    \99\ See id.
---------------------------------------------------------------------------

    Further, Better Markets commented that the de minimis threshold 
framework should be revised to focus on strict, observable measures 
like total notional amount or transactional activities, rather than a 
subset of such activities that potential registrants are able to 
interpret for themselves, and are not presently required by regulation 
to monitor, report, or internally track across the firm.\100\
---------------------------------------------------------------------------

    \100\ See id.
---------------------------------------------------------------------------

    Better Markets also asserted that the statutory provision regarding 
the de minimis exception authorizes the CFTC to issue exemptive orders 
for individual or similarly-situated legal entities based upon 
generally applicable factors for determining whether such entities may 
be involved in a de minimis amount of swap dealing activities. Better 
Markets noted that it is unreasonable to conclude that Congress 
intended a wholesale exemption from registration that is divorced from 
the particular circumstances of any one petitioner. Further, Better 
Markets argued that the language in the exemptive mandate must be 
construed in a manner that is faithful to Congress' intent that the 
quantity of exempted swap dealing activities be minimal, a concept that 
has boundaries that can be drawn far short of billions of dollars and 
thousands of transactions by unregulated entities.\101\
---------------------------------------------------------------------------

    \101\ See id.

---------------------------------------------------------------------------

[[Page 56673]]

    AFR stated that, though the improved data adds weight to the claim 
that an $8 billion threshold is appropriate for some financial swaps, 
arguments against the $8 billion threshold are particularly strong in 
the case of NFC markets. Specifically, AFR asserted that the Commission 
should be willing to vary the de minimis threshold based on market 
characteristics, and in particular should reduce the $8 billion 
threshold in NFC markets where $8 billion in notional amount represents 
a different level of economic significance than in some other markets. 
AFR elaborated that the Commission continues to lack data on the 
notional amount for NFC swaps, making it difficult to draw definitive 
conclusions on the economic significance of the activity that is not 
subject to SD regulation, and stated that significant dealing activity 
in the NFC market is not subject to SD regulation since roughly half of 
all the entities with 10 or more NFC swap counterparties are not 
registered as SDs.\102\
---------------------------------------------------------------------------

    \102\ See AFR comment letter.
---------------------------------------------------------------------------

    AFR also stated that the AGNA threshold analysis does not account 
for the numerous other exceptions proposed, which could exclude very 
large amounts of swaps activity from being considered in the de minimis 
calculation.\103\
---------------------------------------------------------------------------

    \103\ See id.
---------------------------------------------------------------------------

    IATP stated that the data analysis does not support the idea that 
more ancillary dealing would promote greater competition, and thus more 
efficient and transparent price discovery. IATP asserted that the 
Commission's true motivation for maintaining an $8 billion threshold is 
the regulatory compliance cost and burden reduction objective of 
Project KISS, rather than promoting improved price discovery. Further, 
IATP claimed that the AGNA of activity in the swap market has shrunk 
due to the clearing of swaps on centralized platforms and the migration 
of swaps to the futures markets, not because of constraints of the de 
minimis threshold or because of the lack of exemptions to the 
calculation of that threshold. IATP also stated that though it did not 
have a data-based argument for changing the $8 billion threshold, it 
believed that maintaining the $8 billion threshold because of potential 
administrative burdens involved in lowering the threshold is a poor, 
Project KISS-based, rationale that does not consider the benefits of SD 
registration for the financial integrity and price discovery of the 
swap market.\104\
---------------------------------------------------------------------------

    \104\ See IATP comment letter.
---------------------------------------------------------------------------

4. Other Comments
(i) Testing Frequency for Threshold
    Some commenters addressed the testing frequency for the threshold. 
Commenters stated that the AGNA threshold calculation should continue 
to be based primarily on a rolling 12-month test of the AGNA of swap 
dealing activity.\105\ Specifically, commenters indicated that: (1) 
Resources have been spent and systems have been built to comply with 
the current approach, and additional changes would add costs with no 
tangible benefit; \106\ and (2) the current test is relatively simple 
to administer, and the 12-month testing period helps to smooth out any 
short-term aberrations in activity and allows for moderation of future 
swap dealing activity to avoid inadvertently triggering an SD 
registration requirement.\107\ However, BDA stated that the CFTC should 
allow entities to test only at the end of every month, which would 
significantly reduce the compliance testing burdens for small and mid-
sized firms.\108\
---------------------------------------------------------------------------

    \105\ See ABA, CMC, Frost Bank, and IECA comment letters.
    \106\ See ABA, CMC, and IECA comment letters.
    \107\ See Frost Bank comment letter.
    \108\ See BDA comment letter.
---------------------------------------------------------------------------

(ii) Alternatives to Single AGNA Threshold
    A number of commenters addressed whether the Commission should 
consider an alternative to a threshold based on the AGNA of swap 
dealing activity.
    AFR and IECA noted that using AGNA as the relevant criterion for SD 
registration, as compared to other options, is beneficial because: (1) 
Resources have been expended to comply with the current approach, and 
changing that approach would add costs for no perceived benefit; \109\ 
and (2) AGNA provides a stable metric of the gross size of swaps 
commitments that is not reliant on either current market valuations, 
model forecasts, or institutional arrangements such as bankruptcy 
procedures.\110\
---------------------------------------------------------------------------

    \109\ See IECA comment letter.
    \110\ See AFR comment letter.
---------------------------------------------------------------------------

    AFR stated that controlling operational risk, not simply market 
risk, is a major reason for SD designation, and AGNA remains a good 
measure of the total operational risks incurred by an entity,\111\ and 
Better Markets maintained that the de minimis exception must require 
consideration of the quantity of swap dealing, not net exposures or 
other risk-based measures.\112\
---------------------------------------------------------------------------

    \111\ See id.
    \112\ See Better Markets comment letter.
---------------------------------------------------------------------------

    However, IECA indicated that although using an alternative netting 
option (e.g., entity-netted notional amounts) is a reasonable idea and 
could be incorporated into existing analysis, in the NFC markets, 
netting would need to be done as a measure of credit exposure with 
physical and bilateral swaps being able to be offset against each other 
in connection with perceived ``risk exposure'' to a third party.\113\ 
Additionally, ABA and Citizens stated that the Commission should 
consider a risk-based de minimis exception.\114\ ABA asserted that a 
notional amount-based threshold is not the appropriate metric for the 
De Minimis Exception because it is not based on risk, and suggested 
that the Commission consider initial margin as the relevant 
metric.\115\
---------------------------------------------------------------------------

    \113\ See IECA comment letter.
    \114\ See ABA and Citizens comment letters.
    \115\ See ABA comment letter. ABA also suggested that the 
Commission could consider other market risk metrics, such as value 
at risk and sensitivities, as well as credit risk metrics, such as 
total swaps current exposure net of collateral received and largest 
fifteen swap counterparty current exposures net of collateral 
received.
---------------------------------------------------------------------------

    Commenters also stated that a tiered SD registration structure 
should not be considered, noting that a tiered structure could: (1) 
Create more uncertainty for situations where legal and regulatory 
certainty is important; \116\ and (2) subject entities to instability 
and inefficiency relative to a permanent, single AGNA de minimis 
threshold.\117\ On the other hand, IATP asserted that the Commission 
should propose, after further analytic work, a tiered SD registration 
for SDs with a certain threshold of NFC swaps activity (e.g., via 
commodity indexes).\118\
---------------------------------------------------------------------------

    \116\ See IECA comment letter.
    \117\ See JBA comment letter.
    \118\ See IATP comment letter.
---------------------------------------------------------------------------

    Several commenters also addressed whether the Commission should 
consider counterparty count and transaction count as additional metrics 
to be included in the de minimis threshold, as discussed in section 
IV.A below.
(iii) Additional Calculation Changes
    Commenters addressed other calculation changes the Commission 
should consider for the de minimis threshold.
    Virtu stated that the CFTC should exempt swap transactions where 
one party is a registered SD or one party holds their account with a 
registered SD since these transactions are already subject to the 
existing reporting

[[Page 56674]]

requirements and, as such, Commission oversight.\119\
---------------------------------------------------------------------------

    \119\ See Virtu comment letter.
---------------------------------------------------------------------------

    JBA stated that the CFTC should specify that the termination and 
modification of terms and conditions of existing transactions do not 
count towards the threshold, noting that termination of transactions 
mitigates counterparty credit risk and reduces the outstanding AGNA of 
swaps.\120\
---------------------------------------------------------------------------

    \120\ See JBA comment letter.
---------------------------------------------------------------------------

    BDA argued that the CFTC should consider increasing the ``special 
entity'' threshold to $100 million in order to provide special entities 
with more access to the marketplace. BDA maintained that the $25 
million threshold results in many mid-sized firms deciding not to enter 
into swaps with special entities, while an increase in that threshold 
could provide better market access for special entities while having no 
material impact on the overall regulation of SDs.\121\
---------------------------------------------------------------------------

    \121\ See BDA comment letter.
---------------------------------------------------------------------------

    Virtu asserted that transactions by market makers maintaining net 
open positions not exceeding $1 billion (over a 12-month period) should 
be exempted from the de minimis threshold calculation.\122\ Virtu 
explained that certain market makers do not hold positions or carry 
risk for long periods of time, but rather seek to facilitate efficient 
risk transference to earn a spread and, in doing so, lower costs for 
investors through increased price competition and more transparency in 
the market.
---------------------------------------------------------------------------

    \122\ See Virtu comment letter. Virtu noted that, while in 
aggregate the number of transactions engaged in by market makers 
might exceed the $8 billion threshold, the net risk of these trades 
would not have the same potential impact to overall systemic risk 
because exempt market makers' open net positions in otherwise non-
exempt transactions would be capped at $1 billion over a rolling 12-
month period. Additionally, certain market makers access the market 
through prime brokers--who are registered SDs--and, as such, these 
transactions would be included in the prime brokers' regulatory 
reports and subject to CFTC oversight.
---------------------------------------------------------------------------

    IIB stated that entities that have discontinued new swap dealing 
activity should not have to count towards their AGNA threshold certain 
transactions that modify legacy swaps entered into by those entities, 
including: (1) Partial or full terminations; (2) modifications that 
shorten the duration of an outstanding swap; (3) partial or full 
novations of legacy swap transactions; or (4) swaps submitted for 
clearing.\123\
---------------------------------------------------------------------------

    \123\ See IIB comment letter.
---------------------------------------------------------------------------

(iv) Cross-Border Issues
    With respect to cross-border issues, JBA stated that the market has 
been divided into two groups because non-SD entities outside of the 
U.S. avoid transactions with U.S. persons, thereby undermining the 
diversity of U.S. markets.\124\ Additionally, Western Union suggested 
that the Commission should also address the foreign consolidated 
subsidiary rules in the context of the De Minimis Exception 
rulemaking.\125\ Further, IIB stated that the Commission should clarify 
that a swap between a non-U.S. person and a non-U.S. asset manager that 
is subject to post-trade allocation and submitted for clearing, or 
given up to a non-U.S. prime broker prior to being allocated, should 
not count towards the AGNA threshold in certain circumstances.\126\
---------------------------------------------------------------------------

    \124\ See JBA comment letter.
    \125\ See Western Union comment letter (referring to Cross-
Border Application of the Registration Thresholds and External 
Business Conduct Standards Applicable to Swap Dealers and Major Swap 
Participants, 81 FR 71946 (proposed Oct. 18, 2016)). Western Union 
also stated that the proposed application of the foreign 
consolidated subsidiary definition to SD registration is 
inconsistent with principles of international comity and would 
create an unfair competitive disadvantage for certain market 
participants.
    \126\ See IIB comment letter.
---------------------------------------------------------------------------

C. Final Rule and Commission Response

    Upon consideration of the comments,\127\ the Commission is adopting 
an amendment to paragraph (4)(i)(A) of the De Minimis Exception to set 
the AGNA swap dealing threshold at $8 billion over the immediately 
preceding 12 months, as proposed. The Commission is also adopting the 
other conforming and clarifying changes as proposed.
---------------------------------------------------------------------------

    \127\ The Commission also notes that the data analysis discussed 
in this adopting release and the Proposal confirmed the analysis 
conducted for the Staff Reports. See generally 83 FR 27449-58; Final 
Staff Report, supra note 19; Preliminary Staff Report, supra note 
17.
---------------------------------------------------------------------------

1. Rationale for Not Reducing AGNA Threshold to $3 Billion
    As discussed in the Proposal,\128\ as well as by most commenters 
that addressed this aspect of the Proposal,\129\ 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 decreased to $3 billion. Additionally, the policy 
objectives furthered by a de minimis exception--increasing efficiency, 
allowing limited ancillary dealing, encouraging new participants, and 
focusing regulatory resources--would not be significantly advanced, and 
may be impaired to some extent, if the threshold decreased. Generally, 
as discussed in the Proposal and as agreed with by most commenters, 
analysis of the data indicated that: (1) The current $8 billion 
threshold subjects almost all swap transactions (as measured by AGNA or 
transaction count) to SD regulations; (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 there would potentially be 
reduced liquidity in the swap market, as compared to the $8 billion 
threshold; and (3) a lower threshold could lead to reduced liquidity 
for NFC swaps, negatively impacting end-users who utilize NFC swaps for 
hedging purposes.\130\
---------------------------------------------------------------------------

    \128\ See generally 83 FR 27450-58.
    \129\ See supra section II.B.1.
    \130\ See generally supra section II.B.1; 83 FR 27450-58. See 
also Final Staff Report, supra note 19; Preliminary Staff Report, 
supra note 17.
---------------------------------------------------------------------------

(i) High Regulatory Coverage at $8 Billion Threshold
    During the review period, 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. Overall, approximately 98 percent of transactions 
involved at least one registered SD. Further, almost all AGNA of swaps 
activity included at least one registered SD--greater than 99 percent 
for IRS, CDS, FX swaps, and equity swaps. The Commission notes that 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.\131\ However, given the 2017 AGNA Coverage and 2017 
Transaction Coverage statistics, these 6,440 entities had limited 
overall swaps activity. Accordingly, to the extent these 6,440 entities 
were engaged in swap dealing activities, such activity was likely 
ancillary and in connection with other client services, potentially 
advancing the policy rationales behind a de minimis exception. This 
data signifies that nearly all swaps already benefited from the policy 
considerations discussed above (e.g., reducing systemic

[[Page 56675]]

risk, increasing counterparty protections, and increasing market 
efficiency, orderliness, and transparency) at the existing $8 billion 
threshold.\132\
---------------------------------------------------------------------------

    \131\ The actual number of entities without a single transaction 
with a registered SD was likely lower than 6,440. Of the 6,440 
entities, 1,780 had invalid identifiers that staff was unable to 
manually replace with a valid LEI. It is possible that these 1,780 
invalid identifiers actually represented fewer than 1,780 distinct 
counterparties because one counterparty may be associated with 
multiple invalid identifiers. See 83 FR 27451.
    \132\ This analysis is discussed in greater detail in the 
Proposal, and was also addressed by commenters. See supra section 
II.B.1; 83 FR 27450-52.
---------------------------------------------------------------------------

(ii) Minimal Additional 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. Specifically, 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). 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). 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). These small increases in Estimated 
Regulatory 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 
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 (e.g., costs of implementing policies and procedures, 
technology systems, and training programs to address requirements 
imposed by SD regulations).\133\
---------------------------------------------------------------------------

    \133\ This analysis is discussed in greater detail in the 
Proposal, and was also addressed by commenters. See supra section 
II.B.1; 83 FR 27452-54.
---------------------------------------------------------------------------

    Additionally, as discussed by the Commission and most commenters, a 
$3 billion AGNA threshold could lead certain entities to reduce or 
cease swap dealing activity to avoid registration and its related 
costs.\134\ Generally, the costs associated with registering as an SD 
may exceed the profits from dealing swaps for entities with limited 
dealing activities. This could lead to negative impacts for swap market 
participants, including, but not limited to, small and mid-sized end-
users who use swaps for hedging purposes. Reduced swap dealing activity 
could lead to increased concentration in the swap dealing market, 
reduced availability of potential swap counterparties, reduced 
liquidity, increased volatility, increased systemic risk, and/or higher 
fees 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.\135\ Additionally, as noted by some 
commenters, the nature of the swaps activity entered into by certain 
entities poses less systemic risk--e.g., commercial banks that have 
swap dealing activity below $8 billion and entities that primarily 
enter into NFC swaps.\136\
---------------------------------------------------------------------------

    \134\ See supra section II.B.1; 83 FR 27452-54. See also Final 
Staff Report, supra note 19.
    \135\ See supra section II.B.1; 83 FR 27452-54.
    \136\ See supra section II.B.1; Citizens, IECA, NRECA/APPA, 
NGSA, and SVB comment letters.
---------------------------------------------------------------------------

    Further, although approximately 86 percent of NFC swaps involved at 
least one registered SD compared to approximately 99 percent for other 
asset classes, as discussed in the Proposal, the Commission is of the 
view that lower SD regulatory coverage is acceptable given the special 
characteristics of the NFC swap market. A reduced threshold likely 
would have negative impacts on NFC swap liquidity as some entities 
(e.g., small and mid-sized banks and/or non-financial entities) reduce 
dealing to avoid registration and its related costs. This would be 
detrimental to the end-users who do not have trading relationships with 
larger, financial-entity SDs, and who rely on small to mid-sized banks 
and/or non-financial entities to access liquidity in the wider swap 
market. Additionally, even if the threshold decreased, the available 
data leaves it unclear if or to what extent the 2017 Counterparty 
Coverage statistic of 86 percent would increase for NFC swaps since 
several of those entities may already have less than $3 billion in AGNA 
of swap dealing activity. Further, many of the entities engaged in 
limited swap dealing activity for NFC swaps appear to have a 
specialized 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.\137\ Finally, entities 
that are active in the NFC swap market may utilize the existing 
physical position hedging exemption, which is more directly applicable 
to the NFC asset class than to other swaps.\138\
---------------------------------------------------------------------------

    \137\ This analysis is discussed in greater detail in the 
Proposal, and was also addressed by commenters. See supra section 
II.B.1; 83 FR 27452-57. See also CMC, IECA, and NGSA comment 
letters.
    \138\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); 83 FR 
27456-57.
---------------------------------------------------------------------------

(iii) Response to Commenters Advocating Lower Threshold
    The Commission disagrees with the few commenters that stated that 
the AGNA threshold should decrease to $3 billion.\139\
---------------------------------------------------------------------------

    \139\ See supra section II.B.3.
---------------------------------------------------------------------------

    Better Markets stated that the high regulatory coverage ratios are 
not indicative of the absolute level of swap dealing activities 
relevant to SD registration, and asserted that maintaining an $8 
billion threshold would have more than a limited detrimental effect on 
counterparty protections.\140\ The Commission notes that the statutory 
requirements do not dictate a specific methodology for assessing the de 
minimis exception, such as the focus on the absolute level of swap 
dealing suggested by Better Markets. Rather, the CEA 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, without 
stating additional requirements.\141\
---------------------------------------------------------------------------

    \140\ See supra section II.B.3; Better Markets comment letter.
    \141\ 7 U.S.C. 1a(49)(D).
---------------------------------------------------------------------------

    Additionally, as stated in the SD Definition Proposing Release and 
the SD Definition Adopting Release, the de minimis exception ``should 
be interpreted to address amounts of dealing activity that are 
sufficiently small that they do not warrant registration to address 
concerns implicated by the regulations governing swap dealers and 
security-based swap dealers. In other words, the exception should apply 
only when an entity's dealing activity is so minimal that applying 
dealer regulations to the entity would not be warranted.'' \142\ This 
decision inherently requires judgment, and for that reason the 
Commission has considered whether entities that have less than $8 
billion in swap dealing activity meet this standard. Given the nature 
of the swap market and the Commission's analysis of the data, requiring 
an entity that has less than $8 billion in swap dealing activity to 
register as an SD is not warranted because it would not appreciably 
impact the systemic risk, counterparty protection, and market 
efficiency considerations of SD regulation, but

[[Page 56676]]

would negatively impact the policy considerations underlying the de 
minimis exception by reducing the amount of swap dealing allowed under 
the exception.\143\ Thus, the Commission concludes that the $8 billion 
threshold is consistent with a key rationale behind the de minimis 
exception because it would permit ``amounts of dealing activity that 
are sufficiently small that they do not warrant registration.'' \144\ 
No individual policy factor was dispositive in the Commission's 
analysis. Rather, the Commission considered all of the policy factors 
when assessing the regulatory coverage ratios.\145\
---------------------------------------------------------------------------

    \142\ SD Definition Adopting Release, 77 FR 30626; SD Definition 
Proposing Release, 75 FR 80179.
    \143\ As discussed, the analysis conducted in connection with 
the Proposal was consistent with the analysis conducted in 
connection with the Staff Reports. See generally 83 FR 27449-58; 
Final Staff Report, supra note 19; Preliminary Staff Report, supra 
note 17.
    \144\ 77 FR 30626. See also 75 FR 80179.
    \145\ As noted in the SD Definition Adopting Release, 
``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.'' 77 FR 
30628.
---------------------------------------------------------------------------

    As noted above in section II.B.3, Better Markets also asserted that 
the statutory provision regarding the de minimis exception authorizes 
the CFTC to issue exemptive orders for individual or similarly-situated 
legal entities based upon generally applicable factors for determining 
whether such entities may be involved in de minimis swap dealing 
activities. Better Markets contends that it is unreasonable to conclude 
that Congress intended a wholesale exemption from registration that is 
divorced from the particular circumstances of any one petitioner.\146\ 
As noted, however, the CEA states that the Commission shall promulgate 
factors, through regulation, regarding the De Minimis Exception 
determination. Nothing in the statutory language prohibits the 
Commission from establishing a de minimis exception that is self-
effectuating. The Commission believes that the $8 billion threshold 
appropriately excludes entities ``whose dealing activity is 
sufficiently modest in light of the total size, concentration and other 
attributes'' of the swap market and for which SD regulation ``would not 
be expected to contribute significantly to advancing the customer 
protection, market efficiency and transparency objectives of dealer 
regulation.'' \147\ The Commission sees no basis in the record or 
requirement in the statute to treat entities differently when they are 
similarly situated in this respect.
---------------------------------------------------------------------------

    \146\ See Better Markets comment letter.
    \147\ 77 FR 30629-30.
---------------------------------------------------------------------------

    Also as noted above, with respect to the data analysis methodology, 
Better Markets and the Senators stated that the data insufficiently or 
misleadingly justifies maintaining the threshold at $8 billion.\148\ 
Better Markets also asserted that: (1) The CFTC should have provided an 
opportunity for public comment on alternative assumptions; (2) there is 
some ambiguity in the terms used in the CFTC's analysis; (3) the CFTC's 
reliance upon a 10 unique counterparty filter is based on fatally 
flawed logic; (4) the data limitations argue for better field-level and 
affiliate reporting of swaps, which would give the CFTC an informed 
basis to consider changes to a $3 billion threshold; and (5) the CFTC 
must first amend its swap data and chief compliance officer reporting 
regulations to ensure it has sufficient data to provide an informed 
basis for administrative action.\149\ Each of these comments will be 
addressed in turn.
---------------------------------------------------------------------------

    \148\ See supra section II.B.3; Better Markets and Senators 
comment letters.
    \149\ See supra section II.B.3; Better Markets comment letter.
---------------------------------------------------------------------------

    First, with respect to Better Markets' comment that the Commission 
should have provided an opportunity for public comment on alternative 
assumptions for the data analysis, the Commission notes that the 
methodology used by Commission staff to analyze data in relation to the 
de minimis threshold was first laid out in the Preliminary Staff 
Report, on which the public had the opportunity to comment. The Final 
Staff Report updated that analysis, and then the Proposal explained how 
the data related specifically to the proposal to maintain the $8 
billion threshold. As discussed in the Proposal, the updated analysis 
largely confirmed the analysis conducted for the Staff Reports. 
However, there is greater confidence in the results given the improved 
data and refined methodology. The Commission believes that the public 
has had an appropriate opportunity to comment on the data, the 
methodology, the assumptions about the data, and how the data relates 
to the maintenance of the $8 billion threshold.
    Second, the Commission cannot assess Better Markets' comment that 
the analysis discussed in the Proposal contained ambiguous terms 
because Better Markets does not state which terms were ambiguous.
    Third, the Commission disagrees with Better Markets' comment that 
``the fact that CFTC-registered swap dealers, including every major 
Wall Street bank, tend to have more than 10 counterparties is 
irrelevant.'' \150\ The Commission notes that staff used the minimum 10 
counterparty count only for analytical purposes, as a heuristic to help 
isolate those entities that appeared to be dealing. Lacking a dealing 
field in the data, for the reasons set forth above, staff selected a 
minimum of 10 counterparties as a conservative estimate to improve the 
analysis and better identify entities likely engaged in swap 
dealing.\151\
---------------------------------------------------------------------------

    \150\ See Better Markets comment letter.
    \151\ See supra section II.A; 83 FR 27449-50.
---------------------------------------------------------------------------

    The Commission also believes that the 10 counterparty filter is 
appropriate for purposes of this analysis based on its observations of 
registered SDs and unregistered entities active in the swap market. As 
noted in the Proposal, data analysis showed that 83 percent of 
registered SDs had 10 or more counterparties, without weighting the 
results.\152\ In other words, since the analysis was performed using a 
non-weighted ranking, SDs with thousands of counterparties did not bias 
the results.
---------------------------------------------------------------------------

    \152\ See 83 FR 27449.
---------------------------------------------------------------------------

    Fourth, the Commission does not believe that the data limitations 
warrant a delay in setting the threshold at $8 billion. As discussed, 
the data has improved since the analysis in the Staff Reports. Further, 
the Commission believes its analysis was appropriately conservative, 
particularly given that the volume of activity it analyzed was over-
inclusive (since hedging and other non-dealing activity could not be 
excluded), and given that its entity-level exclusions were based on an 
informed assessment of the likely activity of swap market participants.
    In the SD Definition Adopting Release, the Commission noted that 
``comprehensive information regarding the total size of the domestic 
swap market is incomplete, with more information available with respect 
to certain asset classes than others.'' \153\ In 2012, the Commission 
evaluated the appropriateness of the initial $3 billion AGNA threshold 
using three primary sources of data: (1) Index CDS; (2) the Quarterly 
Report on Bank Trading and Derivatives Activities issued by the Office 
of the Comptroller of the Currency (``OCC''); and (3) public comments 
to the 2010 SD Definition Proposing Release.\154\ At the time, 
granular, transaction-level swaps data across all swap asset classes 
was not yet available for review by the Commission. The data now 
available is significantly more detailed than what was available

[[Page 56677]]

to the Commission when the $3 billion threshold was originally 
established. The data now includes details such as counterparty pairs, 
product identifiers, transaction-level data for those market 
participants active in more asset classes than only index CDS, and 
transaction-level data (not just quarterly position data) involving 
market participants beyond banks subject to OCC reporting. In light of 
the additional, more detailed data, the Commission believes that the $8 
billion threshold continues to be appropriately calibrated to the 
policy goals of SD registration and the de minimis exception.\155\
---------------------------------------------------------------------------

    \153\ 77 FR 30632.
    \154\ Id. at 30632-33.
    \155\ Additionally, Commission staff attempted to accurately 
identify those entities that, based on their observable business 
activities, are potentially engaged in swap dealing activity versus 
those likely engaged in other kinds of transactions. See supra 
section II.A; 83 FR 27449.
---------------------------------------------------------------------------

    Fifth, for similar reasons, the Commission does not believe it 
should wait to amend its swap data and chief compliance officer 
reporting regulations before setting the threshold at $8 billion. As 
noted above, the Commission believes that it does have sufficient data 
to support this action, so it is not necessary to wait for future 
changes to the data reporting regime.\156\
---------------------------------------------------------------------------

    \156\ The Commission also notes that it recently adopted 
amendments to its chief compliance officer requirements. See Chief 
Compliance Officer Duties and Annual Report Requirements for Futures 
Commission Merchants, Swap Dealers, and Major Swap Participants, 83 
FR 43519 (Aug. 27, 2018).
---------------------------------------------------------------------------

    As noted above, Better Markets also commented that the de minimis 
threshold framework should be revised to focus on strict, observable 
measures like total notional amount or transactional activities, rather 
than a subset of such activities that potential registrants are able to 
interpret for themselves, and are not presently required by regulation 
to monitor, report, or internally track across the firm.\157\ However, 
the Commission notes that the statutory definition of ``swap dealer'' 
itself limits the scope to swap dealing activity, and therefore, using 
total notional amount would not be appropriate.
---------------------------------------------------------------------------

    \157\ See supra section II.B.3; Better Markets comment letter.
---------------------------------------------------------------------------

    As noted, the Senators stated that the data that was available for 
NFC swaps shows significantly less coverage for that asset class under 
an $8 billion threshold compared to other asset classes.\158\ In 
justifying the $8 billion proposal, the Senators commented that though 
the Proposal noted the ``unique characteristics'' of NFC swaps, the 
analysis provided indicated a series of assumptions and possibilities 
rather than concrete data. The Senators also questioned whether, given 
the lack of relevant data for NFC swaps, it is necessary to reduce the 
threshold for SDs involved with energy-related swaps. However, as 
discussed in section II.C.1.ii, the Commission believes that a reduced 
threshold would have a negative impact on NFC swap market liquidity as 
some entities may reduce dealing to avoid registration and its related 
costs. Additionally, as noted, entities active in the NFC swap market 
may utilize the existing physical position hedging exemption, which is 
more directly applicable to the NFC asset class than other swaps.\159\
---------------------------------------------------------------------------

    \158\ See supra section II.B.3; Senators comment letter. As 
noted above, for NFC swaps, approximately 86 percent of transactions 
involved at least one registered SD as a counterparty, compared to 
greater than 99 percent for IRS, CDS, FX swaps, and equity swaps. 
See supra section II.C.1.i.
    \159\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); supra 
section II.C.1.ii; 83 FR 27456-57.
---------------------------------------------------------------------------

    Further, AFR stated that, though the improved data adds weight to 
the claim that an $8 billion threshold is appropriate for some 
financial swaps, arguments against the $8 billion threshold are 
particularly strong in the case of NFC swaps.\160\ The Commission does 
not believe a lower threshold for NFC swaps would advance the policy 
goals of SD registration or the de minimis exception. As noted by the 
Commission and several commenters, the nature of the NFC swap market 
poses less systemic risk than financial swaps.\161\ Additionally, the 
Commission notes the concerns of reduced liquidity if the threshold is 
reduced for NFC swaps, including an increased concentration in the 
market, which could adversely affect end-users who rely on small and 
mid-sized SDs that do not have to register at an $8 billion threshold.
---------------------------------------------------------------------------

    \160\ See supra section II.B.3; AFR comment letter.
    \161\ See supra section II.B.1. See, e.g., IECA and NGSA comment 
letters. See also 83 FR 27456-57; Final Staff Report, supra note 19, 
at 12 (citing comment letters submitted in response to Preliminary 
Staff Report, supra note 17).
---------------------------------------------------------------------------

    Lastly, the Commission disagrees with IATP's assertion that 
promoting improved price discovery is not the true rationale for 
maintaining an $8 billion threshold, and that rather, the motivation is 
the regulatory compliance cost and burden reduction objective of 
Project KISS.\162\ The Commission has laid out above the various 
policy-related considerations that justify maintaining an $8 billion 
threshold; these relate to the regulatory goals of both SD registration 
in general and of the de minimis exception in particular. Additionally, 
these goals were discussed in the Staff Reports, well in advance of any 
comments submitted in response to Project KISS.\163\
---------------------------------------------------------------------------

    \162\ See supra section II.B.3; IATP comment letter.
    \163\ See Final Staff Report, supra note 19; Preliminary Staff 
Report, supra note 17.
---------------------------------------------------------------------------

2. Rationale for Not Increasing AGNA Threshold
    Although several commenters suggested a higher threshold, the 
Commission is declining to increase the AGNA threshold from the current 
$8 billion level. As discussed in the Proposal,\164\ at a $100 billion 
threshold: (1) 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); \165\ (2) 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); \166\ and (3) 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).\167\
---------------------------------------------------------------------------

    \164\ See 83 FR 27454-56.
    \165\ The decrease would be lower at thresholds of $20 billion 
and $50 billion, at 0.01 percentage points and 0.04 percentage 
points, respectively.
    \166\ The decrease would be lower at thresholds of $20 billion 
and $50 billion, at 0.05 percentage points and 0.42 percentage 
points, respectively.
    \167\ The decrease would be lower at thresholds of $20 billion 
and $50 billion, at 2.80 percentage points and 5.71 percentage 
points, respectively.
---------------------------------------------------------------------------

    As the Commission and commenters have stated, 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 adverse effect on the systemic risk and 
market efficiency policy considerations of SD regulation.\168\ 
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 Commission is of the 
view that the decrease in Estimated Counterparty Coverage indicates 
that fewer entities would be transacting with registered SDs, reducing 
the counterparty protection benefits of SD regulation if the AGNA 
threshold increased from $8 billion to $20 billion, $50 billion, or 
$100 billion.\169\ The

[[Page 56678]]

Commission also notes that increasing the threshold could result in 
changes in market behavior that could lead to the regulatory coverage 
decreasing more than the analysis indicated.
---------------------------------------------------------------------------

    \168\ See supra section II.B.2; 83 FR 27455.
    \169\ As noted, the decrease in Estimated Counterparty Coverage 
would be 2.80 percentage points, 5.71 percentage points, 7.61 
percentage points, at thresholds of $20 billion, $50 billion, and 
$100 billion, respectively.
---------------------------------------------------------------------------

    Further, maintaining the status quo signals long-term stability of 
the de minimis threshold, and should provide for the efficient 
application of the SD Definition, as it allows for long-term planning 
based on the current AGNA threshold.\170\
---------------------------------------------------------------------------

    \170\ See 83 FR 27456-57.
---------------------------------------------------------------------------

3. Response to Other Comments
    With respect to BDA's comment regarding permitting month-end only 
testing for the de minimis threshold, the Commission notes that several 
commenters indicated that the market has adapted to the current 
requirements and that changes would not be beneficial.\171\ In 
particular, the Commission agrees with commenters that the current test 
is relatively simple to administer, and the 12-month testing period 
helps to smooth out any short-term variations in activity. The 
Commission does not believe that allowing month-end only testing would 
reduce burdens since persons should already have systems in place to 
regularly track the level of their swap dealing activity. Therefore, 
the Commission is not adopting this alternative. Additionally, in 
response to BDA, the Commission notes that for purposes of the $8 
billion threshold calculation, an entity must count activity that took 
place in the immediately preceding 12 months.
---------------------------------------------------------------------------

    \171\ See supra section II.B.4.i. Potentially, month-end only 
testing could marginally encourage competition because newly-
established swap dealing businesses (as contrasted to the existing 
businesses that have adapted to current requirements) could set up 
only month-end testing as opposed to regular testing. However, the 
Commission believes that maintaining the current requirements is 
appropriate even in view of any marginal encouragement of 
competition that could result from the suggested change.
---------------------------------------------------------------------------

    Similarly, in response to the commenters that recommended 
alternatives to the single AGNA threshold or other calculation 
changes,\172\ the Commission points out that systems and processes have 
been established for the current requirements,\173\ and therefore the 
Commission is not adopting the proposed adjustments at this time. The 
Commission may take subsequent action or conduct further study with 
respect to alternative approaches to the single AGNA threshold, 
including moving toward a risk-based SD registration metric in the 
future. The Commission would expect that a change could entail costs as 
market participants adjust their de minimis threshold calculation 
processes.
---------------------------------------------------------------------------

    \172\ See supra sections II.B.4.ii and II.B.4.iii.
    \173\ See, e.g., supra sections II.B.4.i and II.B.4.ii.
---------------------------------------------------------------------------

    Additionally, any modification to the special entity threshold is 
outside of the scope of the Proposal,\174\ but as with other 
suggestions, the Commission may consider this in the future. Lastly, 
with respect to comments asking that the Commission address cross-
border issues,\175\ this issue is also outside of the scope of this 
rulemaking.
---------------------------------------------------------------------------

    \174\ See supra section II.B.4.iii; supra note 12; 83 FR 27445 
n.14.
    \175\ See supra section II.B.4.iv.
---------------------------------------------------------------------------

III. Proposed Rule Amendments Not Adopted

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

1. Proposal
    The Commission proposed adding an IDI loan-related factor in the De 
Minimis Exception (the ``IDI De Minimis Provision'') to address 
concerns that there are circumstances where swaps not covered by the 
IDI loan-related swap exclusion in paragraph (5) of the SD Definition 
(the ``IDI Swap Dealing Exclusion'') should be excluded from the de 
minimis calculation. Specifically, the Commission proposed to add 
specific characteristics 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 proposed IDI De Minimis Provision would have 
encompassed a broader scope of loan-related swaps than the IDI Swap 
Dealing Exclusion. The proposed IDI De Minimis Provision included: (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; and (4) an elimination of the 
notional amount cap. The IDI could exclude qualifying swaps from the de 
minimis calculation pursuant to the IDI De Minimis Provision regardless 
of whether the swaps would qualify for the IDI Swap Dealing Exclusion.
2. Summary of Comments
    Almost all commenters that addressed the IDI De Minimis Provision 
expressed general support for the proposed amendment.\176\ Commenters 
often compared the IDI De Minimis Provision to the IDI Swap Dealing 
Exclusion. In that regard, commenters generally stated that the IDI De 
Minimis Provision better aligns the regulatory framework with the risk 
mitigation demands of bank customers.\177\
---------------------------------------------------------------------------

    \176\ See ABA, BDA, Capital One, CDEU, Citizens, Frost Bank, 
IIB, ISDA/SIFMA, JBA, M&T, and Regions comment letters.
    \177\ See Capital One, Frost Bank, M&T, Regions comment letters.
---------------------------------------------------------------------------

    Commenters generally supported proposed new paragraph 
(4)(i)(C)(1),\178\ which provided that a swap must be entered into no 
earlier than 90 days before execution of the loan agreement, or before 
transfer of principal to the customer, unless an executed commitment or 
forward agreement for the applicable loan exists. In that event, the 
90-day restriction does not apply. In comparison, the IDI Swap Dealing 
Exclusion in paragraph (5) of the SD Definition requires that a 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).\179\ On the other hand, three commenters 
recommended removing the 90-day restriction because it would be 
detrimental to the IDIs and/or borrowers.\180\ Additionally, two 
commenters suggested revisions to the ``executed commitment'' or 
``forward agreement'' exception to the 90-day restriction.\181\
---------------------------------------------------------------------------

    \178\ See Capital One, Citizens, Frost Bank, M&T, and Regions 
comment letters.
    \179\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(A).
    \180\ See BDA, CDEU, and ISDA/SFIMA comment letters.
    \181\ See Capital One and Frost Bank comment letters.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(i)(C)(2) stated that for purposes of the 
IDI De Minimis Provision, a swap is ``in connection with'' a loan if: 
(1) The rate, asset, liability or other term underlying such swap is, 
or is related to, a financial term of such loan; or (2) if such swap is 
required as a condition of the loan, either under the IDI'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. Two commenters requested clarification 
regarding the proposed ``condition of the loan'' language.\182\
---------------------------------------------------------------------------

    \182\ See ABA and Regions comment letters.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(i)(C)(3) stated that the termination 
date of the swap cannot extend beyond termination of the loan. A few 
commenters stated that circumstances can be anticipated at the time of 
loan origination that would support permitting the termination date of 
the swap to extend beyond

[[Page 56679]]

termination of the loan.\183\ Additionally, in response to a question 
in the Proposal, a few commenters stated that in order to qualify for 
the IDI De Minimis Provision, IDIs should not be required to terminate 
loan-related swaps if a loan is called, put, accelerated, or goes into 
default before scheduled termination.\184\
---------------------------------------------------------------------------

    \183\ See ABA, BDA, CDEU, Citizens, and M&T comment letters.
    \184\ See ABA, BDA, Capital One, CDEU, IIB, and ISDA/SIFMA 
comment letters.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(i)(C)(4)(i) required 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, and 
proposed new paragraph (4)(i)(C)(4)(ii) stated 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. A few commenters stated that the five percent 
participation requirement should be eliminated from the IDI De Minimis 
Provision,\185\ while two commenters generally supported the five 
percent requirement.\186\
---------------------------------------------------------------------------

    \185\ See ABA, BDA, Citizens, and ISDA/SIFMA comment letters.
    \186\ See Capital One and M&T comment letters.
---------------------------------------------------------------------------

    The proposed IDI De Minimis Provision did not include the 
requirement in the IDI Swap Dealing Exclusion that the AGNA of swaps 
entered into in connection with the loan not exceed the principal 
amount outstanding,\187\ and two commenters agreed that there are 
circumstances where the AGNA of loan-related swaps can exceed the 
outstanding principal amount of the loan.\188\
---------------------------------------------------------------------------

    \187\ 17 CFR 1.3, Swap dealer, paragraph (5)(i)(E). However, as 
discussed, pursuant to 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. See also 83 FR 27461.
    \188\ See Capital One and M&T comment letters.
---------------------------------------------------------------------------

    In response to a question in the Proposal, three commenters stated 
that the CFTC should not impose any prior notice requirement or other 
conditions on the ability of IDIs to rely on the proposed IDI De 
Minimis Provision.\189\ In response to another question in the 
Proposal, three commenters stated that there should not be a 
requirement that swap confirmations reference a specific loan because 
doing so would add operational complexity for little or no 
benefit.\190\
---------------------------------------------------------------------------

    \189\ See ABA, Capital One, and M&T comment letters.
    \190\ See ABA, BDA, and Capital One comment letters.
---------------------------------------------------------------------------

    Two commenters discussed whether the IDI De Minimis Provision could 
be promulgated without a joint rulemaking.\191\ ABA stated that the 
Commission is not required to promulgate the IDI De Minimis Provision 
through joint rulemaking with the SEC.\192\ However, Better Markets 
asserted that the CFTC's position that a ``joint rulemaking is not 
required with respect to changes to the de minimis exception-related 
factors'' is invalid and ``would impermissibly enable the CFTC to 
conduct an end-run around the statutory joint rulemaking requirement.'' 
In particular, Better Markets stated that language potentially 
permitting unilateral action on the de minimis threshold itself does 
not permit unilateral regulatory actions affecting core definitional 
issues that must be accomplished through joint rulemaking.\193\
---------------------------------------------------------------------------

    \191\ See ABA and Better Markets comment letter.
    \192\ See ABA comment letter.
    \193\ See Better Markets comment letter.
---------------------------------------------------------------------------

3. Commission Response
    The Commission has determined not to adopt the IDI De Minimis 
Provision at this time. The Commission continues to consider the issues 
raised by commenters. For example, the various contexts in which IDIs 
enter into swaps with their loan customers, and the relation between 
those swaps and the larger swap market, may merit further 
consideration.

B. Swaps Entered Into to Hedge Financial or Physical Positions

1. Proposal
    The Commission proposed adding a provision in new paragraph 
(4)(i)(D) of the De Minimis Exception, to include as a factor whether a 
swap was entered into primarily for the purpose of hedging and met 
certain related conditions (the ``Hedging De Minimis Provision'').\194\ 
As proposed, to qualify for the Hedging De Minimis Provision, the 
primary purpose for the swap would need to be to reduce or otherwise 
mitigate one or more specific risks to which the person is subject. 
Proposed paragraph (4)(i)(D)(2) provided that the person entering into 
the hedging swap could not be the price maker of the hedging swap and 
receive or collect a bid/ask spread, fee, or other commission for 
entering into the hedging swap (the ``price maker condition''). In 
addition, the proposed Hedging De Minimis Provision included in 
paragraphs (D)(3) through (D)(5) the following conditions that are 
similar to conditions in the physical hedging exclusion in paragraph 
(6)(iii) of the SD Definition: (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 must not be entered 
into in connection with activity structured to evade designation as an 
SD.
---------------------------------------------------------------------------

    \194\ See 83 FR 27462-63.
---------------------------------------------------------------------------

2. Summary of Comments
    Most commenters supported including an express hedging exception 
that would clarify which physical and financial hedging swaps do not 
need to be included in the AGNA threshold calculation.\195\ These 
commenters agreed with the Commission that there is currently some 
uncertainty and confusion among market participants regarding this 
determination. However, many of these commenters raised issues with the 
particular conditions identified in the proposed Hedging De Minimis 
Provision, and two other commenters objected to inclusion of the 
Hedging De Minimis Provision.\196\ Among other issues, the two 
commenters viewed the Hedging De Minimis Provision as a major expansion 
of the De Minimis Exception.
---------------------------------------------------------------------------

    \195\ See ABA, AGA, AFEX/GPS, BDA, Capital One, CDEU, COPE, CMC, 
EEI/EPSA, Frost Bank, FIA, IIB, IECA, ISDA/SIFMA, JBA, NRECA/APPA, 
NGSA, Virtu, and Western Union comment letters.
    \196\ See AFR and Better Markets comment letters.
---------------------------------------------------------------------------

    Generally, commenters supported adding the Hedging De Minimis 
Provision to the De Minimis Exception to provide more certainty and/or 
clarity regarding the treatment of hedging activity.\197\ On the other 
hand, AFR and Better Markets stated that excepting hedges of swap 
dealing positions from the de minimis threshold could exclude swaps 
that appear to be hedges, but are actually dealing swaps.\198\ 
Furthermore, Better Markets asserted that a hedge of client facing swap 
is ``inextricably'' tied to accommodating customer demands.\199\
---------------------------------------------------------------------------

    \197\ See ABA, AGA, BDA, Capital One, Citizens, CDEU, EEI/EPSA, 
Frost Bank, FIA, NGSA, NRECA/APPA, Virtu, and Western Union comment 
letters.
    \198\ See AFR and Better Markets comment letters.
    \199\ See Better Markets comment letter.
---------------------------------------------------------------------------

    Several commenters noted that the price maker condition included in 
the proposed Hedging De Minimis Provision could be viewed as more

[[Page 56680]]

limiting than the existing physical swap hedging exclusion.\200\ Many 
commenters expressed concern that the proposed condition would be 
overly prescriptive, ambiguous, and/or could inadvertently require 
certain hedging activity to be treated as swap dealing activity.\201\ 
In particular, commenters asked that the bid/ask spread limitation be 
deleted or clarified.\202\ Conversely, two commenters expressed some 
support for this condition as proposed.\203\
---------------------------------------------------------------------------

    \200\ See CEWG, CMC, FIA, and IECA comment letters.
    \201\ See CDEU, EEI/EPSA, IECA, and Western Union comment 
letters.
    \202\ See ABA, BDA, EEI/EPSA, IECA, IIB, NRECA/APPA, and Western 
Union comment letters.
    \203\ See COPE and NRECA/APPA comment letters.
---------------------------------------------------------------------------

    ISDA/SIFMA was of the view that the requirement that the primary 
purpose for entering into the swap must be to reduce or otherwise 
mitigate one or more ``specific'' risks is unreasonably 
restrictive.\204\ ISDA/SIFMA suggested that the Commission should 
remove the term ``specific'' from the regulatory text to better achieve 
the Commission's policy objective of encouraging greater use of swaps 
to hedge risks. On the other hand, NRECA/APPA noted that the specific, 
but non-exclusive, risks identified in paragraph (4)(i)(D)(1) are 
consistent with the types of commercial risks that an end-user would 
hedge.\205\
---------------------------------------------------------------------------

    \204\ See ISDA/SIFMA comment letter.
    \205\ See NRECA/APPA comment letter.
---------------------------------------------------------------------------

    AFR and Better Markets objected to the Hedging De Minimis 
Provision, stating that it could allow even large dealers to escape 
registration, and that the exclusion of anticipatory hedges allows too 
much discretion to institutional judgment.\206\
---------------------------------------------------------------------------

    \206\ See AFR and Better Markets comment letters.
---------------------------------------------------------------------------

    Better Markets expressed concern that the Hedging De Minimis 
Provision promotes unregulated swap dealing and is therefore ``not a 
valid statutory objective.'' Furthermore, Better Markets stated that 
the Commission does not need to provide clarity for the existing 
hedging exemption because the existing standard of using facts and 
circumstances to distinguish dealing swaps is a ``well-settled 
framework.'' \207\ Better Markets also asserted that the Commission 
misinterpreted its prior statements about the use of swaps to hedge 
dealing positions. However, in doing so, Better Markets cited to 
language in the joint SD Definition Adopting Release that addressed the 
definition of ``security-based swap dealer,'' not ``swap dealer.'' 
\208\
---------------------------------------------------------------------------

    \207\ See Better Markets comment letter. Better Markets noted 
that, in October 2012, DSIO addressed whether hedging activity is 
included in calculating the de minimis amount when it stated that 
``a person must consider the swap in light of all other relevant 
facts and circumstances to determine whether such hedging activity 
is swap dealing activity. . . .'' See Frequently Asked Questions 
(FAQ)--[DSIO] Responds to FAQs About Swap Entities (Oct. 12, 2012) 
(``DSIO FAQ Guidance''), available at https://www.cftc.gov/idc/groups/public/@newsroom/documents/file/swapentities_faq_final.pdf.
    \208\ 77 FR 30619 n.280 (stating that security-based swaps 
activity for hedging purposes ``unrelated to activities that 
constitute dealing'' would not be expected to lead the person to be 
a security-based swap dealer).
---------------------------------------------------------------------------

    AFR and Better Markets also asserted that the Hedging De Minimis 
Provision should not be included in the De Minimis Exception because 
enforcement of the conditions would be impractical.\209\
---------------------------------------------------------------------------

    \209\ See AFR and Better Markets comment letters. AFR described 
the potential need for a swap-by-swap analysis and the potential for 
disputes regarding the proposed anti-evasion provision.
---------------------------------------------------------------------------

3. Commission Response
    The comments generally confirmed that nuanced facts and 
circumstances may be relevant to determining whether a swap that hedges 
financial risk, but also has dealing characteristics or is connected to 
dealing activities, should be counted toward the AGNA threshold. 
However, the comments also raised specific implementation and 
compliance issues. For these reasons, the Commission has determined not 
to adopt the Hedging De Minimis Provision at this time.
    The Commission confirms that the ``relevant facts and 
circumstances'' test established in the SD Definition Adopting Release 
and further discussed in the DSIO FAQ Guidance \210\ continues to be in 
effect. In doing so, the Commission emphasizes that market participants 
should continue to evaluate such swaps without consideration of the 
proposed Hedging De Minimis Provision.
---------------------------------------------------------------------------

    \210\ See supra note 207.
---------------------------------------------------------------------------

C. Swaps Resulting From Multilateral Portfolio Compression Exercises

1. Proposal
    The Commission proposed new paragraph (4)(i)(E) of the De Minimis 
Exception, which would add as a factor in the de minimis calculation 
whether a swap results from multilateral portfolio compression 
exercises (``MPCE De Minimis Provision''). Specifically, the Proposal 
stated that for purposes of determining whether a person has exceeded 
the AGNA threshold set forth in paragraph (4)(i)(A), the person may 
exclude swaps that result from multilateral portfolio compression 
exercises, as defined in Sec.  23.500 of Commission regulations, to the 
extent the person does not enter into the multilateral portfolio 
compression exercise in connection with activity structured to evade 
designation as an SD. The Proposal was consistent with DSIO no-action 
relief issued on December 21, 2012 (``Staff Letter 12-62'').\211\
---------------------------------------------------------------------------

    \211\ CFTC Staff Letter No. 12-62, supra note 47.
---------------------------------------------------------------------------

2. Summary of Comments
    Most commenters addressing this aspect of the Proposal supported 
excepting from the de minimis threshold swaps that result from 
multilateral portfolio compression exercises,\212\ stating that 
multilateral portfolio compression: (1) Advances the Commission's 
policy goals of reducing counterparty credit risks by allowing swap 
market participants with large portfolios to net down the size and 
number of swaps among them, thus lowering the AGNA of outstanding 
swaps; \213\ and (2) does not involve dealing activity, but rather 
allows market participants to reduce their risk without implicating any 
of the other considerations related to SD regulation.\214\
---------------------------------------------------------------------------

    \212\ See ABA, IIB, ISDA/SIFMA, JBA, and NEX comment letters.
    \213\ See ABA, ISDA/SIFMA, and NEX comment letters.
    \214\ See IIB comment letter.
---------------------------------------------------------------------------

    Several commenters also stated that, given the policy-related 
similarities between bilateral and multilateral portfolio compression, 
the Commission should also exclude from counting towards the De Minimis 
Exception swaps that result from bilateral portfolio compression 
exercises.\215\ One commenter asserted that reliance on the 
``multilateral portfolio compression exercise'' definition in Sec.  
23.500(h) of Commission regulations may be too limiting.\216\
---------------------------------------------------------------------------

    \215\ See ABA, IIB, ISDA/SIFMA, and JBA comment letters.
    \216\ See IIB comment letter.
---------------------------------------------------------------------------

    On the other hand, AFR and IATP expressed concerns with the MPCE De 
Minimis Provision.\217\ AFR stated that the definition of portfolio 
compression appears overbroad since it goes beyond the termination of 
fully offsetting swaps to include any exercise which would result in 
the reduction of current market risks for a set of swaps, even if the 
exercise might actually increase credit exposure or market risk under 
stressed market conditions.\218\ IATP noted that entities should be 
required to document and report the results of multilateral compression 
exercises to qualify for the exception. Additionally, IATP stated

[[Page 56681]]

that any de minimis exception-related exemption must be in the public 
interest, and asked questions regarding the legal authority for the 
Commission to propose the amendments included in the NPRM.\219\
---------------------------------------------------------------------------

    \217\ See AFR and IATP comment letters.
    \218\ See AFR comment letter.
    \219\ See IATP comment letter.
---------------------------------------------------------------------------

3. Commission Response
    The Commission has determined not to adopt the MPCE De Minimis 
Provision at this time. The Commission believes that further action on 
this provision may require additional consideration of the various 
relevant issues.\220\
---------------------------------------------------------------------------

    \220\ The Commission notes that Staff Letter 12-62 is not 
affected by the Commission's determination not to adopt the MPCE De 
Minimis Provision at this time.
---------------------------------------------------------------------------

D. Methodology for Calculating Notional Amounts

1. Proposal
    Given the variety of potential 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., certain NFC swaps), the Commission proposed new paragraph 
(4)(vii) of the De Minimis Exception, 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 threshold. The proposed rule required 
that such methodology be economically reasonable and analytically 
supported, and that any such determination be posted on the CFTC 
website. Further, to ensure timely clarity to market participants, the 
Commission proposed to delegate to the Director of DSIO the authority 
to make such determinations.
2. Summary of Comments
    Several commenters generally supported Commission efforts to 
provide certainty and clarity regarding calculation of notional 
amounts.\221\ Some of these commenters supported providing the 
Commission with the explicit authority to approve or establish 
methodologies for calculating notional amount.\222\ Citizens 
specifically noted that the lack of clarity regarding notional amount 
interpretations has persisted for too long, and what little guidance 
that exists does not provide the certainty that market participants 
need in order to run their businesses efficiently.\223\ Further, FIA 
stated that the DSIO FAQ left open a multitude of questions for market 
participants attempting to calculate notional amount.\224\ 
Additionally, NGSA requested that the CFTC provide a safe harbor for 
reliance on a notional amount calculation methodology that is based on 
standard industry practice unless and until CFTC publishes notice that 
invalidates such a methodology or prescribes a different 
methodology.\225\
---------------------------------------------------------------------------

    \221\ See ABA, Citizens, CEWG, CMC, EEI/EPSA, FIA, Frost Bank, 
IIB, NGSA, and Western Union comment letters.
    \222\ See Citizens, EEI/EPSA, FIA, Frost Bank, and Western Union 
comment letters.
    \223\ See Citizens comment letter.
    \224\ See FIA comment letter.
    \225\ See NGSA comment letter.
---------------------------------------------------------------------------

    NRECA/APPA suggested that the Commission should not determine the 
methodology for calculating notional amounts, stating that the word 
``determine'' in proposed new paragraph (4)(vii) of the De Minimis 
Exception should be changed to ``provide guidance with respect to.'' 
\226\
---------------------------------------------------------------------------

    \226\ See NRECA/APPA comment letter.
---------------------------------------------------------------------------

    Several commenters did not support the proposal to delegate to the 
Director of DSIO the authority to make notional calculation 
determinations.\227\ Specifically, some commenters stated that the 
Commission, rather than the Director of DSIO, should determine the 
methodology for calculating notional amounts because the methodology 
used to determine the AGNA is a critical component of the de minimis 
threshold, as it impacts which entities will be designated as SDs.\228\ 
Commenters also noted that the delegation, as proposed, would permit 
Commission staff to make substantive, and potentially critical, policy 
determinations in an informal process,\229\ and that Commissioners 
should not remove themselves from that decision-making process, 
particularly given that one of the challenges related to NFC swaps was 
lack of a standard for calculation of notional amount.\230\
---------------------------------------------------------------------------

    \227\ See AGA, AFR, COPE, EEI/EPSA, FIA, IATP, ISDA/SIFMA, JBA, 
NRECA/APPA, and Senators comment letters.
    \228\ See AFR, AGA, and FIA comment letters.
    \229\ See COPE comment letter.
    \230\ See Senators comment letter.
---------------------------------------------------------------------------

    On the other hand, several commenters supported the proposal to 
delegate to the Director of DSIO the authority to make notional 
calculation determinations.\231\ However, many of these commenters 
supported delegation only if determinations were subject to a public 
notice and comment process.\232\ A few commenters noted that if the 
Commission believes that delegation is proper, it should add 
safeguards, such as an appeal to the Commission, coupled with a stay of 
any contested staff determination, pending Commission action.\233\ One 
commenter suggested that DSIO should be granted authority to respond to 
individual dealer requests for guidance on how the notional amount 
would be calculated for a given transaction, and dealers should be able 
to rely on any response from DSIO.\234\
---------------------------------------------------------------------------

    \231\ See Citizens, CDEU, CEWG, CMC, Frost Bank, IIB, NGSA, and 
Western Union comment letters.
    \232\ See CDEU, CEWG, CMC, IIB, and NGSA comment letters.
    \233\ See COPE, EEI/EPSA, and IECA comment letters.
    \234\ See BDA comment letter.
---------------------------------------------------------------------------

    Several commenters stated that notional calculation methodologies 
should be subject to a formal public notice and comment process.\235\ A 
few commenters also noted that notional calculation methodologies 
should be evaluated pursuant to a cost-benefit analysis.\236\ A few 
commenters suggested that notional calculations be guided by 
international standards, industry group comment letters, and the DSIO 
FAQ Guidance.\237\
---------------------------------------------------------------------------

    \235\ See ABA, AGA, BDA, CDEU, CMC, EEI/EPSA, FIA, IECA, IIB, 
ISDA/SIFMA, NRECA/APPA, and NGSA comment letters.
    \236\ See AGA, FIA, and ISDA/SIFMA comment letters.
    \237\ See ABA, EEI/EPSA, NRECA/APPA, and NGSA comment letters.
---------------------------------------------------------------------------

    Commenters also provided feedback regarding specific notional 
amount calculation methodologies.\238\
---------------------------------------------------------------------------

    \238\ See BDA, CEWG, CMC, EEI/EPSA, and IECA comment letters.
---------------------------------------------------------------------------

3. Commission Response
    The comments raised a number of issues with the proposed authority 
and delegation regarding the methodology for calculating notional 
amounts. Given the nature and significance of these issues, the 
Commission has determined to not adopt this provision at this time.

IV. Other Matters Discussed in NPRM

    In the NPRM, the Commission did not propose, but sought comment on 
the following additional potential changes to the De Minimis Exception: 
(1) Adding a minimum dealing counterparty count threshold and/or a 
minimum dealing transaction count threshold; (2) establishing as a 
factor in the de minimis determination whether a given swap was 
exchange-traded and/or cleared; and (3) establishing as a factor in the 
de minimis determination whether a given swap is a non-deliverable 
forward transaction. The Commission did not propose rule text for any 
of these topics.
    At this time, the Commission is not adopting final rules regarding 
any of these three potential changes. The Commission may take 
subsequent action

[[Page 56682]]

or conduct further study with respect to any of these issues. The 
Commission recognizes the public interest in moving forward with the 
aspects of the NPRM that it is adopting in this release, rather than 
delaying action on the NPRM as a whole in order to further consider any 
of these additional topics.

A. Dealing Counterparty Count and Dealing Transaction Count Thresholds

    The Commission sought 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. Although a few 
commenters expressed general support for adding a dealing counterparty 
or dealing transaction count threshold to the De Minimis 
Exception,\239\ most commenters did not support the idea.\240\
---------------------------------------------------------------------------

    \239\ See generally BDA, IIB, and JBA comment letters.
    \240\ See generally Citizens, CEWG, EEI/EPSA, IATP, IECA, ISDA/
SIFMA, and NGSA comment letters.
---------------------------------------------------------------------------

B. Exception for Exchange-Traded and/or Cleared Swaps

    The Commission sought comment on whether an exception from the de 
minimis calculation for swaps that are executed on an exchange (e.g., a 
SEF or designated contract market (``DCM'')) and/or cleared by a 
derivatives clearing organization is appropriate. Most commenters 
supported including an exception for exchange-traded and/or cleared 
trades,\241\ though two commenters were opposed to the idea.\242\
---------------------------------------------------------------------------

    \241\ See generally 360 Trading, ABA, BDA, Daiwa, Cboe SEF, 
Citizens, CME/ICE, EEI/EPSA, FXPA, Frost Bank, FIA, IIB, IECA, JBA, 
MFA, Optiver, TR SEF, Virtu, and XTX comment letters.
    \242\ See generally AFR and Better Markets comment letters.
---------------------------------------------------------------------------

C. Exception for Non-Deliverable Forwards

    The Commission sought comment on whether an exception from the de 
minimis calculation for non-deliverable forwards is appropriate. Most 
commenters generally supported including an exception for NDFs,\243\ 
though one commenter was opposed to the idea.\244\
---------------------------------------------------------------------------

    \243\ See generally 360 Trading, ABA, AFEX/GPS, AGC, BDA, 
Capital One, Cboe SEF, Citizens, CDEU, CMC, Covington, FXPA, FIA, 
IIB, IECA, ISDA/SIFMA, JBA, Northern Trust, Optiver, Regions, State 
Street, SVB, TR SEF, Virtu, Western Union, and XTX comment letters.
    \244\ See Better Markets comment letter.
---------------------------------------------------------------------------

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities.\245\ As 
noted in the Proposal, the regulations adopted herein only affect 
certain entities that are close to the AGNA threshold in the De Minimis 
Exception. For example, the regulations would affect entities with a 
relevant AGNA of swap dealing activity between $3 billion and $8 
billion. Moreover, they would affect IDIs that enter into loan-related 
swaps. That is, the regulations are 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. Additionally, the Commission 
received no comments on the Proposal's RFA discussion. Therefore, the 
regulations being adopted herein will not have a significant economic 
impact on a substantial number of small entities, as defined in the 
RFA.
---------------------------------------------------------------------------

    \245\ 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 these regulations will not 
have a significant economic impact on a substantial number of small 
entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1955 (``PRA'') \246\ 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. As discussed in the Proposal, the 
final regulations will not impose any new recordkeeping or information 
collection requirements, or other collections of information that 
require approval of OMB under the PRA.
---------------------------------------------------------------------------

    \246\ 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 De Minimis Exception.\247\
---------------------------------------------------------------------------

    \247\ 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.
---------------------------------------------------------------------------

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.\248\ 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.
---------------------------------------------------------------------------

    \248\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    In this adopting release, the Commission is amending the De Minimis 
Exception by setting the AGNA threshold at $8 billion in swap dealing 
activity. The Proposal requested public comment on the costs and 
benefits of the proposed regulations, and specifically invited comments 
on: (1) The costs and benefits to market participants associated with 
each change; (2) the direct costs associated with SD registration and 
compliance; (3) the indirect benefits to registering as an SD; (4) the 
indirect costs to becoming a registered SD; (5) whether 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; (6) the costs and benefits to the public 
associated with each proposed change; (7) how each proposed change 
affects each of the Section 15(a) factors; (8) whether the Commission 
identified all of the relevant categories of costs and benefits in its 
preliminary consideration of the costs and benefits; and (9) whether 
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.
    As part of this cost-benefit consideration, the Commission will 
discuss the costs and benefits of the adopted change and analyze the 
amendment as it relates to each of the

[[Page 56683]]

15(a) factors. The Commission notes that this consideration of costs 
and benefits is based on the understanding that the swap market 
functions internationally, with many transactions involving U.S. firms 
occurring across different international jurisdictions, with some 
prospective Commission registrants organized outside the U.S., and 
other entities operating both within and outside the U.S., and commonly 
following substantially similar business practices wherever located. 
Where the Commission does not specifically refer to matters of 
location, the discussion below of the costs and benefits of the 
regulations being adopted refers to their effects on all subject swaps 
activity, whether by virtue of the activity's physical location in the 
United States or by virtue of the activity's connection with or effect 
on U.S. commerce under CEA section 2(i).
    As discussed above, the De Minimis Exception 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 amending the De Minimis Exception to set the AGNA 
threshold at the current $8 billion phase-in level.
    There are market-wide costs and benefits associated with setting 
the AGNA threshold at $8 billion. In addition, setting the threshold at 
$8 billion would 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 relevant no-action relief, to the extent such 
relief is being relied upon. As the Commission is of the belief that 
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 considers the effects of that relief.
1. General Costs and Benefits
    There are several policy objectives underlying SD regulation and 
the de minimis exception to SD registration, which have associated with 
them general costs and benefits depending on the level of the AGNA 
threshold. As discussed above in section I.A.3, costs and benefits may 
be associated with the primary policy objectives of SD regulation, 
which include reducing systemic risk, increasing counterparty 
protections, and increasing market efficiency, orderliness, and 
transparency.\249\ The Commission also considers the costs and benefits 
associated with the 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.\250\
---------------------------------------------------------------------------

    \249\ See also SD Definition Adopting Release, 77 FR 30628-30, 
30707-08. To achieve these policy objectives, registered SDs are 
subject to a broad range of requirements which may carry their own 
costs and benefits. These requirements include, 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. However, costs associated with regulatory 
requirements applicable to SDs result from other rulemakings and are 
outside the scope of rulemakings related to the De Minimis 
Exception.
    \250\ See id.
---------------------------------------------------------------------------

    As noted by the Commission and a few commenters, generally, the 
lower the 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.\251\ However, the 
Commission and most commenters recognize that a lower threshold could 
have offsetting costs for the market. For example, it is likely that a 
lower threshold would discourage new participants from entering into 
the swap market, and reduce the amount of dealing activity in which 
swap market participants engage in connection with their other 
businesses.\252\
---------------------------------------------------------------------------

    \251\ See supra sections I.A.3 and II.B.3; 83 FR 27471-72; 77 FR 
30628-30, 30703, 30707.
    \252\ See supra sections I.A.3, II.B.1, and II.C.1; 83 FR 27448-
58, 27471-72; 77 FR 30628-30, 30703, 30707.
---------------------------------------------------------------------------

    On the other hand, and as discussed further below, the higher the 
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. However, a 
higher AGNA threshold could potentially decrease the number of 
registered SDs, which could have a negative impact on achieving the 
general benefits associated with the policy objectives of SD 
regulation. This might adversely affect the swap market to some 
extent.\253\
---------------------------------------------------------------------------

    \253\ See supra sections II.B.2 and II.C.2; 83 FR at 27454-56.
---------------------------------------------------------------------------

(i) Maintaining the $8 Billion Threshold
    The comments received for this proposed amendment were generally 
supportive.\254\ As discussed in section II.C.1.i, at the $8 billion 
threshold the 2017 Transaction Coverage and 2017 AGNA Coverage ratios 
indicate that nearly all swaps were covered by SD regulation, generally 
giving rise to the benefits of SD regulation discussed above. 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. Further, 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 the Proposal, the 6,440 entities entered into 77,333 
transactions, representing approximately 1.7 percent of the overall 
number of transactions during the review period.\255\ 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.
---------------------------------------------------------------------------

    \254\ See supra section II.B.1. See also ABA, AGA, AFEX/GPS, 
BDA, Capital One, Cboe SEF, Citizens, CDEU, COPE, CEWG, CMC, EEI/
EPSA, FXPA, Frost Bank, FIA, IIB, IECA, ISDA/SIFMA, JBA, M&T, NCFC, 
NRECA/APPA, NGSA, Regions, SVB, Virtu, Western Union, and XTX 
comment letters.
    \255\ 83 FR 27451.
---------------------------------------------------------------------------

    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 benefits associated with the 
policy objectives of SD registration and the de minimis

[[Page 56684]]

exception are being advanced at the current $8 billion threshold. 
Additionally, setting the AGNA at $8 billion would foster efficiency 
and potentially reduce costs by allowing persons to continue to use 
existing calculation procedures and business processes that are geared 
towards the $8 billion threshold.
    Commenters generally agreed with the Commission's position. For 
example, many commenters noted that the current $8 billion threshold 
already subjects the vast majority of transactions to SD regulation, or 
that a reduced threshold would not capture significant additional 
dealing activity.\256\ Some commenters stated that the nature of the 
swaps activity entered into by certain entities poses less systemic 
risk (e.g., commercial banks that have swap dealing activity below $8 
billion, and entities that primarily enter into NFC swaps).\257\
---------------------------------------------------------------------------

    \256\ See supra section II.B.1. See also AGA, BDA, Capital One, 
CDEU, CMC, Frost Bank, IECA, M&T, SVB, and Western Union comment 
letters.
    \257\ See supra section II.B.1. See also Citizens, IECA, NRECA/
APPA, NGSA, and SVB comment letters.
---------------------------------------------------------------------------

    However, as discussed above, Better Markets stated that the high 
regulatory coverage ratios are not indicative of the absolute level of 
swap dealing activities relevant to SD registration, and noted that 
maintaining an $8 billion threshold would have more than a limited 
effect on counterparty protections.\258\ The Commission believes that 
while either percentage of the market or absolute level of swaps 
activity are valid considerations, it is more relevant in this context 
of achieving a desirable balance of policy goals to consider the level 
of activity as a percentage of the whole.
---------------------------------------------------------------------------

    \258\ See supra section II.B.3.
---------------------------------------------------------------------------

    Additionally, the Senators stated that though notional amount data 
for NFC swaps was not used in considering the Proposal, the data that 
was available for NFC swaps shows significantly less coverage for NFC 
swaps under an $8 billion threshold than in other asset classes.\259\ 
The Commission notes that with respect to NFC swaps, registered SDs 
still entered into the significant majority (86 percent) of the overall 
market's total transactions and, as noted in the Proposal, faced 83 
percent of counterparties in at least one transaction, indicating that 
the existing $8 billion threshold has helped extend the benefits of SD 
registration to much of the NFC swap market.\260\ 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 benefits associated with the policy objectives of the de 
minimis exception are being advanced at the current $8 billion 
threshold.\261\ The Commission believes these market-wide benefits 
demonstrate that maintaining an $8 billion threshold is also 
appropriate with respect to the NFC swap asset class.
---------------------------------------------------------------------------

    \259\ See supra section II.B.3; Senators comment letter.
    \260\ 83 FR 27456.
    \261\ Id.
---------------------------------------------------------------------------

(ii) $3 Billion 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 AGNA 
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 discussed, 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); 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); and 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).\262\ 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 the 
Proposal, 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 threshold.\263\ 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 AGNA threshold level.\264\
---------------------------------------------------------------------------

    \262\ See supra section II.C.1.ii; 83 FR 27452-54.
    \263\ See 83 FR 27456. 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.
    \264\ See 17 CFR 1.3, Swap dealer, paragraph (6)(iii); supra 
section II.C.1.ii; 83 FR 27456-57.
---------------------------------------------------------------------------

    As discussed, a lower AGNA threshold could lead to certain entities 
reducing or ceasing swaps activity to avoid registration and its 
related costs.\265\ 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. Systemic risk 
could actually increase as a result. 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.
---------------------------------------------------------------------------

    \265\ See supra sections II.B.1 and II.C.1.ii; 83 FR 27452-54.
---------------------------------------------------------------------------

    Most commenters generally agreed with the Commission's position. 
For example, commenters indicated that there would be a market-wide 
costs associated with a lower threshold given that if entities reduced 
or ceased swaps activity to avoid registration and its related costs, 
the small and mid-sized end-users and commercial entities who utilize 
swaps for hedging purposes and NFC swap market participants would have 
fewer dealers available to them.\266\ Two commenters indicated that the 
market-wide benefit of a lower threshold would be limited because 
Commission regulations not related to SD registration already apply to 
unregistered entities, and therefore, many of the policy goals of SD 
registration are already being advanced with respect to swaps entered 
into by these unregistered entities.\267\
---------------------------------------------------------------------------

    \266\ See supra section II.B.1. See also ABA, AGA, AFEX/GPS, 
BDA, Capital One, Citizens, CDEU, COPE, CEWG, CMC, EEI/EPSA, Frost 
Bank, IIB, IECA, ISDA/SIFMA, JBA, M&T, NCFC, NRECA/APPA, NGSA, SVB, 
Virtu, and Western Union comment letters.
    \267\ See Citizens and Virtu comment letters.
---------------------------------------------------------------------------

    IATP suggested that contrary to the assumption that small banks may 
avoid the swap market due to the costs of SD registration at a $3 
billion threshold, the costs and obligations of SD registration would 
not discourage swap dealing

[[Page 56685]]

when there is strong market demand for innovative swap market risk 
management products. IATP stated that the lack of participation in the 
swap market by smaller banks may be due to the smaller banks preferring 
the price transparency of the futures and options markets as compared 
to the swap market.\268\ However, as discussed, the Commission 
believes, and most commenters agree, that a lower threshold could lead 
to certain entities reducing or ceasing swaps activity.
---------------------------------------------------------------------------

    \268\ See IATP comment letter.
---------------------------------------------------------------------------

    However, the Senators questioned why, given the lack of relevant 
data for NFC swaps, it is necessary to remove the phase-in reduction of 
the AGNA threshold for energy-related SDs.\269\ The Commission 
believes, and commenters generally agreed, that a reduced threshold 
would have a cost in terms of a decrease in NFC swap market liquidity 
because some entities may reduce dealing to avoid registration.\270\ 
For example, with respect to NFC swaps, EEI/EPSA and NGSA expressed 
concern that a lower AGNA threshold would provide less accommodation 
for increasing NFC prices, which could lead to market participants 
reducing their swap dealing activity to remain below the 
threshold.\271\ Further, NGSA stated that a lower threshold may reduce 
ancillary swap dealing in commodity markets and reduce counterparty 
diversity for end-users.\272\
---------------------------------------------------------------------------

    \269\ See supra section II.B.3; Senators comment letter.
    \270\ See supra sections II.B.1 and II.C.1.ii.
    \271\ See supra section II.B.1; EEI/EPSA and NGSA comment 
letters. As stated by EEI/EPSA, if NFC prices increase, the same 
level of swaps activity would potentially have a higher notional 
amount.
    \272\ See NGSA comment letter.
---------------------------------------------------------------------------

    The Commission notes that although AGNA data was not available for 
NFC swaps, the OCC publishes the Quarterly Report on Bank Derivatives 
Activities, including end-of-quarter gross notional amount position 
data from call reports filed by insured U.S. commercial banks and 
savings associations. Although point-in-time position data is not 
directly comparable to the transaction volume calculations that are 
required for evaluating AGNA threshold calculations, the report does 
provide outstanding commodity notional amount position totals in 
comparison with IRS, CDS, FX swaps, and equity swaps. According to the 
OCC, as of the end of 2017, NFC swaps represented $1,373 billion out of 
the $171,964 billion total notional amount reported outstanding, or 
approximately 0.8 percent of the total.\273\ Although the number of 
transactions involving at least one registered SD is lower in the NFC 
swap market than other asset classes (86 percent compared to over 99 
percent for the other four asset classes), the Commission believes it 
would be inappropriate to lower the AGNA threshold to $3 billion only 
to potentially increase the registered SD coverage rate (as measured by 
transaction count) for the smallest of the five asset classes as 
measured by outstanding notional amount per the OCC Quarterly Report on 
Bank Derivatives Activities.
---------------------------------------------------------------------------

    \273\ See OCC, Quarterly Report on Bank Trading and Derivatives 
Activities (Fourth Quarter 2017), available at https://www.occ.gov/topics/capital-markets/financial-markets/derivatives/dq318.pdf.
---------------------------------------------------------------------------

(iii) Higher Threshold
    Conversely, a higher AGNA threshold would potentially decrease the 
number of registered SDs, which could have a negative impact on 
achieving the general benefits associated with the policy objectives of 
SD regulation. For example, a higher threshold would allow a greater 
amount of swap dealing to be undertaken without certain counterparty 
protections.\274\ This might impact the integrity of the 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, as noted 
by the Commission and commenters, the higher the AGNA 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.\275\ A higher threshold 
could also allow the Commission to expend its resources on entities 
with larger swap dealing activities that warrant more oversight.
---------------------------------------------------------------------------

    \274\ See supra section II.C.2; 83 FR 27454-56.
    \275\ See supra sections II.B.2 and II.C.2; 83 FR 27454-56.
---------------------------------------------------------------------------

    Some commenters agreed that 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-related benefits of SD regulation.\276\ Additionally, a 
higher threshold could enhance the benefits associated with a de 
minimis exception, for example by allowing entities to increase 
ancillary dealing activity.\277\ However, the decrease in Estimated 
Counterparty Coverage indicates that fewer entities would be 
transacting with registered SDs, reducing the counterparty protection 
benefits of SD regulation if the threshold increased from $8 billion to 
$20 billion, $50 billion, or $100 billion.\278\ The Commission also 
notes that increasing the threshold could result in changes in market 
behavior that could lead to the regulatory coverage decreasing more 
than the analysis indicated.
---------------------------------------------------------------------------

    \276\ See supra section II.B.2. As discussed, 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). 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. See supra 
section II.C.2; 83 FR 27455.
    \277\ See supra sections II.B.2 and II.C.2; 83 FR 27455.
    \278\ As discussed, the data also indicates that at higher 
thresholds, there is a more pronounced decrease in Estimated 
Counterparty Coverage. 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. See supra section II.C.2; 
83 FR 27455.
---------------------------------------------------------------------------

    Additionally, though it did not conduct an analysis of AGNA 
activity for NFC swaps, the Commission is of the view that increasing 
the AGNA 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.C.2. This could reduce the number of entities transacting 
with registered SDs.
    The cost of reduced protections for counterparties would be 
realized to the extent that 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 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, increasing the 
general costs associated with the De Minimis Exception.
2. Direct Cost and Benefits
    As discussed in the Proposal, for any AGNA threshold, some firms 
will have AGNA of swap dealing activity sufficiently close to the 
threshold so as to require analysis to determine whether their activity 
qualifies as de minimis. Hence, (1) with a $3 billion threshold,

[[Page 56686]]

some set of entities would likely have to incur the direct costs of 
analyzing whether they would exceed the threshold, (2) with an $8 
billion threshold, a (mostly) different set of entities would have to 
continue to incur costs of analyzing their activity, and (3) with a 
higher threshold, some entities would no longer need to conduct an 
ongoing analysis of whether they would be above the new threshold, 
while other entities may begin conducting such an analysis.
    Based on the available data, the Commission estimates that if the 
AGNA 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.\279\ 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.\280\
---------------------------------------------------------------------------

    \279\ 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. See 83 FR 27474 n.191.
    \280\ 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 1800-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 30712 n.1347.
    The Commission recognizes that particular entities may, based on 
their circumstances, incur costs substantially greater or less than 
the estimated averages. See 83 FR 27474 n.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.\281\ 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.\282\ The projected 11 entities 
that may conduct periodic de minimis calculations represents a net 
figure, as some entities may need to conduct a periodic de minimis 
calculation, while on the other hand, some entities with AGNA near $8 
billion might be able to avoid periodic de minimis calculation costs 
because they will be certain that their AGNA exceeds the $3 billion 
threshold.
---------------------------------------------------------------------------

    \281\ 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. See 83 FR 27474 n.193.
    \282\ 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 estimates that the cost of the ongoing analysis would be 
approximately 50 percent of the cost of the initial analysis. See 83 
FR 27474 n.194.
---------------------------------------------------------------------------

    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 estimates the 
savings that would result from a higher AGNA threshold of $20 billion. 
Based on the available data, the Commission estimates that if the 
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.\283\ 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.\284\
---------------------------------------------------------------------------

    \283\ 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. See 83 FR 27474 n.195.
    \284\ See supra note 282.
---------------------------------------------------------------------------

    The Commission notes that ABA submitted a study that evaluated the 
costs and benefits of SD registration for member banks at various AGNA 
thresholds, prepared by NERA Economic Consulting (``NERA'').\285\ 
NERA's study provided cost estimates for initial and ongoing testing of 
whether a bank holding company has exceeded the AGNA threshold, under 
various scenarios.\286\ To arrive at aggregate estimates, NERA 
estimated the per entity costs of initial and ongoing SD registration 
determination analyses, and also provided its estimates of the number 
of registrants at various AGNA thresholds, which Commission staff used 
to estimate the additional costs or cost savings at different AGNA 
thresholds, as compared to an $8 billion threshold.
---------------------------------------------------------------------------

    \285\ See ABA comment letter (attaching NERA study).
    \286\ Although addressed by the NERA study, the costs associated 
with SD regulatory requirements (e.g., margin, reporting, 
technology, etc.) are not considered in this analysis. Costs 
associated with regulatory requirements applicable to SDs result 
from other rulemakings and are outside the scope of rulemakings 
related to the De Minimis Exception.
---------------------------------------------------------------------------

    First, to estimate initial and ongoing SD registration 
determination costs, NERA sent a survey to 22 bank holding companies 
that participate in the swap market and received eight responses.\287\ 
Based on these responses, NERA estimated average, one-time, upfront SD 
determination costs of $657,696 per entity \288\ (as compared to the 
Commission's estimate of approximately $79,000 per entity on average). 
Further, NERA estimated average, ongoing, SD determination costs of 
$89,209 per entity \289\ (as compared to the Commission's estimate of 
approximately $40,000 per entity on average).\290\
---------------------------------------------------------------------------

    \287\ See ABA comment letter (attaching NERA study). To estimate 
activity, NERA applied a 1.5 assumed turnover ratio to swap position 
data from the Federal Reserve Bank of Chicago's ``Holding Company 
Data'' for bank holding companies with greater than $10 billion in 
assets on a consolidated basis. The 1.5 adjustment factor was based 
on NERA's estimate of the typical turnover/notional holdings ratio 
to convert periodic position data into an annualized estimate of 
AGNA transaction volume.
    \288\ NERA estimated median, one-time, upfront SD determination 
costs of $188,095 per entity, significantly lower than the average 
cost of $657,696. NERA noted that initial SD determination costs 
were distributed widely, but the variation did not appear related to 
institution size or magnitude of annual swaps activity.
    \289\ NERA estimated median, ongoing, SD determination costs of 
$83,430 per entity.
    \290\ NERA also calculated a 10 year net present value estimate 
of the ongoing monitoring costs. NERA estimated the present value of 
ongoing determination costs to be $723,562 per bank holding company 
using the average estimate. Additionally, NERA's analysis included 
10 year net present value estimates of business conduct and margin 
costs, which was outside of the scope of the CFTC's analysis.
---------------------------------------------------------------------------

    NERA's survey of banking entities indicates significantly higher 
initial and ongoing SD determination monitoring costs than the 
Commission's cost estimates on a per entity annualized basis. NERA's 
per entity cost estimates were based on the eight responses to their 
survey, while the Commission's estimates were based on: (1) Estimates

[[Page 56687]]

of the number of personnel hours required in light of the Commission's 
experience in implementing the SD Definition; and (2) modified costs 
from SIFMA's Management & Professional Earnings in the Securities 
Industry 2013 survey.\291\ Additionally, NERA's analysis evaluated bank 
holding companies on a consolidated basis, while the Commission's 
analysis included subsidiaries of banks prior to consolidation and 
firms unrelated to banks.
---------------------------------------------------------------------------

    \291\ See supra note 280.
---------------------------------------------------------------------------

    Second, to estimate the number of entities that would be required 
to register at different AGNA thresholds, NERA evaluated four different 
scenarios, including various combinations of an AGNA threshold, a risk-
based threshold, and amendments to date restrictions related to the IDI 
Swap Dealing Exclusion. At various AGNA thresholds--including $3 
billion, $8 billion, and $15 billion--NERA estimated the number of bank 
holding companies expected to register as SDs for each scenario it 
evaluated. To allow for a more direct comparison with the Commission's 
estimates, the Commission made an assumption that the difference in the 
number of entities required to register at $3 billion and $15 billion 
thresholds, as compared to an $8 billion threshold, would also be the 
number of entities that would incur ongoing costs or cost savings 
related to assessing whether they would be required to register as SDs. 
Depending on the scenario evaluated, the Commission believes that NERA 
estimated that 13 to 17 additional bank holding companies would conduct 
ongoing SD registration-related analyses at the $3 billion threshold as 
compared to the $8 billion threshold.\292\ Conversely, depending on the 
scenario, the Commission believes that NERA estimated that 7 to 10 bank 
holding companies would no longer incur ongoing monitoring costs at a 
$15 billion threshold compared to an $8 billion threshold.\293\
---------------------------------------------------------------------------

    \292\ This is based on NERA's ``Number of Banks Required To 
Register As Swap Dealer'' estimates at $3 billion compared to $8 
billion under the various scenarios. NERA did not explicitly 
calculate the number of entities that may yet incur initial 
determination costs, but instead estimated the number of entities 
that would be required to register at various thresholds.
    \293\ This is based on NERA's ``Number of Banks Required To 
Register As Swap Dealer'' estimates at $15 billion compared to $8 
billion under the various scenarios. Note that NERA did not provide 
estimates at a $20 billion threshold, and its estimates at the $15 
billion threshold are the closest for relevant comparison with 
Commission estimates at $20 billion.
---------------------------------------------------------------------------

    In general, the Commission believes that its per entity estimated 
costs reflect the broader nature of the types of entities that would 
need to conduct such an analysis. For example, NERA's analysis focused 
on survey responses from consolidated bank holding companies, whereas 
the Commission's estimates also account for smaller financial 
institutions and non-financial entities that may have less operational 
complexity and therefore may incur lower costs in making 
determinations. Additionally, the Commission's estimates of the number 
of entities that would incur costs related to SD registration analyses 
are based on non-public SDR data on AGNA activity, while NERA's implied 
estimates are based on publicly available swap position data from the 
Federal Reserve Bank of Chicago's ``Holding Company Data'' for bank 
holding companies with greater than $10 billion in assets on a 
consolidated basis.
    However, given the different methods and sources of information 
utilized, the Commission is providing a range of estimated costs or 
cost savings that combine the per entity costs and the counts of the 
number of entities required to conduct SD registration analyses, as 
estimated by the Commission and NERA. The tables below summarize the 
estimates for initial and ongoing SD determination costs. Since NERA 
conducted estimates using four different scenarios, the tables below 
include information based on the highest and lowest number of entities 
estimated by NERA at given thresholds.
---------------------------------------------------------------------------

    \294\ For Tables 1 through 3, aggregate cost or cost savings 
estimates are calculated using a given scenario's per entity average 
cost estimate multiplied by the relevant entity count. For example, 
in Table 1, $79,000 multiplied by 22 entities equals $1,738,000.
    \295\ As discussed, the Commission considered a higher threshold 
of $20 billion, while NERA considered a higher threshold of $15 
billion.

              Table 1--Estimate of Additional Costs Incurred for Initial SD Determination Analyses
                                          [$3 Billion threshold] \294\
----------------------------------------------------------------------------------------------------------------
                                                                                                   NERA high
            Per entity average cost estimate                  CFTC (22      NERA low estimate     estimate (17
                                                             entities)        (13 entities)        entities)
----------------------------------------------------------------------------------------------------------------
CFTC--$79,000..........................................         $1,738,000         $1,027,000         $1,343,000
NERA--$657,696.........................................         14,469,312          8,550,048         11,180,832
----------------------------------------------------------------------------------------------------------------


              Table 2--Estimate of Additional Costs Incurred for Ongoing SD Determination Analyses
                                             [$3 Billion threshold]
----------------------------------------------------------------------------------------------------------------
                                                                                                   NERA high
            Per entity average cost estimate                  CFTC (11      NERA low estimate     estimate (17
                                                             entities)        (13 entities)        entities)
----------------------------------------------------------------------------------------------------------------
CFTC--$40,000..........................................           $440,000           $520,000           $680,000
NERA--89,209...........................................            981,299          1,159,717          1,516,553
----------------------------------------------------------------------------------------------------------------


             Table 3--Estimate of Cost Savings for Not Conducting Ongoing SD Determination Analyses
                                  [$15 Billion or $20 billion threshold] \295\
----------------------------------------------------------------------------------------------------------------
                                                                                                   NERA high
                                                             CFTC ($20      NERA low estimate    estimate ($15
            Per entity average cost estimate                billion) (25     ($15 billion) (7     billion) (10
                                                             entities)          entities)          entities)
----------------------------------------------------------------------------------------------------------------
CFTC--$40,000..........................................         $1,000,000           $280,000           $400,000

[[Page 56688]]

 
NERA--89,209...........................................          2,230,225            624,463            892,090
----------------------------------------------------------------------------------------------------------------

    Based on its analysis, and incorporating information provided by 
NERA, the Commission estimates that for the 13 to 22 entities at a $3 
billion AGNA threshold that may need to conduct an initial SD 
registration analyses, at per entity average costs of $79,000 to 
$657,696, the estimated aggregate initial determination cost ranges 
from $1,027,000 to $14,469,312, as indicated in Table 1.\296\
---------------------------------------------------------------------------

    \296\ Using a different methodology, NERA estimated $2,623,925 
(median estimate) to $9,174,855 (average estimate) in remaining 
aggregate initial determination costs. The Commission notes that 
this estimate is within the $1,027,000 to $14,469,312 range 
calculated above.
---------------------------------------------------------------------------

    Additionally, for the 11 to 17 entities at a $3 billion AGNA 
threshold that may need to conduct ongoing SD registration analyses, at 
per entity average costs of $40,000 to $89,209, the estimated aggregate 
annual ongoing monitoring cost ranges from $440,000 to $1,516,553, as 
indicated in Table 2.
    Lastly, for the 7 to 25 entities at a $15 billion or $20 billion 
AGNA threshold that would no longer need to conduct ongoing SD 
registration analyses, at per entity average cost savings of $40,000 to 
$89,209, the estimated aggregate annual ongoing monitoring cost savings 
ranges from $280,000 to $2,230,225, as indicated in Table 3.
    The Commission notes that the aggregate estimates of initial and 
ongoing SD determination and monitoring costs, based on either the 
Commission or NERA's per entity cost estimates or marginal entity count 
estimates, buttress the Commission's decision to adopt an $8 billion 
threshold and not let it decrease to $3 billion. Additionally, the 
Commission is of the view that the cost savings at $15 billion or $20 
billion thresholds would not sway its decision to maintain the 
threshold at $8 billion given the general costs and benefits discussed 
above. Lastly, in light of all the considerations, the Commission would 
come to the same conclusion, regardless of where the most accurate cost 
falls in the range of potential initial and ongoing costs.
3. 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:
(i) 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 benefit advanced by registration of SDs. For 
example, registered SDs are required to provide mid-mark quotes and 
perform scenario analyses. However, these requirements are not in 
standard ISDA agreements and are not required of entities that deal a 
de minimis amount of swaps.
    The Commission is maintaining 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 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.\297\
---------------------------------------------------------------------------

    \297\ As discussed in section II.C.1.i, the 2017 Transaction 
Coverage ratio 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 AGNA thresholds, potentially indicating that the 
benefit of SD counterparty protections requirements could be reduced at 
higher thresholds.
    SD registration 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 threshold may result in more entities being required to 
register as SDs, thereby potentially further reducing systemic risk. 
Conversely, a higher threshold may result in fewer entities being 
required to register an SD and, thus, possibly increase systemic risk.
    However, the data appears to indicate that the additional entities 
that would need to register at the $3 billion 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 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 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.
    The Commission believes that setting the AGNA 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

[[Page 56689]]

substantially increase the protection of market participants and the 
public.
(ii) Efficiency, Competitiveness, and Financial Integrity of Markets
    Another goal of SD registration is swap market efficiency, 
orderliness, and transparency. These market benefits are achieved 
through regulations regarding, for example, recordkeeping, reporting, 
disclosure, and risk management.
    As compared to a $3 billion 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 AGNA 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 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, potentially reducing the financial 
integrity of markets.
    Considering these countervailing factors, the Commission believes 
that setting the AGNA 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.
(iii) Price Discovery
    All else being equal, the Commission 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 of the view that, as compared to 
a $3 billion threshold, an $8 billion threshold would encourage 
participation of new swap dealing businesses 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.
    The Commission notes that some counterparties might be more likely 
to transact at off-market prices if they trade with an entity that does 
not provide mid-market quotes or scenario analyses, as would be 
required if the entity were a registered SD. If so, such transactions 
might harm post-trade price discovery since these transactions would 
occur at off-market prices.
(iv) Sound Risk Management
    The Commission notes that a higher AGNA 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. The 
Commission also notes that to the extent an entity that is not required 
to register as an SD at a higher threshold is a prudentially regulated 
bank, that entity would be subject to the risk management requirements 
of its prudential regulator.
(v) Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations with respect to setting the AGNA threshold at $8 billion 
in swap dealing activity.

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.\298\ The Commission believes that 
the public interest to be protected by the antitrust laws is generally 
to protect competition.
---------------------------------------------------------------------------

    \298\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission has considered this final rule to determine whether 
it is anti-competitive and has identified no anti-competitive effects. 
Because the Commission has determined that the final rulemaking is not 
anti-competitive and has no anti-competitive effects, the Commission 
has not identified any less anti-competitive means of achieving the 
purposes of the CEA.

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 amends 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'' by 
revising paragraph (4)(i)(A) and removing and reserving paragraph 
(4)(ii).
    The revision reads 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

[[Page 56690]]

swap, the calculation shall be based on the effective notional amount 
of the swap rather than on the stated notional amount.
* * * * *

    Issued in Washington, DC, on November 6, 2018, by the 
Commission.
Robert Sidman,
Deputy Secretary of the Commission.

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

Appendicies 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 Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    Today's final rule on the numeric threshold for swap dealer de 
minimis will provide the market with certainty that the threshold 
will not fall from $8 billion to $3 billion. I fully support the 
proposed final rule.
    The action before us is without prejudice to all other items in 
the Commission's June 2018 NPRM. That includes various proposed rule 
amendments and other topics for consideration. Those proposals and 
considerations are clearly of wide ranging interest as evidenced by 
the public comments received. They remain under staff consideration 
pending further Commission action.
    Indeed, I will direct CFTC staff to continue their analysis of 
the range of matters raised in the June 2018 NPRM and comments 
submitted by the public.
    I will specifically ask staff to conduct a study on possible 
alternative metrics for the calculation of the swap dealer de 
minimis threshold drawing upon proposals in the June 2018 NPRM, 
including the feasibility of: (i) Removing cleared swaps from the 
current de minimis calculation; (ii) haircutting cleared swaps 
included in the current de minimis calculation; (iii) adopting a 
new, bifurcated de minimis calculation that uses initial margin 
amounts for cleared swaps and entity-netted notional amounts for 
uncleared swaps; and (iv) applying other risk-based approaches that 
the staff may recommend. I will be asking the staff for specific 
deadlines and deliverables for this work. Once staff has reviewed 
and analyzed the data, I expect that the study will be made public 
for further discussion and possible Commission consideration.
    I deliberately decline at this time to express any view on the 
appropriateness of whether any of the proposals in the June 2018 
NPRM not before us today should be addressed by CFTC unilateral 
rulemaking or joint consideration with the U.S. Securities and 
Exchange Commission (SEC).
    Be assured that SEC Chairman Clayton and I--and our fellow CFTC 
and SEC Commissioners--are committed to working together on robust 
harmonization where appropriate and working jointly where necessary 
on these and other matters.
    With respect to IDIs, staff has informed me that they would 
consider no-action relief for IDIs pending formal Commission action 
should they receive a meritorious request.
    In sum, I am hopeful that we will today provide market certainty 
that the de minimis threshold will not fall below its current level.
    Surely, it has taken a while to reach this point. Yet, I am 
hopeful that we may achieve it with a good degree of consensus 
across the full Commission. Assuming so, then we have increased 
market certainty--a very good thing in trading markets.
    Sometimes it's worth the wait.

Appendix 3--Statement of Commissioner Brian D. Quintenz

    I support today's final rule to rescind the de minimis 
threshold's scheduled reduction to $3 billion of gross notional swap 
dealing activity. Every iteration of data analysis completed by CFTC 
staff on this issue, from the 2015 Preliminary Report,\1\ to the 
2016 Final Report,\2\ to the updated data and analysis in the 2018 
June proposed rule, and to the data presented in this final rule, 
clearly and unequivocally supported eliminating this ill-conceived 
reduction. I am pleased that today's action will remove a large 
source of negative regulatory uncertainty for market participants in 
managing their swaps business and serving their customers.
---------------------------------------------------------------------------

    \1\ See Swap Dealer De Minimis Exception Preliminary Report 
(``Preliminary Report''), http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_sddeminis_1115.pdf.
    \2\ See Swap Dealer De Minimis Exception Final Report (``Final 
Report''), https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/dfreport_sddeminis081516.pdf.
---------------------------------------------------------------------------

    However, this is just the first of many necessary steps toward 
correcting what I believe is a flawed swap dealer registration 
policy. Therefore, it is my hope that today's final rule should be 
viewed with finality only in this one regard.
    The Dodd-Frank Act advanced three main and substantial policy 
objectives for swap dealer registration: Systemic risk reduction, 
counterparty protection, and enhanced swap market transparency and 
efficiency. As I have emphasized on many prior occasions, given the 
significant costs of swap dealer regulation, it is critical that the 
de minimis exception be appropriately calibrated to ensure that the 
correct market group--those best situated to realize the 
corresponding policy goals of registration--shoulders the burdens of 
swap dealer regulations.
    As I have also said repeatedly in the past, notional value is a 
poor measure of activity, and it is a meaningless measure of risk. 
Therefore, by itself, notional value is an incredibly deficient 
metric by which to impose large costs and achieve substantial policy 
objectives. A one-size-fits-all notional value test for swap dealer 
registration captures entities that engage in low volume, low risk 
activity with high notional amounts, and places those firms under 
the same regulatory regime as the world's largest, most complex 
financial institutions that deal in trillions of dollars' worth of 
swaps.\3\ The end result is that smaller firms are disincentivized 
from engaging in lower risk activity when faced with justifying the 
cost of swap dealer registration.
---------------------------------------------------------------------------

    \3\ See Office of the Comptroller of the Currency, ``Quarterly 
Report on Bank Trading and Derivatives Activities, Second Quarter 
2018,'' available at: https://www.occ.gov/topics/capital-markets/financial-markets/derivatives/dq218.pdf.
---------------------------------------------------------------------------

    I have heard anecdotally from certain small to mid-sized players 
in the swap markets that the breakeven point of the costs of swap 
dealer registration as measured by a level of notional swap dealing 
activity is much higher than the $8 billion level in this rule. If 
that is the case, the current $8 billion notional threshold 
effectively forces these smaller players to curtail their swap 
dealing business, thereby limiting competition and further 
concentrating swaps activity with their larger competitors.\4\
---------------------------------------------------------------------------

    \4\ 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.'').
---------------------------------------------------------------------------

    In my view, an appropriately calibrated de minimis exception 
would better align the criteria of the de minimisthreshold with the 
costs of swap dealer regulation, particularly the largest costs tied 
to mitigating systemic risk, like capital and margin. A de minimis 
threshold based on metrics more closely correlated with the risk of 
the products traded, as opposed to the current risk-insensitive 
notional value metric, would better measure dealing activity and 
more appropriately capture the entities warranting Commission 
oversight.
    I am pleased the Chairman continues to recognize this and has 
directed staff to study many of the alternative risk-based 
registration metrics that were suggested in the proposed rule. The 
staff report will provide the Commission with additional data and 
insights into the impact that alternative approaches may have on 
swap dealer registration. For example, staff's analysis should show 
how removing or haircutting cleared swaps from the de minimis 
calculation would impact the number and composition of firms 
required to register as swap dealers. The report will also provide 
staff with an opportunity to consider, for the first time, how a 
registration threshold tied to initial margin for cleared swaps 
could better represent a de minimis quantity of swap dealing 
activity. For uncleared products, staff can examine the impact of 
using entity-netted notional amounts, a more accurate measure of a 
firm's risk and market size, as a metric of swap dealing activity. 
The results of the staff report will be critical to any future 
Commission consideration of a

[[Page 56691]]

more risk-sensitive swap dealer registration threshold.
    In addition, many of the policy recommendations discussed in the 
proposed rule, such as better allowing insured depository 
institutions to assist their customers in hedging loan-related risks 
and excluding non-deliverable forwards from an entity's de minimis 
count--would advance the policy goals of the de minimis exception by 
encouraging greater participation and competition in the swap 
markets. I would eagerly anticipate the Commission's action on these 
important reforms. As the Commission's recent no-action letter to a 
Main Street bank this past August shows, the deficiencies of the 
current de minimis exception are beginning to squeeze firms' 
activity and constrain their ability to serve clients.\5\
---------------------------------------------------------------------------

    \5\ CFTC No-Action Letter 18-20 (August 28, 2018), https://www.cftc.gov/PressRoom/PressReleases/7775-18.
---------------------------------------------------------------------------

    Any de minimis threshold must always be put into context of the 
broader swaps market regulatory regime. The Commission is not 
establishing the de minimis exception in a vacuum. Since the swap 
dealer definition was adopted in 2012, a broad range of rigorous 
regulatory requirements have gone into effect which also advance the 
goals of swap dealer registration, such as mandatory clearing, SEF 
trading, swap data reporting, and margin requirements for uncleared 
swaps.
    The Commission's regulatory framework for the swap market has 
greatly evolved from its state six years ago; it is only common 
sense that the swap dealer registration threshold should evolve as 
well. It will be a great day when financial regulators, including 
the CFTC, finally move away from gross notional value as any sort of 
metric or test of derivatives exposure, activity, or risk. I look 
forward to that day, and I am committed to working with the 
Chairman, my fellow Commissioners, and our staff to make sure we get 
the swap dealer de minimis exception policy right.

Appendix 4--Concurring Statement of Commissioner Rostin Behnam

    Today, the Commission acts decisively to 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. I am comfortable supporting today's final 
rule because it is limited to establishing a clear and certain de 
minimis threshold. While I was unable to support the proposed rule--
which moved the Commission far beyond the task before it towards 
unilaterally redefining swap dealing activity absent meaningful, 
congressionally-required collaboration with the Securities and 
Exchange Commission (``SEC'')--I am gratified that the Commission is 
not moving forward with aspects of the Proposal which would have 
further complicated the distinction between dealing and non-dealing 
activities.\1\ Such action would have been detrimental to market 
participants. To the extent the Commission continues to consider 
addressing long standing concerns with the IDI Swap Dealing 
Exclusion,\2\ ambiguity regarding the treatment of swaps used for 
hedging, or relief applicable to swaps that result from multilateral 
portfolio compression exercises, it should do so jointly with the 
SEC.
---------------------------------------------------------------------------

    \1\ De Minimis Exception to the Swap Dealer Definition, 83 FR 
27444, 27481-2 (proposed June 12, 2018).
    \2\ If the proposed IDI Minimis Provision truly better aligns 
the swap dealer regulatory framework with the risk mitigation 
demands of bank customers, as commenters suggested, then it would 
seem that there should be few hurdles in the way of the CFTC and SEC 
engaging to reconsider the parameters of the IDI Swap Dealing 
Exclusion.
---------------------------------------------------------------------------

NFC Swap Data

    Today's decision to maintain the AGNA threshold at $8 billion 
follows a period of prolonged uncertainty during which Commission 
staff conducted more complete data analysis regarding the de minimis 
exception.\3\ While swap data repository (``SDR'') data quality has 
improved, AGNA data was unavailable for non-financial commodity 
(``NFC'') swaps.\4\ Nevertheless, Commission staff used counterparty 
and transaction counts and a series of assumptions to analyze likely 
swap dealing activity in the NFC swap market and concluded that 
reducing the $8 billion AGNA threshold could lead to reduced 
liquidity in NFC swaps, negatively impacting end-users and 
commercial entities who utilize NFC swaps for hedging.\5\ The 
Commission further relied upon findings and comments that the unique 
characteristics of the NFC swap market pose less systemic risk than 
financial swaps.\6\
---------------------------------------------------------------------------

    \3\ 83 FR 27445-6.
    \4\ 83 FR 27445.
    \5\ 83 FR 27450, 27456-7.
    \6\ 83 FR 27457; Final Rule, De Minimis Exception to the Swap 
Dealer Definition, section II.C.1.ii (to be codified at 17 CFR pt. 
1).
---------------------------------------------------------------------------

    It is my hope that Commission staff will continue to examine and 
monitor data and activities in the NFC swap market to ensure that 
concentrated activity by unregistered NFC counterparties in segments 
of that swap market, such as in energy-related swaps, do not present 
outsized risk or harm to end-users, and most importantly, the 
general public.

Appendix 5--Statement of Commissioner Dan M. Berkovitz

    I support amending the swap dealer de minimis exception to set 
the threshold at $8 billion. This limited amendment relies on 
extensive data analysis to achieve a balance between the policy 
objectives of the de minimis exception and the registration of swap 
dealers.
    At the outset, I would like to acknowledge the leadership of 
Chairman Giancarlo and the efforts of my fellow Commissioners to 
achieve consensus on this rulemaking. I look forward to working 
together to continue to find areas of agreement where it makes sense 
for our markets and the American people.

Data-Driven Rulemaking

    Title VII of the Dodd-Frank Act directed the Commodity Futures 
Trading Commission (``Commission'') and the U.S. Securities and 
Exchange Commission (``SEC'') to jointly further define, among other 
things, the term ``swap dealer.'' \1\ At the same time, Congress 
enacted Section 1a(49)(D) of the Commodity Exchange Act (``CEA''), 
which directed the Commission to exempt from designation as a swap 
dealer entities that engage in a de minimis quantity of swap 
dealing.
---------------------------------------------------------------------------

    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
section 712(d)(1), Public Law 111-203, 124 Stat. 1376 (2010) (the 
``Dodd-Frank Act'').
---------------------------------------------------------------------------

    In 2012, the Commission--jointly with the SEC--adopted the 
further definition of the term swap dealer. In this rulemaking, the 
de minimis swap dealing threshold was set at $3 billion. However, 
recognizing that a lack of swap trading data made it difficult to 
set an appropriate threshold, the Commission implemented a long 
phase-in period during which the threshold was set at $8 billion.\2\ 
The regulation directed Commission staff to study the data on swap 
dealing activity that would be collected through swap data 
repositories (``SDRs'') and publish a report for public comment, 
enabling the Commission at a later time to make a data-based 
judgment regarding the de minimis quantity threshold.\3\
---------------------------------------------------------------------------

    \2\ See 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A); see also 
Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant,'' 77 FR 30596, 
30633-34 (May 23, 2012) (``SD Adopting Release'').
    \3\ 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(B).
---------------------------------------------------------------------------

    To this end, the staff built a comprehensive database to 
aggregate data from all four SDRs. Over several years, the staff 
developed and refined new techniques to sort and evaluate the data, 
published two reports on the de minimis exception, and continued to 
revise its analysis in response to public comments. This process was 
not without considerable challenges, but the staff worked diligently 
to produce meaningful, data-driven information to guide the 
Commission's decision-making regarding the appropriate de minimis 
threshold.
    This effort provided a highly significant data point: 
Approximately 98 percent of all swap transactions involved at least 
one registered swap dealer. We now know that at the $8 billion 
threshold, nearly all swap transactions benefit from swap dealer 
regulation.
    The staff's analysis also showed that reducing the threshold to 
$3 billion would have a minimal impact on the amount of swaps 
activity that would be subject to swap dealer regulation. Indeed, 
based on the analysis, reducing the threshold to $3 billion would 
only add swap dealer coverage to less than one-tenth of one percent 
of reported swaps. By the same token, the analysis demonstrated that 
increasing the threshold quantity above $8 billion would have almost 
no impact on the amount of swaps subject to dealer regulation until 
that threshold reaches a significantly higher level. At those 
levels, the effect on specific categories of swaps--notably non-
financial commodity swaps (``NFC'')--becomes much more significant.
    When considering amending a rule, the Commission should consider 
both the

[[Page 56692]]

benefits and costs from those rule changes. Here, data analysis has 
shown that the benefits of changing the current $8 billion threshold 
are relatively small because nearly all swap activity is already 
covered by dealer regulation.
    On the other hand, decreasing the threshold from its current 
level would impose tangible costs on market participants. If the 
threshold were lowered to $3 billion, unregistered dealers that are 
currently under the $8 billion level, but that could exceed the $3 
billion threshold, would have to re-evaluate whether swap dealing in 
excess of $3 billion would continue to make business sense. The de 
minimis rulemaking proposal \4\ noted that this issue is 
particularly important in the NFC swap market. The staff's data 
analysis showed that many of the smaller swap dealers for physical 
commodities are physical commodity producers, distributors, 
consumers, or merchandizers. Swap dealing is an ancillary business 
for them. Where the costs of registering as a swap dealer exceed 
anticipated benefits, it is likely that many of these entities would 
withdraw from providing swap dealing services to their customers. 
That would leave many end users looking to hedge their risks with 
either no dealers available, or very few dealers to provide 
competitive pricing.
---------------------------------------------------------------------------

    \4\ Notice of proposed rulemaking, De Minimis Exception to the 
Swap Dealer Definition, 83 FR 27444 (June 12, 2018).
---------------------------------------------------------------------------

    The Commission should seek to preserve and foster competition 
for swap dealer services. One of the fundamental purposes of the CEA 
is to ``promote . . . fair competition among boards of trade, other 
markets and market participants.'' \5\ American businesses 
throughout the country that need to use swaps to hedge their risks 
should not be forced to rely solely on large Wall Street banks. 
Retaining the de minimis threshold at $8 billion will help preserve 
competition and choice for American businesses for these swap 
dealing services.
---------------------------------------------------------------------------

    \5\ 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    It is important to note that this rulemaking represents one of 
the first times in which the Commission has relied on SDR data to 
set policy, and the staff that undertook this principled and 
thorough analysis should be commended for their efforts. Given the 
technological advancements in data collection and analysis, 
effective use of data to inform policy making is critical for the 
Commission to meet its policy objectives of fostering open, 
transparent, competitive, and financially sound markets.
    In sum, the data demonstrates that the current de minimis 
threshold level is largely accomplishing its intended purposes. 
Where the current regulations are working, regulatory stability also 
is an important objective. Accordingly, after considering the 
results of the swap data analysis, relevant policy implications, and 
limited benefits and potential costs of altering the de minimis 
threshold quantity, I believe that maintaining the threshold at $8 
billion is appropriate and sound public policy.

Physical Commodity Swaps

    The proposal noted that Commission staff encountered challenges 
in measuring the aggregate gross notional amount of NFC swaps. 
Instead, the staff used counterparty and transaction counts to 
approximate swap dealing activity for NFC swaps. The staff's 
analysis indicated that fewer NFC swap transactions--86 percent--
involved at least one registered swap dealer, as opposed to 99 
percent for other swap categories.
    The market participants who use physical commodity swaps to 
hedge their risks typically include farmers, ranchers, farm product 
processors, energy producers and consumers, manufacturers, and other 
end users. These consumer-facing businesses need a properly 
functioning physical commodity derivatives marketplace to maintain 
consistent prices for their customers. Ultimately, the American 
people benefit from stable prices on the products that these 
businesses produce and distribute.
    I am therefore calling on the Commission to continue to focus on 
improving our data collection and analysis for NFC swaps. More 
robust data collection will help us improve regulation in this 
space, including considering ways to balance the benefits of de 
minimis swap dealing in physical commodities with the need for 
customer protections and the other benefits of swap dealer 
registration.

Joint Rulemaking Required for Swap Dealer Definition

    I am voting today solely in favor of setting the de minimis 
exception threshold quantity at $8 billion because it is within the 
Commission's authority to do so. Looking forward, however, I will 
not support other amendments to the swap dealer definition without a 
joint rulemaking with the SEC, as required by the Dodd-Frank Act.
    In addition to setting the threshold level, the proposal sought 
to alter the swap dealer definition by excluding from counting 
toward that de minimis threshold: (1) Swaps entered into by an 
insured depository institution (``IDI'') in connection with 
originating loans; (2) swaps hedging financial or physical 
positions; and (3) swaps resulting from multilateral portfolio 
compression exercises. The proposal also asked questions about 
excluding from the threshold calculation swaps that are cleared and/
or exchange traded and non-deliverable forwards.
    Although the Commission is not adopting these provisions today, 
my view is that any such changes would effectively amount to an 
amendment of the swap dealer definition, not the de minimis 
exception. Doing so unilaterally and not as a joint rulemaking with 
the SEC would be contrary to the statutory language and inconsistent 
with Congressional intent.
    When Congress enacted Title VII of the Dodd-Frank Act, its 
intent was clear: ``[T]he [Commission] and the [SEC], in 
consultation with the Board of Governors, shall further define the 
term[] . . . `swap dealer,' '' among other terms.\6\ Congress 
clarified that the Commission must use the joint rulemaking process 
to make any other rules regarding these definitions that it and the 
SEC determine are necessary for the protection of investors.\7\ To 
underscore this point, Congress noted that rules prescribed jointly 
by the Commission and the SEC under Title VII must be ``comparable 
to the maximum extent possible,'' and that any interpretation of, or 
guidance regarding, a provision of the Dodd-Frank Act would be 
effective only if issued jointly by the Commission and the SEC.\8\ 
Pursuant to this statutory directive, the agencies adopted a joint 
rulemaking to define ``swap dealer'' and ``security-based swap 
dealer.''
---------------------------------------------------------------------------

    \6\ Dodd-Frank Act, section 712(d)(1).
    \7\ Dodd-Frank Act, section 712(d)(2)(A).
    \8\ Dodd-Frank Act, section 712(d)(2)(D).
---------------------------------------------------------------------------

    Congress created one exception to the joint rulemaking 
requirement. CEA subsection 1a(49)(D) authorizes ``the Commission'' 
to exempt from designation as a swap dealer ``an entity that engages 
in a de minimis quantity of swap dealing'' and ``to establish 
factors with respect to the making of this determination to 
exempt.'' \9\ The Commission included this de minimis exception in 
paragraph 4 of the swap dealer definition, notably separate from 
other provisions in the definition addressing the IDI exclusion 
(paragraph 5) and the physical hedging exclusion (paragraph 6).
---------------------------------------------------------------------------

    \9\ 7 U.S.C. 1a(49)(D) (emphasis added).
---------------------------------------------------------------------------

    By its terms, the de minimis exception relates solely to 
exempting a numerical quantity of swap dealing activity. Under the 
statutory structure, the Commission and the SEC must jointly 
determine which activities are dealing activities and therefore must 
be counted toward the threshold; the Commission itself may set a 
numerical quantity of such dealing as a threshold for registration. 
Put simply, deciding ``which'' activity gets counted must be done 
jointly; deciding ``how much'' of that activity triggers the 
registration requirement may be done singly.
    The proposal framed these additional proposed changes to the 
swap dealer definition as ``factors'' in the de minimis threshold 
determination. In doing so, the proposal sought to use the 
Commission's unilateral authority to ``establish factors'' as 
provided in the second sentence in CEA subsection 1a(49)(D). 
However, that interpretation is a misreading of the statutory 
provision. The second sentence in CEA subsection 1a(49)(D) 
authorizes the Commission to promulgate regulations to ``establish 
factors with respect to the making of this determination to 
exempt.'' \10\ The words ``this determination'' clearly refer to the 
quantity determination in the first sentence of the subsection: 
``[t]he Commission shall exempt from designation as a swap dealer an 
entity that engages in a de minimis quantity of swap dealing in 
connection with transactions with or on behalf of its customers.'' 
\11\ In other words, the ``factors'' referred to in the second 
sentence relate to the numerical quantity determination in the first 
sentence; this sentence does not create a distinct directive 
authorizing the Commission to independently determine what 
constitutes swap dealing.\12\
---------------------------------------------------------------------------

    \10\ Id.
    \11\ Id. (emphasis added).
    \12\ In the preamble of the SD Adopting Release, the Commission 
discussed the factors envisioned by Section 1a(49)(D). For example, 
the preamble provided that the Commission could consider whether the 
de minimis exception would ``lead[] to an undue amount of dealing 
activity to fall outside the ambit of Title VII regulatory 
framework, or lead[] to inappropriate reductions in counterparty 
protections (including protections for special entities).'' SD 
Adopting Release, 77 FR 30635.

---------------------------------------------------------------------------

[[Page 56693]]

    This point is clear when we examine what would happen if each of 
the five categories of swap dealing activity identified in the 
proposal as ``factors'' (i.e., IDI, physical hedging, multilateral 
portfolio compression exercises, cleared and/or exchange traded, and 
non-deliverable forwards) were removed from the definition of swap 
dealing through this interpretation of the de minimis exception. 
Combined, these five categories of swaps likely total more than half 
of the notional amount traded. There would appear to be no limit to 
what dealing activity could be excluded from dealer regulation 
through the de minimis exception by framing whole categories of 
swaps to be excluded as ``factors.'' The Commission could 
effectively determine unilaterally what constitutes swap dealing. 
The de minimis exception would swallow the swap dealer definition. 
This result cannot be reconciled with the Dodd-Frank Act's joint 
rulemaking requirement.
    For these reasons, while I am amenable to considering further 
refinements to the swap dealer definition and what gets counted as 
dealing, I am of the view that this cannot be accomplished without 
joint rulemaking with the SEC.

[FR Doc. 2018-24579 Filed 11-9-18; 8:45 am]
 BILLING CODE 6351-01-P



                                            56666            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            COMMODITY FUTURES TRADING                                 1. Proposal                                          regularly enters into swaps with
                                            COMMISSION                                                2. Summary of Comments                               counterparties as an ordinary course of
                                                                                                      3. Commission Response                               business for its own account; or (4)
                                            17 CFR Part 1                                             B. Swaps Entered Into to Hedge Financial
                                                                                                                                                           engages in any activity causing the
                                                                                                         or Physical Positions
                                            RIN 3038–AE68                                             1. Proposal                                          person to be commonly known in the
                                                                                                      2. Summary of Comments                               trade as a dealer or market maker in
                                            De Minimis Exception to the Swap                          3. Commission Response                               swaps (collectively referred to as ‘‘swap
                                            Dealer Definition                                         C. Swaps Resulting From Multilateral                 dealing,’’ ‘‘swap dealing activity,’’ or
                                                                                                         Portfolio Compression Exercises                   ‘‘dealing activity’’).6 The statute also
                                            AGENCY:  Commodity Futures Trading                        1. Proposal                                          requires the Commission to promulgate
                                            Commission.                                               2. Summary of Comments                               regulations to establish factors with
                                            ACTION: Final rule.                                       3. Commission Response
                                                                                                                                                           respect to the making of a determination
                                                                                                      D. Methodology for Calculating Notional
                                            SUMMARY:   The Commodity Futures                             Amounts                                           to exempt from designation as an SD an
                                            Trading Commission (‘‘Commission’’ or                     1. Proposal                                          entity engaged in a de minimis quantity
                                            ‘‘CFTC’’) is amending the de minimis                      2. Summary of Comments                               of swap dealing.7 CEA section 1a(49)
                                            exception within the ‘‘swap dealer’’                      3. Commission Response                               further provides that in no event shall
                                            definition in the Commission’s                          IV. Other Matters Discussed in NPRM                    an insured depository institution (‘‘IDI’’)
                                                                                                      A. Dealing Counterparty Count and Dealing            be considered to be an SD to the extent
                                            regulations by setting the aggregate gross
                                                                                                         Transaction Count Thresholds                      it offers to enter into a swap with a
                                            notional amount threshold for the de                      B. Exception for Exchange-Traded and/or
                                            minimis exception at $8 billion in swap                                                                        customer in connection with originating
                                                                                                         Cleared Swaps
                                            dealing activity entered into by a person                                                                      a loan with that customer.8
                                                                                                      C. Exception for Non-Deliverable Forwards
                                            over the preceding 12 months.                           V. Related Matters                                     2. Regulatory History
                                            DATES: This rule is effective November                    A. Regulatory Flexibility Act
                                            13, 2018.                                                 B. Paperwork Reduction Act                              Pursuant to the statutory
                                                                                                      C. Cost-Benefit Considerations                       requirements, in December 2010, the
                                            FOR FURTHER INFORMATION CONTACT:
                                                                                                      1. General Costs and Benefits                        Commissions issued a proposing release
                                            Matthew Kulkin, Director, 202–418–                        2. Direct Cost and Benefits
                                            5213, mkulkin@cftc.gov, Rajal Patel,                                                                           (‘‘SD Definition Proposing Release’’) 9
                                                                                                      3. Section 15(a)
                                            Associate Director, 202–418–5261,                         D. Antitrust Considerations                          further defining, among other things, the
                                            rpatel@cftc.gov, or Jeffrey Hasterok, Data                                                                     term ‘‘swap dealer.’’ Subsequently, in
                                            and Risk Analyst, 646–746–9736,                         I. Background                                          May 2012, the Commissions issued an
                                            jhasterok@cftc.gov, Division of Swap                    A. Statutory and Regulatory Background                 adopting release (‘‘SD Definition
                                            Dealer and Intermediary Oversight;                                                                             Adopting Release’’) 10 further defining,
                                            Bruce Tuckman, Chief Economist, 202–                    1. Statutory Authority                                 among other things, the term ‘‘swap
                                            418–5624, btuckman@cftc.gov or Scott                       Title VII of the Dodd-Frank Wall                    dealer’’ in § 1.3 of the CFTC’s
                                            Mixon, Associate Director, 202–418–                     Street Reform and Consumer Protection                  regulations (‘‘SD Definition’’) and
                                            5771, smixon@cftc.gov, Office of the                    Act (‘‘Dodd-Frank Act’’) 1 established a               providing for a de minimis exception in
                                            Chief Economist; or Mark Fajfar,                        statutory framework to reduce risk,                    paragraph (4) therein (‘‘De Minimis
                                            Assistant General Counsel, 202–418–                     increase transparency, and promote                     Exception’’).11 The De Minimis
                                            6636, mfajfar@cftc.gov, Office of                       market integrity within the financial                  Exception states that a person shall not
                                            General Counsel, Commodity Futures                      system by regulating the swap market.                  be deemed to be an SD unless its swaps
                                            Trading Commission, Three Lafayette                     Among other things, the Dodd-Frank                     connected with swap dealing activities
                                            Centre, 1155 21st Street, NW,                           Act amended the Commodity Exchange                     exceed an aggregate gross notional
                                            Washington, DC 20581.                                   Act (‘‘CEA’’) 2 to provide for the                     amount (‘‘AGNA’’) threshold of $3
                                            SUPPLEMENTARY INFORMATION:                              registration and regulation of swap                    billion (measured over the prior 12-
                                                                                                    dealers (‘‘SDs’’).3 The Dodd-Frank Act                 month period), subject to a phase-in
                                            Table of Contents                                       directed the CFTC and the U.S.                         period during which the AGNA
                                            I. Background                                           Securities and Exchange Commission
                                               A. Statutory and Regulatory Background               (‘‘SEC’’ and together with the CFTC,                      6 7 U.S.C. 1a(49)(A). In general, a person that

                                               1. Statutory Authority                                                                                      satisfies any one of these prongs is deemed to be
                                                                                                    ‘‘Commissions’’) to jointly further                    engaged in swap dealing activity. See also the
                                               2. Regulatory History                                define, among other things, the term
                                               3. Policy Considerations                                                                                    definitions of ‘‘swap’’ in CEA section 1a(47) and
                                               4. De Minimis Calculation                            ‘‘swap dealer,’’ 4 and to exempt from                  § 1.3 of Commission regulations. 7 U.S.C. 1a(47); 17
                                                                                                    designation as an SD a person that                     CFR 1.3.
                                               B. The Proposal                                                                                                7 7 U.S.C. 1a(49)(D).
                                            II. Final Rule—$8 Billion Threshold                     engages in a de minimis quantity of                       8 7 U.S.C. 1a(49)(A).
                                               A. Proposal                                          swap dealing.5                                            9 Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-
                                               B. Summary of Comments                                  CEA section 1a(49) defines the term                 Based Swap Dealer,’’ ‘‘Major Swap Participant,’’
                                               1. Set Threshold at $8 Billion                       ‘‘swap dealer’’ to include any person                  ‘‘Major Security-Based Swap Participant’’ and
                                               2. Increase Threshold                                who: (1) Holds itself out as a dealer in               ‘‘Eligible Contract Participant,’’ 75 FR 80174
                                               3. Allow Threshold to Decrease                       swaps; (2) makes a market in swaps; (3)                (proposed Dec. 21, 2010).
                                               4. Other Comments                                                                                              10 Further Definition of ‘‘Swap Dealer,’’

                                               C. Final Rule and Commission Response                  1 Public Law 111–203, 124 Stat. 1376 (2010),
                                                                                                                                                           ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap
                                               1. Rationale for Not Reducing AGNA                                                                          Participant,’’ ‘‘Major Security-Based Swap
                                                                                                    available at https://www.gpo.gov/fdsys/pkg/PLAW-       Participant’’ and ‘‘Eligible Contract Participant,’’ 77
                                                  Threshold to $3 Billion
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                                                                                                    111publ203/pdf/PLAW-111publ203.pdf.                    FR 30596 (May 23, 2012).
                                               2. Rationale for Not Increasing AGNA                   2 The CEA is found at 7 U.S.C. 1, et seq.
                                                                                                                                                              11 See 17 CFR 1.3, Swap dealer. As discussed in
                                                  Threshold                                           3 See generally 7 U.S.C. 6s.
                                                                                                                                                           more detail in section II, the Commission notes that
                                               3. Response to Other Comments                          4 Dodd-Frank Act section 712(d)(1). See the
                                                                                                                                                           a joint rulemaking with the SEC is not required to
                                            III. Proposed Rule Amendments Not Adopted               definitions of ‘‘swap dealer’’ in CEA section 1a(49)   amend the De Minimis Exception, pursuant to
                                               A. Swaps Entered into by Insured                     and § 1.3 of Commission regulations. 7 U.S.C.          paragraph (4)(v) of the De Minimis Exception. See
                                                  Depository Institutions in Connection             1a(49); 17 CFR 1.3.                                    17 CFR 1.3, Swap dealer, paragraph (4)(v); 77 FR
                                                  With Loans to Customers                             5 See Dodd-Frank Act section 721.                    at 30634 n.464.



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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                  56667

                                            threshold is set at $8 billion.12 The                       In November 2015, staff issued a                    3. Policy Considerations
                                            phase-in period was originally                           preliminary report concerning the De                   (i) Swap Dealer Registration Policy
                                            scheduled to terminate on December 31,                   Minimis Exception (‘‘Preliminary Staff                 Considerations
                                            2017, and the AGNA threshold was                         Report’’).17 After consideration of the
                                            scheduled to decrease to $3 billion at                                                                             The policy goals underlying SD
                                                                                                     public comments received in response
                                            that time. However, as discussed below,                                                                         registration and regulation generally
                                                                                                     to the Preliminary Staff Report,18 and
                                            pursuant to paragraph (4)(ii)(C)(1) of the                                                                      include reducing systemic risk,
                                                                                                     further data analysis, in August 2016                  increasing counterparty protections, and
                                            De Minimis Exception, the Commission                     staff issued a final staff report 19
                                            issued two successive orders to set new                                                                         increasing market efficiency,
                                                                                                     concerning the De Minimis Exception                    orderliness, and transparency.
                                            termination dates, and the phase-in                      (‘‘Final Staff Report,’’ and together with
                                            period is currently scheduled to                                                                                   Reducing systemic risk: The Dodd-
                                                                                                     the Preliminary Staff Report, ‘‘Staff                  Frank Act was enacted in the wake of
                                            terminate on December 31, 2019.13                        Reports’’). The data analysis in the Staff             the financial crisis of 2008, in
                                               When the $3 billion AGNA threshold
                                                                                                     Reports provided some insights into the                significant part, to reduce systemic risk,
                                            was established, the Commissions
                                                                                                     effectiveness of the De Minimis                        including the risk to the broader U.S.
                                            explained that the information then
                                                                                                     Exception as currently implemented.                    financial system created by
                                            available regarding certain portions of
                                                                                                     For example, staff analyzed the number                 interconnections in the swap market.23
                                            the swap market was limited, and that
                                                                                                     of swap transactions involving at least                Pursuant to the Dodd-Frank Act, the
                                            they expected more information to be
                                                                                                     one registered SD,20 which is indicative               Commission has adopted regulations
                                            available in the future (following the
                                                                                                     of the extent to which swaps are subject               designed to mitigate the potential
                                            implementation of swap data reporting),
                                                                                                     to SD regulation at the current $8 billion             systemic risk inherent in the previously
                                            which would enable the Commissions
                                                                                                     AGNA threshold. Data reviewed for the                  unregulated swap market.24
                                            to make a more informed assessment of                                                                              Increasing counterparty protections:
                                            the De Minimis Exception and to revise                   Final Staff Report indicated that
                                                                                                                                                            Providing regulatory protections for
                                            it as appropriate.14 In recognition of                   approximately 96 percent of swap
                                                                                                                                                            swap counterparties who may be less
                                            these limitations and in anticipation of                 transactions analyzed involved at least                experienced or knowledgeable about the
                                            additional swap market data becoming                     one registered SD.                                     swap products offered by SDs
                                            available to the CFTC through the                           To provide additional time for more                 (particularly end-users who use swaps
                                            reporting of transactions to swap data                   information to become available to                     for hedging or investment purposes) is
                                            repositories (‘‘SDRs’’), paragraph                       study the De Minimis Exception, in                     a fundamental policy goal advanced by
                                            (4)(ii)(B) of the De Minimis Exception                   October 2016 the Commission issued an                  the regulation of SDs.25 The
                                            was adopted, which directed CFTC staff                   order, pursuant to paragraph (4)(ii)(C)(1)             Commissions recognized that a
                                            to complete and publish for public                                                                              narrower or smaller de minimis
                                                                                                     of the De Minimis Exception,
                                            comment a report on topics relating to                                                                          exception would increase the number of
                                                                                                     establishing December 31, 2018, as the
                                            the definition of the term ‘‘swap dealer’’                                                                      counterparties that could potentially
                                            and the de minimis threshold as                          new termination date for the $8 billion
                                                                                                     phase-in period.21 To enable staff to                  benefit from those regulatory
                                            appropriate, based on the availability of                                                                       protections.26
                                            data and information.15 Paragraph                        conduct additional analysis, in October
                                                                                                                                                               Increasing market efficiency,
                                            (4)(ii)(C) of the De Minimis Exception                   2017 the Commission further extended
                                                                                                                                                            orderliness, and transparency:
                                            provided that after giving due                           the phase-in period to December 31,                    Increasing swap market efficiency,
                                            consideration to the staff report and any                2019.22 Generally, the extensions                      orderliness, and transparency is another
                                            associated public comment, the CFTC                      provided additional time for                           goal of SD regulation.27 Regulations
                                            may either set a termination date for the                Commission staff to conduct further
                                            phase-in period or issue a notice of                     data analysis regarding the De Minimis                    23 Dodd-Frank Act, Preamble (indicating that the

                                            proposed rulemaking to modify the De                     Exception, and gave market participants                purpose of the Dodd-Frank Act was to promote the
                                                                                                     additional time to begin preparing for a               financial stability of the United States by improving
                                            Minimis Exception.16                                                                                            accountability and transparency in the financial
                                                                                                     change, if any, to the AGNA threshold.                 system, to end ‘‘too big to fail,’’ to protect the
                                              12 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A).                                                              American taxpayer by ending bailouts, to protect
                                            Paragraph (4)(i)(A) also provides for a de minimis                                                              consumers from abusive financial services
                                            threshold of $25 million with regard to swaps in                                                                practices, and for other purposes). See also De
                                                                                                        17 See Swap Dealer De Minimis Exception
                                            which the counterparty is a ‘‘special entity’’                                                                  Minimis Exception to the Swap Dealer Definition,
                                            (excluding ‘‘utility special entities’’ as provided in   Preliminary Report (Nov. 18, 2015), available at       83 FR 27444, 27446 (proposed June 12, 2018).
                                            paragraph (4)(i)(B) of the De Minimis Exception) as      http://www.cftc.gov/idc/groups/public/@swaps/             24 For example, registered SDs have specific
                                            defined in CEA section 4s(h)(2)(C), 7 U.S.C.             documents/file/dfreport_sddeminis_1115.pdf. For        requirements for risk management programs and
                                            6s(h)(2)(C). This final rule would not change the        the Preliminary Staff Report, staff analyzed data      margin. See, e.g., 17 CFR 23.600; 17 CFR 23.150–
                                            AGNA threshold for swaps with special entities.          from April 1, 2014 through March 31, 2015.             23.161.
                                              13 See Order Establishing De Minimis Threshold                                                                   25 For example, registered SDs are subject to
                                                                                                        18 The comment letters are available on the
                                            Phase-In Termination Date, 81 FR 71605 (Oct. 18,                                                                external business conduct standard regulations
                                                                                                     Commission website at http://comments.cftc.gov/
                                            2016); Order Establishing a New De Minimis                                                                      designed to provide counterparty protections. See,
                                            Threshold Phase-In Termination Date, 82 FR 50309         PublicComments/CommentList.aspx?id=1634.
                                                                                                                                                            e.g., 17 CFR 23.400–23.451.
                                                                                                        19 See Swap Dealer De Minimis Exception Final
                                            (Oct. 31, 2017).                                                                                                   26 SD Definition Adopting Release, 77 FR 30628
                                              14 See SD Definition Adopting Release, 77 FR           Staff Report (Aug. 15, 2016), available at http://     (‘‘On the one hand, a de minimis exception, by its
                                            30632–34. In making their determination, the             www.cftc.gov/idc/groups/public/@swaps/                 nature, will eliminate key counterparty protections
                                            Commissions considered the limited and                   documents/file/dfreport_sddeminis081516.pdf. For       provided by Title VII for particular users of swaps
                                            incomplete swap market data that was available at        the Final Staff Report, staff analyzed data from       and security-based swaps.’’). See also 83 FR 27446.
                                            that time and concluded that the $3 billion level        April 1, 2015 through March 31, 2016.                     27 77 FR 30629 (‘‘The statutory requirements that
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                                            appropriately considers the relevant regulatory             20 Given that all of the CEA section 4s             apply to swap dealers . . . include requirements
                                            goals. Id. at 30632. The Commissions found merit                                                                . . . aimed at helping to promote effective
                                                                                                     requirements have not yet been implemented by
                                            in determining the threshold by multiplying the                                                                 operation and transparency of the swap . . .
                                            estimated size of the domestic swap market by a          regulation, the term ‘‘registered SD’’ refers to an
                                                                                                                                                            markets.’’). See id. at 30703 (‘‘Those who engage in
                                            0.001 percent ratio suggested by several                 entity that is a provisionally registered SD. See 17
                                                                                                                                                            swaps with entities that elude swap dealer or major
                                            commenters. Id. at 30633.                                CFR 3.2(c)(3)(iii).
                                                                                                                                                            swap participant status and the attendant
                                              15 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(B).         21 81 FR 71605.
                                                                                                                                                            regulations could be exposed to increased
                                              16 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(C).         22 82 FR 50309.                                                                                 Continued




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                                            56668            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            requiring SDs, for example, to keep                     increase efficiency by establishing a                   could, for example, discourage persons
                                            detailed daily trading records, report                  simple test for whether a person’s swaps                from engaging in limited swap dealing
                                            trade information, and engage in                        connected with swap dealing activity                    activity in order to avoid the burdens
                                            portfolio reconciliation and                            must be included in the de minimis                      associated with SD regulation.
                                            compression exercises help achieve                      calculation. On the other hand, more
                                                                                                                                                            4. De Minimis Calculation
                                            these market benefits.28                                complexity in the de minimis
                                                                                                    calculation potentially results in less                    Generally, a person must count
                                            (ii) De Minimis Exception Policy                                                                                towards its AGNA threshold all swaps
                                                                                                    efficiency.33
                                            Considerations                                             Allowing limited ancillary dealing: A                it enters into for dealing purposes over
                                               Consistent with Congressional intent,                de minimis exception allows persons to                  the preceding 12-month period. In
                                            ‘‘an appropriately calibrated de minimis                accommodate existing clients that have                  addition, each person whose own swaps
                                            exception has the potential to advance                  a need for swaps (on a limited basis)                   do not exceed the AGNA threshold must
                                            other interests.’’ 29 These interests                   along with other services.34 This enables               also include in its de minimis
                                            include increasing efficiency, allowing                 end-users to continue transacting within                calculation the AGNA of swaps of any
                                            limited swap dealing in connection with                 existing business relationships, for                    other unregistered affiliate controlling,
                                            other client services, encouraging new                  example to hedge interest rate or                       controlled by, or under common control
                                            participants to enter the market, and                   currency risk.                                          with that person (referred to as
                                            focusing regulatory resources.30 The                       Encouraging new participants: A de                   ‘‘aggregation’’).38
                                            policy objectives underlying the de                     minimis exception also promotes                            Pursuant to various CFTC regulations,
                                            minimis exception are designed to                       competition by allowing a person to                     certain swaps, subject to specific
                                            encourage participation and                             engage in some swap dealing activities                  conditions, need not be considered in
                                            competition by allowing persons to                      without immediately incurring the                       determining whether a person is an SD,
                                            engage in a de minimis amount of                        regulatory costs associated with SD                     including: (1) Swaps entered into by an
                                            dealing without incurring the costs of                  registration and regulation.35 Without a                IDI with a customer in connection with
                                            registration and regulation.31                          de minimis exception, SD regulation                     originating a loan to that customer; 39 (2)
                                               Increasing efficiency: A de minimis                  could become a barrier to entry that may                swaps between affiliates; 40 (3) swaps
                                            exception based on an objective test                    stifle competition. An appropriately                    entered into by a cooperative with its
                                            with a limited degree of complexity                     calibrated de minimis exception could                   members; 41 (4) swaps hedging physical
                                            enables entities to engage in a lower                   lower the barrier to entry of becoming                  positions; 42 (5) swaps entered into by
                                            level of swap dealing with limited                      an SD by allowing smaller participants                  floor traders; 43 (6) certain foreign
                                            concerns about whether their activities                 to gradually expand their business until                exchange (‘‘FX’’) swaps and FX
                                            would require registration.32 The de                    the scope and scale of their activity                   forwards; 44 and (7) commodity trade
                                            minimis exception thereby fosters                       warrants regulation (and the costs                      options.45 In addition, the Commission
                                            efficient application of the SD                         involved with compliance).                              understands that persons have applied
                                            Definition. Additionally, the                              Focusing regulatory resources:                       CFTC interpretive guidance and staff
                                            Commission is of the view that the                      Finally, the de minimis exception also                  letters so as not to count towards the
                                            potential for regular or periodic changes               increases regulatory efficiency by                      AGNA threshold, subject to certain
                                            to the de minimis threshold may reduce                  enabling the Commission to focus its                    conditions, certain cross-border
                                            its efficacy by making it challenging for               limited resources on entities whose                     swaps 46 and swaps resulting from
                                            persons to calibrate their swap dealing                 swap dealing activity is sufficient in
                                            activity as appropriate for their business              size and scope to warrant oversight.36                     38 17 CFR 1.3, Swap dealer, paragraph (4)(i)(A);

                                            models. Further, the Commission is                         As noted in the SD Definition                        Interpretive Guidance and Policy Statement
                                                                                                                                                            Regarding Compliance With Certain Swap
                                            mindful that objective, predictable                     Adopting Release, ‘‘implementing the                    Regulations, 78 FR 45292, 45323 (July 26, 2013).
                                            standards in the de minimis exception                   de minimis exception requires a careful                 See also 83 FR 27447.
                                                                                                    balancing that considers the regulatory                    39 See 17 CFR 1.3, Swap dealer, paragraph (5); 77

                                            counterparty risk; customer protection and market       interests that could be undermined by                   FR at 30620–24. See also 83 FR 27447.
                                            orderliness benefits that the regulations are                                                                      40 See 17 CFR 1.3, Swap dealer, paragraph (6)(i);

                                            intended to provide could be muted or sacrificed,
                                                                                                    an unduly broad exception as well as                    77 FR at 30624–25. See also 83 FR 27447.
                                            resulting in increased costs through reduced market     those regulatory interests that may be                     41 See 17 CFR 1.3, Swap dealer, paragraph (6)(ii);

                                            integrity and efficiency. . . .’’). See also 83 FR      promoted by an appropriately limited                    77 FR at 30625–26. See also 83 FR 27447.
                                            27446.                                                  exception.’’ 37 A narrower de minimis                      42 See 17 CFR 1.3, Swap dealer, paragraph (6)(iii);
                                               28 See, e.g., 17 CFR 23.200–23.205; 17 CFR parts                                                             77 FR at 30611–14. See also 83 FR 27447.
                                                                                                    exception would likely mean that a
                                            43 and 45; 17 CFR 23.502–23.503.                                                                                   43 See 17 CFR 1.3, Swap dealer, paragraph (6)(iv);
                                               29 See 77 FR 30628. See also 83 FR 27446.
                                                                                                    greater number of entities would be                     77 FR at 30614. See also 83 FR at 27447. The floor
                                               30 See 77 FR 30628–30, 30707–08. See also 83 FR      required to register as SDs and become                  trader exclusion was also addressed in no-action
                                            27446–47.                                               subject to the regulatory framework                     relief. See CFTC Staff Letter No. 13–80, No-Action
                                               31 In considering the appropriate de minimis         applicable to registered SDs. However, a                Relief from Certain Conditions of the Swap Dealer
                                            threshold, ‘‘exclud[ing] entities whose dealing                                                                 Exclusion for Registered Floor Traders (Dec. 23,
                                                                                                    de minimis exception that is too narrow                 2013), available at https://www.cftc.gov/idc/groups/
                                            activity is sufficiently modest in light of the total
                                            size, concentration and other attributes of the                                                                 public/@lrlettergeneral/documents/letter/13-80.pdf.
                                                                                                       33 77 FR 30707–08 (‘‘On the other hand, requiring       44 See Determination of Foreign Exchange Swaps
                                            applicable markets can be useful in avoiding the
                                            imposition of regulatory burdens on those entities      market participants to consider more variables in       and Foreign Exchange Forwards Under the
                                            for which dealer regulation would not be expected       evaluating application of the de minimis exception      Commodity Exchange Act, 77 FR 69694, 69704–05
                                            to contribute significantly to advancing the            would likely increase their costs to make this          (Nov. 20, 2012); Further Definition of ‘‘Swap,’’
                                            customer protection, market efficiency and              determination.’’). See also 83 FR 27446–47.             ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap
                                                                                                       34 77 FR 30629, 30707–08. See also 83 FR 27447.
                                            transparency objectives of dealer regulation.’’ 77 FR                                                           Agreement’’; Mixed Swaps; Security-Based Swap
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                                                                                                       35 77 FR 30629. See also 83 FR 27447.                Agreement Recordkeeping, 77 FR 48208, 48253
                                            30629–30. See also 83 FR 27446–47.
                                               32 77 FR 30628–29 (‘‘[T]he de minimis exception         36 77 FR 30628–29. See also 83 FR 27447.             (Aug. 13, 2012).
                                                                                                                                                               45 See 17 CFR 32.3; Commodity Options, 77 FR
                                            may further the interest of regulatory efficiency          37 77 FR 30628. See SD Definition Proposing

                                            when the amount of a person’s dealing activity is,      Release, 75 FR 80179 (The de minimis exception          25320, 25326 n.39 (Apr. 27, 2012).
                                            in the context of the relevant market, limited to an    ‘‘should apply only when an entity’s dealing               46 See 78 FR 45292; CFTC Letter No. 18–13, No-

                                            amount that does not warrant registration. . . . In     activity is so minimal that applying dealer             Action Position: Relief for Certain Non-U.S. Persons
                                            addition, the exception can provide an objective        regulations to the entity would not be warranted.’’).   from Including Swaps with International Financial
                                            test . . . .’’). See also 83 FR 27446–47.               See also 83 FR 27447.                                   Institutions in Determining Swap Dealer and Major



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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                       56669

                                            multilateral portfolio compression                       as a non-deliverable forward                                II. Final Rule—$8 Billion Threshold
                                            exercises.47 Further, certain inter-                     transaction.                                                   Given the more complete information
                                            governmental or quasi-governmental                          The various aspects of the NPRM are                      now available regarding certain portions
                                            international financial institutions are                 discussed in further detail below. The                      of the swap market, the data analytical
                                            not included within the term ‘‘swap                      Commission received 43 letters and                          capabilities developed since the SD
                                            dealer.’’ 48                                             Commission staff participated in four ex                    regulations were adopted, five years of
                                                                                                     parte meetings 50 concerning the                            implementation experience, and
                                            B. The Proposal                                          NPRM.51                                                     comments received in response to the
                                               On June 12, 2018, the Commission
                                                                                                                                                                 NPRM, in this adopting release the
                                            published for public comment a Notice                       50 Comments were submitted by the following
                                                                                                                                                                 Commission is amending the De
                                            of Proposed Rulemaking (‘‘NPRM’’) to                     entities: 360 Trading Networks Inc. (‘‘360
                                                                                                     Trading’’); American Bankers Association (‘‘ABA’’)          Minimis Exception by setting the AGNA
                                            amend the De Minimis Exception by: (1)
                                                                                                     (ABA also attached a report prepared by NERA                threshold at $8 billion in swap dealing
                                            Setting the AGNA threshold for the De                    Economic Consulting); American Gas Association              activity. The CFTC may in the future
                                            Minimis Exception at $8 billion in swap                  (‘‘AGA’’); Americans for Financial Reform (‘‘AFR’’);
                                                                                                                                                                 separately propose or adopt rules
                                            dealing activity entered into by a person                Associated Foreign Exchange, Inc. and GPS Capital
                                                                                                     Markets, Inc. (‘‘AFEX/GPS’’); Association of Global         addressing any aspect of the NPRM that
                                            over the preceding 12 months; (2)                        Custodians (‘‘AGC’’); Better Markets, Inc. (‘‘Better        is not finalized in this release.52
                                            adding new factors to the De Minimis                     Markets’’); Bond Dealers of America (‘‘BDA’’);                 This change to the De Minimis
                                            Exception that would lead to excepting                   Capital One Financial Corporation (‘‘Capital One’’);
                                                                                                                                                                 Exception is being adopted pursuant to
                                            from the AGNA calculation: (a) Certain                   Cboe SEF, LLC (‘‘Cboe SEF’’); Citizens Financial
                                                                                                     Group, Inc. (‘‘Citizens’’); CME Group Inc. and              the Commission’s authority under CEA
                                            swaps entered into with a customer by                                                                                section 1a(49)(D), which requires the
                                                                                                     Intercontinental Exchange, Inc. (‘‘CME/ICE’’);
                                            an IDI in connection with originating a                  Coalition for Derivatives End-Users (‘‘CDEU’’);             Commission to exempt from designation
                                            loan to that customer, (b) certain swaps                 Coalition of Physical Energy Companies (‘‘COPE’’);
                                                                                                                                                                 as an SD an entity that engages in a de
                                            entered into to hedge financial or                       Commercial Energy Working Group (‘‘CEWG’’);
                                                                                                                                                                 minimis quantity of swap dealing in
                                            physical positions, and (c) certain swaps                Commodity Markets Council (‘‘CMC’’) (CMC also
                                                                                                     expressed support for the CEWG comment letter);             connection with transactions with or on
                                            resulting from multilateral portfolio                    Covington & Burling LLP (‘‘Covington’’); Daiwa              behalf of its customers, and to
                                            compression exercises; and (3)                           Securities Co. Ltd. (‘‘Daiwa’’); Edison Electric            promulgate regulations to establish
                                            providing that the Commission may                        Institute and Electric Power Supply Association
                                                                                                                                                                 factors with respect to the making of
                                            determine the methodology to be used                     (‘‘EEI/EPSA’’); Foreign Exchange Professionals
                                                                                                     Association (‘‘FXPA’’); Frost Bank; Futures Industry        this determination to exempt.53 The
                                            to calculate the notional amount for any                 Association and FIA Principal Traders Group                 Commissions issued the SD Definition
                                            group, category, type, or class of swaps,                (‘‘FIA’’); Institute for Agriculture and Trade Policy       Adopting Release pursuant to section
                                            and delegating to the Director of the                    (‘‘IATP’’); Institute of International Bankers (‘‘IIB’’);
                                                                                                                                                                 712(d)(1) of the Dodd-Frank Act, which
                                            Division of Swap Dealer and                              International Energy Credit Association (‘‘IECA’’)
                                                                                                     (IECA also expressed support for the EEI/EPSA               requires the CFTC and SEC to jointly
                                            Intermediary Oversight (‘‘DSIO’’) the                    comment letter); International Swaps and                    adopt rules regarding the definition of,
                                            authority to make such determinations                    Derivatives Association and Securities Industry and         among other things, the term ‘‘swap
                                            (collectively, the ‘‘Proposal’’).49                      Financial Markets Association (‘‘ISDA/SIFMA’’);
                                                                                                                                                                 dealer.’’ The CFTC continues to
                                               In addition, the Commission sought                    Japanese Bankers Association (‘‘JBA’’); M&T Bank
                                                                                                     (‘‘M&T’’); Managed Funds Association (‘‘MFA’’);             coordinate with the SEC on SD and
                                            comment on the following additional
                                                                                                     National Council of Farmer Cooperatives (‘‘NCFC’’);         security-based swap dealer regulations.
                                            potential changes to the De Minimis                      National Rural Electric Cooperative Association and         However, as discussed in the SD
                                            Exception: (1) Adding as a factor a                      American Public Power Association (‘‘NRECA/
                                                                                                                                                                 Definition Adopting Release, a joint
                                            minimum dealing counterparty count                       APPA’’); Natural Gas Supply Association
                                                                                                     (‘‘NGSA’’); NEX Group plc (‘‘NEX’’); Northern               rulemaking is not required with respect
                                            threshold and/or a minimum dealing
                                                                                                     Trust; Optiver US LLC (‘‘Optiver’’) (Optiver also           to the De Minimis Exception.54 The
                                            transaction count threshold; (2) adding                  expressed support for the FIA comment letter);              Commission notes that it has consulted
                                            as a factor whether a swap is exchange-                  Regions Financial Corp. (‘‘Regions’’); State Street;        with the SEC and prudential regulators
                                            traded and/or cleared; and (3) adding as                 SVB Financial Group (‘‘SVB’’); Thomson Reuters
                                                                                                     (SEF) LLC (‘‘TR SEF’’); six U.S. Senators                   regarding the change to the De Minimis
                                            a factor whether a swap is categorized
                                                                                                     (‘‘Senators’’); Virtu Financial Inc. (‘‘Virtu’’);           Exception adopted herein.55
                                                                                                     Western Union Business Solutions (USA), LLC and
                                            Swap Participant Status (May 16, 2018), available        Custom House USA, LLC (‘‘Western Union’’); and              A. Proposal
                                            at https://www.cftc.gov/sites/default/files/idc/         XTX Markets Limited (‘‘XTX’’). Additionally, there
                                            groups/public/%40lrlettergeneral/documents/letter/                                                                     The Commission proposed to amend
                                                                                                     were three meetings with Delta Strategy Group,
                                            2018-05/18-13.pdf; CFTC Staff Letter No. 12–71,          DRW, Jump Trading, and Optiver, and one meeting             paragraph (4)(i)(A) of the De Minimis
                                            No-Action Relief: U.S. Bank Wholly Owned by              with Better Markets. The comment letters and                Exception by setting the AGNA
                                            Foreign Entity May Calculate De Minimis                  notice of the ex parte meetings are available at            threshold at $8 billion. For added
                                            Threshold Without Including Activity From Its            https://comments.cftc.gov/PublicComments/
                                            Foreign Affiliates (Dec. 31, 2012), available at                                                                     clarity, the Commission also proposed
                                                                                                     CommentList.aspx?id=2885.
                                            https://www.cftc.gov/idc/groups/public/                     51 Additionally, in March 2017, Chairman
                                            %40lrlettergeneral/documents/letter/12-71.pdf;           Giancarlo initiated an agency-wide internal review          (May 24, 2017). The suggestion letters filed by the
                                            CFTC Staff Letter No. 12–61, No-Action Relief: U.S.      of CFTC regulations and practices to identify those         public are available at https://comments.cftc.gov/
                                            Bank Wholly Owned by Foreign Entity May                  areas that could be simplified to make them less            KISS/KissInitiative.aspx.
                                            Calculate De Minimis Threshold Without Including         burdensome and costly (‘‘Project KISS’’). See
                                                                                                                                                                    52 See ICI v. CFTC, 720 F.3d 370, 379 (D.C. Cir.
                                            Activity From Its Foreign Affiliates (Dec. 20, 2012),    Remarks of then-Acting Chairman J. Christopher              2013) (‘‘[A]s the Supreme Court has emphasized,
                                            available at https://www.cftc.gov/sites/default/files/   Giancarlo before the 42nd Annual International              ‘[n]othing prohibits federal agencies from moving in
                                            idc/groups/public/@lrlettergeneral/documents/            Futures Industry Conference in Boca Raton, FL               an incremental manner.’ ’’) (quoting FCC v. Fox
                                            letter/12-61.pdf.                                        (Mar. 15, 2017), available at https://www.cftc.gov/         Television Stations, Inc., 556 U.S. 502, 522 (2009)).
                                               47 CFTC Staff Letter No. 12–62, No-Action Relief:                                                                    53 7 U.S.C. 1a(49)(D). See also 17 CFR 1.3, Swap
                                                                                                     PressRoom/SpeechesTestimony/opagiancarlo-20.
                                            Request that Certain Swaps Not Be Considered in          The Commission subsequently published in the                dealer, paragraph (4)(v).
                                            Calculating Aggregate Gross Notional Amount for          Federal Register a Request for Information                     54 77 FR 30634 n.464 (‘‘We do not interpret the
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                                            Purposes of the Swap Dealer De Minimis Exception         soliciting suggestions from the public regarding            joint rulemaking provisions of section 712(d) of the
                                            for Persons Engaging in Multilateral Portfolio           how the Commission’s existing rules, regulations,           Dodd-Frank Act to require joint rulemaking here,
                                            Compression Activities (Dec. 21, 2012), available at     or practices could be applied in a simpler, less            because such an interpretation would read the term
                                            https://www.cftc.gov/idc/groups/public/@                 burdensome, and less costly manner. A number of             ‘‘Commission’’ out of CEA section 1a(49)(D) (and
                                            lrlettergeneral/documents/letter/12-62.pdf.              responses submitted pursuant to the Project KISS            Exchange Act section 3(a)(71)(D)), which
                                               48 See SD Definition Adopting Release, 77 FR                                                                      themselves were added by the Dodd-Frank Act.’’).
                                                                                                     Request for Information supported modifications to
                                            30693.                                                   the De Minimis Exception. Project KISS, 82 FR                  55 As required by § 712(a)(1) of the Dodd-Frank
                                               49 83 FR 27444.                                       21494 (May 9, 2017), amended by 82 FR 23765                 Act.



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                                            56670            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            to change the term ‘‘swap positions’’ to                    Generally employing methodologies                   of challenges in calculating notional
                                            ‘‘swaps’’ in paragraph (4)(i)(A).                        similar to those used for purposes of the              amounts, including: (1) The vast array of
                                            Additionally, the Commission proposed                    Staff Reports, staff attempted to                      underlying commodities with differing
                                            to delete a parenthetical clause in                      calculate persons’ swaps activity in                   characteristics; (2) the multiple types of
                                            paragraph (4)(i)(A) referring to the                     terms of AGNA to assess how the swap                   swaps (e.g., fixed-float, basis, options,
                                            period after adoption of the rule further                market might be impacted by potential                  multi-leg, exotic); (3) the variety of data
                                            defining the term ‘‘swap,’’ and to                       changes to the current De Minimis                      points required to calculate notional
                                            remove and reserve paragraph (4)(ii) of                  Exception. The reason an entity enters                 amounts (e.g., price, quantity, quantity
                                            the De Minimis Exception, which                          into a swap (e.g., dealing, hedging,                   units, location, grades, exchange rate);
                                            addresses the phase-in procedure and                     investing, proprietary trading) is not                 (4) locality-specific terms; and (5) lack
                                            staff report requirements of the De                      collected under the reporting                          of industry standards for notional
                                            Minimis Exception (discussed above in                    requirements in part 45 of the                         amount-equivalent calculations.66 Given
                                            section I.A.2), since both of those                      Commission’s regulations.60                            the limitations in the AGNA data,
                                            provisions would no longer be                            Accordingly, staff applied filters to the              counterparty counts and transaction
                                            applicable.                                              data to exclude from the analysis certain              counts were used as proxies to analyze
                                               The Commission proposed to                            transactions and entities that were less               likely swap dealing activity for
                                            maintain the AGNA threshold at $8                        likely to be connected to potential swap               participants in the NFC swap market.
                                            billion, and also solicited comment on                   dealing activity. Entities such as funds,                 The analysis conducted for the
                                            whether to reduce the threshold to $3                    insurance companies, cooperatives,                     Proposal largely confirmed the analysis
                                            billion, or increase the threshold. The                  government-sponsored entities, most                    conducted for the Staff Reports; 67
                                            Commission cited as relevant an                          commercial end-users, and international                however, there is greater confidence in
                                            analysis of SDR data from January 1,                     financial institutions were excluded as                the results given the improved data and
                                            2017, through December 31, 2017 (the                     potential SDs for the purpose of the                   refined methodology. Nonetheless,
                                            ‘‘review period’’).56 Given                              analysis because these entities generally              given the lack of a swap dealing
                                            improvements in the quality of data                      use swaps for investing, hedging, or                   indicator for individual swaps, and the
                                            being reported to SDRs since the Staff                   proprietary trading, or otherwise enter                lack of an indicator to identify whether
                                            Reports were issued, Commission staff                    into swaps that would not be included                  a specific swap need not be considered
                                            analyzed the AGNA of swaps activity                      in determining whether the entity is an                in determining whether a person is an
                                            for interest rate swaps (‘‘IRS’’), credit                SD.61 Further, additional filters allowed              SD or counted towards the person’s
                                            default swaps (‘‘CDS’’), FX swaps,57 and                 for the exclusion of inter-affiliate 62 and            AGNA threshold, staff’s analysis was
                                            equity swaps (whereas the analysis of                    non-U.S. to non-U.S. swap                              based on a person’s AGNA of swaps
                                            AGNA data in the Staff Reports was                       transactions.63                                        activity, as opposed to AGNA of swap
                                            limited to IRS and CDS).58 However,                         With the benefits of improved data                  dealing activity.
                                            given certain limitations discussed                      quality and analytical tools, staff                       To assess the relative impact on the
                                            below, AGNA data was not available for                   conducted a more granular analysis (as                 swap market of potential changes to the
                                            non-financial commodity (‘‘NFC’’)                        compared to the Staff Reports) to more                 De Minimis Exception, CFTC staff
                                            swaps. In addition to now-available                      accurately identify those entities that,               analyzed the extent to which the swap
                                            AGNA information for FX swaps and                        based on their observable business                     market was subject to SD regulation
                                            equity swaps, there were also continued                  activities, were potentially engaging in               during the review period because at
                                            improvements in the consistency of                       swap dealing activity (‘‘In-Scope                      least one counterparty to a swap was a
                                            legal entity identifier (‘‘LEI’’) and                    Entities’’) 64 versus those likely to be               registered SD (‘‘2017 Regulatory
                                            unique swap identifier reporting.59                      engaging in other kinds of transactions                Coverage’’). Specifically, with regard to
                                                                                                     (e.g., entering into swaps for investment              2017 Regulatory Coverage, staff
                                               56 See 83 FR 27448–58. The data was sourced           purposes). Further, for the purposes of                identified the extent to which: (1)
                                            from data reported to the four registered SDRs:          the Proposal, a minimum unique
                                            BSDR LLC, Chicago Mercantile Exchange Inc.,                                                                     Swaps activity, measured in terms of
                                            DTCC Data Repository, and ICE Trade Vault. The           counterparty count of 10 counterparties                AGNA or transaction count, was subject
                                            analysis excluded inter-affiliate and non-U.S.           was utilized to better identify the                    to SD regulation during the review
                                            transactions. The total size of the swap market that     entities that are likely to be engaged in              period because at least one counterparty
                                            was analyzed, after excluding inter-affiliate and        transactions that have to be considered
                                            non-U.S. transactions, was approximately $221.1                                                                 to a swap was a registered SD (‘‘2017
                                            trillion in AGNA of swaps activity (excluding non-       for the SD Definition. Adding this filter              AGNA Coverage’’ or ‘‘2017 Transaction
                                            financial commodity swaps), approximately 4.4            to the analysis reduced the likelihood of              Coverage,’’ as applicable); and (2)
                                            million transactions, and 39,107 counterparties.         false positives—i.e., reduced the                      counterparties in the swap market
                                            The Proposal includes additional discussion              potential that entities likely engaged in
                                            regarding the methodology utilized to conduct the                                                               transacted with at least one registered
                                            analysis. 83 FR 27449–50.                                hedging or other non-dealing activity                  SD during the review period (‘‘2017
                                               57 The term ‘‘FX swaps’’ is used in this release to   would be identified as potential SDs.65                Counterparty Coverage’’).
                                            only describe those FX transactions that are                With respect to NFC swaps,                             Additionally, staff estimated
                                            counted towards a person’s de minimis calculation.       Commission staff encountered a number
                                            The term ‘‘FX swaps’’ does not refer to swaps and                                                               regulatory coverage by assessing the
                                            forwards that are not counted towards the de               60 See
                                                                                                                                                            extent to which the swap market would
                                            minimis threshold pursuant to the exemption                        17 CFR part 45 app.1.
                                                                                                       61 See  supra section I.A.4 (discussing the de
                                                                                                                                                            have been subject to SD regulation at
                                            granted by the Secretary of the Treasury. See 77 FR
                                            at 69704–05; 77 FR 48253.                                minimis threshold calculation). The Commission         different AGNA thresholds because at
                                               58 See 83 FR 27449–50; Preliminary Staff Report,      notes that the entity-based exclusions and             least one counterparty to a swap was
                                            supra note 19, at 21–22; Final Staff Report, supra       transaction filters are not a determinative means of   identified as a ‘‘Likely SD’’ (‘‘Estimated
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                                            note 17, at 19.                                          assessing whether any particular entity is engaged
                                                                                                     in swap dealing. See also 83 FR 27449 n.73.            Regulatory Coverage’’). For purposes of
                                               59 As discussed in the Proposal, certain data
                                                                                                        62 See 17 CFR 1.3, Swap dealer, paragraph (6)(i).   this analysis, the term ‘‘Likely SD’’
                                            restrictions limited the usefulness of the SDR data
                                                                                                        63 See generally 78 FR 45292.
                                            to identify which swaps should be counted towards
                                                                                                        64 The majority of In-Scope Entities are banks,       66 See 83 FR 27449–50.
                                            a person’s de minimis threshold, and the ability to
                                            precisely assess the current de minimis threshold        broker-dealers, non-bank financial entities, and         67 See generally 83 FR 27449–58; Final Staff
                                            or the impact of potential changes to the current        affiliates thereof.                                    Report, supra note 19; Preliminary Staff Report,
                                            exclusions. See 83 FR 27449–50.                             65 See 83 FR 27449.                                 supra note 17.



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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                              56671

                                            refers to an In-Scope Entity that                          Specifically, commenters stated that a             alleviates the uncertainty currently
                                            exceeded a specified AGNA threshold                     reduced AGNA threshold could lead to                  experienced by market participants with
                                            level, and traded with at least 10 unique               some entities reducing or ceasing swaps               an AGNA of swap dealing activity
                                            counterparties. With regard to Estimated                activity to avoid registration and its                between $3 billion and $8 billion.76
                                            Regulatory Coverage, staff identified the               related costs, which could lead to                       Some commenters suggested that
                                            extent to which: (1) Swaps activity,                    negative impacts for swap market                      maintaining the $8 billion threshold
                                            measured in terms of AGNA or                            participants. For example, fewer de                   would enable the Commission to focus
                                            transaction count, would have been                      minimis dealers could mean that small                 its limited resources on entities whose
                                            subject to SD regulation during the                     and mid-sized end-users and                           swap dealing is sufficient in size and
                                            review period, at a specified AGNA                      commercial entities who utilize swaps                 scope to warrant oversight.77 Two
                                            threshold, because at least one                         for hedging purposes, as well as NFC                  commenters also noted that Commission
                                            counterparty to a swap was identified as                swap market participants, would have                  regulations not related to SD registration
                                            a Likely SD at that AGNA threshold                      fewer dealers available to them.71 The                (e.g., part 43 and 45 reporting
                                            (‘‘Estimated AGNA Coverage’’ or                         potential negative impacts could                      requirements, and mandatory clearing
                                            ‘‘Estimated Transaction Coverage,’’ as                  include: (1) Increased concentration in               and swap execution facility (‘‘SEF’’)
                                            applicable); and (2) counterparties in                  the swap dealing market; (2) reduced                  trading requirements) already apply to
                                            the swap market would have transacted                   availability of potential swap                        unregistered entities, and therefore,
                                            with at least one Likely SD during the                  counterparties; (3) reduced liquidity; (4)            many of the policy goals of SD
                                            review period, at a specified AGNA                      increased volatility; (5) increased                   registration are already being advanced
                                            threshold (‘‘Estimated Counterparty                     systemic risk; and/or (6) higher fees or              with respect to swaps entered into by
                                            Coverage’’).                                            reduced competitive pricing.72                        these unregistered entities.78
                                                                                                       Several commenters also noted that                    With respect to NFC swaps, EEI/EPSA
                                            B. Summary of Comments
                                                                                                    the current $8 billion threshold already              and NGSA expressed concern that a
                                            1. Set Threshold at $8 Billion                          subjects the vast majority of transactions            lower AGNA threshold would provide
                                               Most commenters that addressed this                  to SD regulation, or that a reduced                   less accommodation for increasing NFC
                                            aspect of the Proposal stated that the                  threshold would not capture significant               prices, which could lead to market
                                            AGNA threshold should not decrease to                   additional dealing activity.73                        participants reducing their swap dealing
                                            $3 billion, and/or supported setting the                   Some commenters stated that the                    activity to remain below the threshold.79
                                            threshold at $8 billion.68 Some of those                nature of the swaps activity entered into             To address concerns regarding volatility
                                            commenters also stated that the                         by certain entities poses less systemic               in NFC prices, EEI/EPSA also suggested
                                            Commission could or should consider a                   risk—e.g., commercial banks that have                 that the AGNA threshold be adjusted
                                            higher threshold, as discussed in more                  swap dealing activity below $8 billion                annually, consistent with the consumer
                                            detail in section II.B.2 below.69                       and may be subject to prudential                      price index.80 NGSA also stated that the
                                            Commenters generally stated that the                    banking rules, and entities that                      lower regulatory coverage for NFC
                                            policy goals for SD registration—                       primarily enter into NFC swaps.74 More                swaps is appropriate given the
                                            reducing systemic risk, increasing                      specifically, Citizens noted that                     characteristics of that market.81
                                            counterparty protections, and/or                        prudential regulators examine the safety                 A few commenters addressed the
                                            increasing market efficiency,                           and soundness of middle-market banks’                 compliance costs associated with SD
                                            orderliness, and transparency—and the                   swap businesses, and the swaps offered                registration,82 stating that: (1)
                                            policy goals for a de minimis                           by these banks are structured                         Establishing an $8 billion threshold
                                            exception—increasing efficiency,                        conservatively to assist customers with               results in aggregate recurring
                                            allowing limited ancillary dealing,                     hedging activities. Further, with respect             compliance costs over a 10-year period,
                                            encouraging new participants, and/or                    to counterparty protections, Citizens                 on a net present value basis, of
                                            focusing regulatory resources—would                     stated that many middle-market banks                  approximately $373 million; 83 and (2)
                                            be better advanced if the threshold did                 that would potentially have to register at            the cost of SD registration (e.g., systems
                                            not decrease to $3 billion.70                           a lower threshold likely already                      build-out, external advisors, National
                                                                                                    perform, under applicable prudential                  Futures Association membership dues,
                                               68 See ABA, AGA, AFEX/GPS, BDA, Capital One,         banking rules, know-your-counterparty                 compliance with margin rules) is
                                            Cboe SEF, Citizens, CDEU, COPE, CEWG, CMC,              and suitability analyses of their                     underestimated,84 with one commenter
                                            EEI/EPSA, FXPA, Frost Bank, FIA, IIB, IECA, ISDA/       counterparties prior to entering into
                                            SIFMA, JBA, M&T, NCFC, NRECA/APPA, NGSA,                                                                        76 See AFEX/GPS, Capital One, COPE, EEI/EPSA,
                                            Regions, SVB, Virtu, Western Union, and XTX
                                                                                                    swaps with them.75
                                                                                                                                                          FXPA, FIA, IECA, ISDA/SIFMA, JBA, M&T, NGSA,
                                            comment letters.                                           Several commenters stated that                     and Regions comment letters.
                                               69 See ABA, AFEX/GPS, BDA, Capital One,              maintaining the $8 billion threshold                    77 See Citizens, Virtu, and Western Union
                                            Citizens, FIA, IIB, IECA, JBA, Regions, and SVB         provides regulatory stability or                      comment letters.
                                            comment letters.                                                                                                78 See Citizens and Virtu comment letters.
                                               70 Additionally, CDEU and CEWG referenced the
                                                                                                    Opportunities—Capital Markets (available at             79 See EEI/EPSA and NGSA comment letters. As
                                            Congressional Directive stating that the Commission     https://www.treasury.gov/press-center/press-          stated by EEI/EPSA, if NFC prices increase, the
                                            should establish a threshold of $8 billion or greater   releases/Documents/A-Financial-System-Capital-        same level of swaps activity will potentially have
                                            within 60 days of enactment of the Appropriations       Markets-FINAL-FINAL.pdf).                             a higher notional amount.
                                            Act (i.e., by February 16, 2016), while CEWG also         71 See ABA, AGA, AFEX/GPS, BDA, Capital One,          80 See EEI/EPSA comment letter.
                                            cited to the recent recommendation from the U.S.
                                                                                                    Citizens, CDEU, COPE, CEWG, CMC, EEI/EPSA,              81 See NGSA comment letter.
                                            Department of the Treasury to set the threshold at
                                                                                                    Frost Bank, IIB, IECA, ISDA/SIFMA, JBA, M&T,            82 See ABA, IECA, and SVB comment letters.
                                            $8 billion. See CDEU and CEWG comment letters;
                                                                                                    NCFC, NRECA/APPA, NGSA, SVB, Virtu, and               Although addressed by ABA and SVB, the costs
                                            Accompanying Statement to the Consolidated
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                                                                                                    Western Union comment letters.                        associated with SD regulatory requirements (e.g.,
                                            Appropriations Act of 2016, Explanatory Statement         72 See id.
                                            Division A at 32 (Dec. 2015), available at http://                                                            margin, reporting, technology, etc.) are not
                                                                                                      73 See AGA, BDA, Capital One, CDEU, CMC, Frost      considered in the cost-benefit analysis below. See
                                            docs.house.gov/meetings/RU/RU00/20151216/
                                            104298/HMTG-114-RU00-20151216-SD002.pdf; H.             Bank, IECA, M&T, SVB, and Western Union               infra notes 249 and 286.
                                            Rpt. 114–205 at 76 (July 14, 2015), available at        comment letters.                                        83 See ABA comment letter.
                                                                                                      74 See Citizens, IECA, NRECA/APPA, NGSA, and          84 See IECA and SVB comment letters. Although
                                            https://www.congress.gov/114/crpt/hrpt205/CRPT-
                                            114hrpt205.pdf; U.S. Department of the Treasury, A      SVB comment letters.                                  outside of the scope of this rulemaking, IECA also
                                            Financial System That Creates Economic                    75 See Citizens comment letter.                                                               Continued




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                                            56672            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            estimating that the initial cost would be               aggregate compliance cost savings for                   Markets explained that, with respect to
                                            approximately $8 to $10 million per                     market participants. For example,                       the 10 counterparty count filter, if a
                                            entity, with ongoing costs to meet                      AGNA thresholds of $15 billion and $50                  commodities affiliate of a large firm
                                            regulatory requirements of $2 million                   billion would result in potential                       held itself out as an SD or stood ready
                                            per year thereafter.85                                  aggregate savings of $81 million and                    to accommodate the demand of nine
                                              BDA stated that the CFTC should                       $170 million, respectively, on a net                    counterparties, that affiliate should have
                                            clarify whether changes to the De                       present value basis, as compared to an                  been treated, for purposes of the
                                            Minimis Exception would be applicable                   $8 billion threshold.94                                 analysis, as an SD on account of its
                                            to activity that occurred in the                                                                                swap dealing activities, unless those
                                            preceding 12 months.86                                  3. Allow Threshold to Decrease                          activities did not exceed the AGNA
                                                                                                      Better Markets and the Senators stated                threshold or otherwise were excluded
                                            2. Increase Threshold
                                                                                                    that the Commission should permit the                   from the SD registration analysis.
                                               Some commenters stated that the                      AGNA threshold to decrease to $3                        Further, Better Markets argued that: (1)
                                            Commission should also consider a                       billion, contending generally that the                  The CFTC should have provided an
                                            higher AGNA threshold, maintaining                      data insufficiently or misleadingly                     opportunity for public comment on the
                                            generally that the policy goals for SD                  justifies maintaining the threshold at $8               assumptions that were made in the
                                            registration and a de minimis exception                 billion,95 and arguing that the Proposal                CFTC’s analysis; (2) there was some
                                            would be better advanced if the                         did not follow necessary administrative                 ambiguity in the terms used in the
                                            threshold was higher than $8 billion.87                 procedures or exceeded statutory                        CFTC’s analysis; (3) the CFTC’s reliance
                                               Specifically, several commenters                     authority.96                                            upon a 10 unique counterparty filter
                                            stated that an increased threshold                        The Senators stated that though                       was based on fatally flawed logic; (4) the
                                            would not lead to a significant decrease                notional amount data for NFC swaps                      data limitations demonstrate the
                                            in regulatory coverage of swap dealing                  was not used in considering the                         benefits of better field-level and affiliate
                                            activity.88 ABA and AFEX/GPS asserted                   Proposal, the data that was available for               reporting of swaps, which would give
                                            that a $20 billion threshold would result               NFC swaps shows significantly less                      the CFTC an informed basis to consider
                                            in a trivial or non-consequential                       regulatory coverage under an $8 billion                 changes to the $3 billion threshold; and
                                            reduction in Estimated Regulatory                       threshold than in other asset classes.                  (5) the CFTC must first amend its swap
                                            Coverage,89 and JBA stated that at a                    The Senators commented that though                      data and chief compliance officer
                                            $100 billion threshold, Estimated AGNA                  the Proposal notes the ‘‘unique                         reporting regulations to ensure it has
                                            Coverage would be almost the same.90                    characteristics’’ of NFC swaps, the                     sufficient data to provide an informed
                                            AFEX/GPS also asserted that the                         analysis provided to justify the $8                     basis for administrative action.99
                                            cumulative swaps activity conducted by                  billion threshold indicates a series of                    Further, Better Markets commented
                                            SDs between $8 billion and $20 billion                  assumptions and possibilities rather                    that the de minimis threshold
                                            does not pose systemic risk, and entities               than concrete data. The Senators also                   framework should be revised to focus on
                                            would still be subject to reporting rules               questioned why, given the lack of                       strict, observable measures like total
                                            and recordkeeping requirements.91                       relevant notional amount data for NFC                   notional amount or transactional
                                            Additionally, AFEX/GPS and Citizens                     swaps, it is necessary to maintain the $8               activities, rather than a subset of such
                                            asserted that a decrease in the number                  billion threshold for SDs involved with                 activities that potential registrants are
                                            of registered SDs would focus the                       energy-related swaps.97                                 able to interpret for themselves, and are
                                            Commission’s resources on SDs whose                       Better Markets claimed that the                       not presently required by regulation to
                                            dealing activity is sufficient in size and              regulatory coverage statistics are                      monitor, report, or internally track
                                            scope to warrant greater oversight.92                   incomplete, misleading, and irrelevant                  across the firm.100
                                               Further, a few commenters stated that                to the Dodd-Frank Act’s activities-based                   Better Markets also asserted that the
                                            given the costs of SD registration, a                   standard for SD registration, stating that              statutory provision regarding the de
                                            higher threshold would encourage new                    the high AGNA and transaction                           minimis exception authorizes the CFTC
                                            participants to engage in swap dealing                  coverage percentages are not indicative                 to issue exemptive orders for individual
                                            activity, which SVB noted as important                  of the absolute level of swap dealing                   or similarly-situated legal entities based
                                            given the highly concentrated nature of                 activities relevant to SD registration                  upon generally applicable factors for
                                            the SD market, where the nation’s                       under CEA section 1a(49)(A). Further, in                determining whether such entities may
                                            largest banks control the vast majority of              connection with the 680 additional                      be involved in a de minimis amount of
                                            swap market share.93                                    counterparties that would potentially                   swap dealing activities. Better Markets
                                               Additionally, ABA indicated that an                  benefit from SD regulations under a                     noted that it is unreasonable to
                                            increased threshold would result in                     lower $3 billion threshold, Better                      conclude that Congress intended a
                                                                                                    Markets asserted that expanding                         wholesale exemption from registration
                                            asserted that the Commission underestimates the
                                                                                                    counterparty protections to hundreds of                 that is divorced from the particular
                                            negative impact on market development due to its                                                                circumstances of any one petitioner.
                                            failure to provide a workable capital rule for non-     market participants would have more
                                            bank SDs.                                               than a ‘‘limited’’ effect on counterparty               Further, Better Markets argued that the
                                               85 See SVB comment letter.
                                                                                                    protection once relative statistics are                 language in the exemptive mandate
                                               86 See BDA comment letter.
                                                                                                    abandoned.98                                            must be construed in a manner that is
                                               87 See ABA, AFEX/GPS, BDA, Capital One,                                                                      faithful to Congress’ intent that the
                                                                                                      Better Markets also asserted that the
                                            Citizens, FIA, IIB, IECA, JBA, Regions, and SVB                                                                 quantity of exempted swap dealing
                                            comment letters.                                        data filtering methodology was flawed
                                                                                                                                                            activities be minimal, a concept that has
                                                                                                    and inadequately explained. Better
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                                               88 See ABA, AFEX/GPS, BDA, Citizens, IIB, and

                                            SVB comment letters.
                                                                                                                                                            boundaries that can be drawn far short
                                               89 See ABA and AFEX/GPS comment letters.               94 See   ABA comment letter.                          of billions of dollars and thousands of
                                               90 See JBA comment letter.                             95 See   Better Markets and Senators comment          transactions by unregulated entities.101
                                               91 See AFEX/GPS comment letter.                      letters.
                                               92 See AFEX/GPS and Citizens comment letters.           96 See Better Markets comment letter.                  99 See id.
                                               93 See AFEX/GPS, BDA, Citizens, and SVB                 97 See Senators comment letter.                        100 See id.
                                            comment letters.                                           98 See Better Markets comment letter.                  101 See id.




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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                  56673

                                               AFR stated that, though the improved                 4. Other Comments                                     exposures or other risk-based
                                            data adds weight to the claim that an $8                (i) Testing Frequency for Threshold                   measures.112
                                            billion threshold is appropriate for some                                                                        However, IECA indicated that
                                            financial swaps, arguments against the                     Some commenters addressed the                      although using an alternative netting
                                            $8 billion threshold are particularly                   testing frequency for the threshold.                  option (e.g., entity-netted notional
                                            strong in the case of NFC markets.                      Commenters stated that the AGNA                       amounts) is a reasonable idea and could
                                            Specifically, AFR asserted that the                     threshold calculation should continue                 be incorporated into existing analysis,
                                            Commission should be willing to vary                    to be based primarily on a rolling 12-                in the NFC markets, netting would need
                                            the de minimis threshold based on                       month test of the AGNA of swap dealing                to be done as a measure of credit
                                            market characteristics, and in particular               activity.105 Specifically, commenters                 exposure with physical and bilateral
                                            should reduce the $8 billion threshold                  indicated that: (1) Resources have been               swaps being able to be offset against
                                            in NFC markets where $8 billion in                      spent and systems have been built to                  each other in connection with perceived
                                            notional amount represents a different                  comply with the current approach, and                 ‘‘risk exposure’’ to a third party.113
                                            level of economic significance than in                  additional changes would add costs                    Additionally, ABA and Citizens stated
                                            some other markets. AFR elaborated that                 with no tangible benefit; 106 and (2) the             that the Commission should consider a
                                            the Commission continues to lack data                   current test is relatively simple to                  risk-based de minimis exception.114
                                            on the notional amount for NFC swaps,                   administer, and the 12-month testing                  ABA asserted that a notional amount-
                                            making it difficult to draw definitive                  period helps to smooth out any short-                 based threshold is not the appropriate
                                            conclusions on the economic                             term aberrations in activity and allows               metric for the De Minimis Exception
                                            significance of the activity that is not                for moderation of future swap dealing                 because it is not based on risk, and
                                            subject to SD regulation, and stated that               activity to avoid inadvertently triggering            suggested that the Commission consider
                                            significant dealing activity in the NFC                 an SD registration requirement.107                    initial margin as the relevant metric.115
                                            market is not subject to SD regulation                  However, BDA stated that the CFTC                        Commenters also stated that a tiered
                                            since roughly half of all the entities with             should allow entities to test only at the             SD registration structure should not be
                                            10 or more NFC swap counterparties are                  end of every month, which would                       considered, noting that a tiered
                                            not registered as SDs.102                               significantly reduce the compliance                   structure could: (1) Create more
                                                                                                    testing burdens for small and mid-sized               uncertainty for situations where legal
                                               AFR also stated that the AGNA                                                                              and regulatory certainty is important; 116
                                                                                                    firms.108
                                            threshold analysis does not account for                                                                       and (2) subject entities to instability and
                                            the numerous other exceptions                           (ii) Alternatives to Single AGNA                      inefficiency relative to a permanent,
                                            proposed, which could exclude very                      Threshold                                             single AGNA de minimis threshold.117
                                            large amounts of swaps activity from                                                                          On the other hand, IATP asserted that
                                            being considered in the de minimis                         A number of commenters addressed
                                                                                                    whether the Commission should                         the Commission should propose, after
                                            calculation.103                                                                                               further analytic work, a tiered SD
                                                                                                    consider an alternative to a threshold
                                               IATP stated that the data analysis                   based on the AGNA of swap dealing                     registration for SDs with a certain
                                            does not support the idea that more                     activity.                                             threshold of NFC swaps activity (e.g.,
                                            ancillary dealing would promote greater                                                                       via commodity indexes).118
                                            competition, and thus more efficient                       AFR and IECA noted that using                         Several commenters also addressed
                                                                                                    AGNA as the relevant criterion for SD                 whether the Commission should
                                            and transparent price discovery. IATP
                                                                                                    registration, as compared to other                    consider counterparty count and
                                            asserted that the Commission’s true
                                                                                                    options, is beneficial because: (1)                   transaction count as additional metrics
                                            motivation for maintaining an $8 billion
                                                                                                    Resources have been expended to                       to be included in the de minimis
                                            threshold is the regulatory compliance
                                                                                                    comply with the current approach, and                 threshold, as discussed in section IV.A
                                            cost and burden reduction objective of
                                                                                                    changing that approach would add costs                below.
                                            Project KISS, rather than promoting
                                                                                                    for no perceived benefit; 109 and (2)
                                            improved price discovery. Further,                                                                            (iii) Additional Calculation Changes
                                                                                                    AGNA provides a stable metric of the
                                            IATP claimed that the AGNA of activity
                                                                                                    gross size of swaps commitments that is                 Commenters addressed other
                                            in the swap market has shrunk due to
                                                                                                    not reliant on either current market                  calculation changes the Commission
                                            the clearing of swaps on centralized
                                                                                                    valuations, model forecasts, or                       should consider for the de minimis
                                            platforms and the migration of swaps to
                                                                                                    institutional arrangements such as                    threshold.
                                            the futures markets, not because of                     bankruptcy procedures.110
                                            constraints of the de minimis threshold                                                                         Virtu stated that the CFTC should
                                            or because of the lack of exemptions to                    AFR stated that controlling                        exempt swap transactions where one
                                            the calculation of that threshold. IATP                 operational risk, not simply market risk,             party is a registered SD or one party
                                            also stated that though it did not have                 is a major reason for SD designation,                 holds their account with a registered SD
                                            a data-based argument for changing the                  and AGNA remains a good measure of                    since these transactions are already
                                            $8 billion threshold, it believed that                  the total operational risks incurred by               subject to the existing reporting
                                            maintaining the $8 billion threshold                    an entity,111 and Better Markets
                                            because of potential administrative                     maintained that the de minimis                          112 See  Better Markets comment letter.
                                            burdens involved in lowering the                        exception must require consideration of                 113 See  IECA comment letter.
                                            threshold is a poor, Project KISS-based,                the quantity of swap dealing, not net                    114 See ABA and Citizens comment letters.
                                                                                                                                                             115 See ABA comment letter. ABA also suggested
                                            rationale that does not consider the                                                                          that the Commission could consider other market
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                                                                                                      105 See ABA, CMC, Frost Bank, and IECA
                                            benefits of SD registration for the                                                                           risk metrics, such as value at risk and sensitivities,
                                                                                                    comment letters.                                      as well as credit risk metrics, such as total swaps
                                            financial integrity and price discovery                   106 See ABA, CMC, and IECA comment letters.
                                                                                                                                                          current exposure net of collateral received and
                                            of the swap market.104                                    107 See Frost Bank comment letter.
                                                                                                                                                          largest fifteen swap counterparty current exposures
                                                                                                      108 See BDA comment letter.                         net of collateral received.
                                              102 See AFR comment letter.                             109 See IECA comment letter.                           116 See IECA comment letter.
                                              103 See id.                                             110 See AFR comment letter.                            117 See JBA comment letter.
                                              104 See IATP comment letter.                            111 See id.                                            118 See IATP comment letter.




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                                            56674            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            requirements and, as such, Commission                   transactions with U.S. persons, thereby               and as agreed with by most commenters,
                                            oversight.119                                           undermining the diversity of U.S.                     analysis of the data indicated that: (1)
                                               JBA stated that the CFTC should                      markets.124 Additionally, Western                     The current $8 billion threshold
                                            specify that the termination and                        Union suggested that the Commission                   subjects almost all swap transactions (as
                                            modification of terms and conditions of                 should also address the foreign                       measured by AGNA or transaction
                                            existing transactions do not count                      consolidated subsidiary rules in the                  count) to SD regulations; (2) at a lower
                                            towards the threshold, noting that                      context of the De Minimis Exception                   threshold of $3 billion, there would
                                            termination of transactions mitigates                   rulemaking.125 Further, IIB stated that               only be a small amount of additional
                                            counterparty credit risk and reduces the                the Commission should clarify that a                  AGNA and swap transactions subject to
                                            outstanding AGNA of swaps.120                           swap between a non-U.S. person and a                  SD regulation, and there would
                                               BDA argued that the CFTC should                      non-U.S. asset manager that is subject to             potentially be reduced liquidity in the
                                            consider increasing the ‘‘special entity’’              post-trade allocation and submitted for               swap market, as compared to the $8
                                            threshold to $100 million in order to                   clearing, or given up to a non-U.S.                   billion threshold; and (3) a lower
                                            provide special entities with more                      prime broker prior to being allocated,                threshold could lead to reduced
                                            access to the marketplace. BDA                          should not count towards the AGNA                     liquidity for NFC swaps, negatively
                                            maintained that the $25 million                         threshold in certain circumstances.126                impacting end-users who utilize NFC
                                            threshold results in many mid-sized                                                                           swaps for hedging purposes.130
                                            firms deciding not to enter into swaps                  C. Final Rule and Commission Response
                                            with special entities, while an increase                                                                      (i) High Regulatory Coverage at $8
                                                                                                      Upon consideration of the                           Billion Threshold
                                            in that threshold could provide better                  comments,127 the Commission is
                                            market access for special entities while                adopting an amendment to paragraph                       During the review period, almost all
                                            having no material impact on the overall                (4)(i)(A) of the De Minimis Exception to              swap transactions involved at least one
                                            regulation of SDs.121                                   set the AGNA swap dealing threshold at                registered SD as a counterparty—greater
                                               Virtu asserted that transactions by                  $8 billion over the immediately                       than 99 percent for IRS, CDS, FX swaps,
                                            market makers maintaining net open                      preceding 12 months, as proposed. The                 and equity swaps. For NFC swaps,
                                            positions not exceeding $1 billion (over                Commission is also adopting the other                 approximately 86 percent of
                                            a 12-month period) should be exempted                   conforming and clarifying changes as                  transactions involved at least one
                                            from the de minimis threshold                           proposed.                                             registered SD as a counterparty. Overall,
                                            calculation.122 Virtu explained that                                                                          approximately 98 percent of
                                            certain market makers do not hold                       1. Rationale for Not Reducing AGNA                    transactions involved at least one
                                            positions or carry risk for long periods                Threshold to $3 Billion                               registered SD. Further, almost all AGNA
                                            of time, but rather seek to facilitate                    As discussed in the Proposal,128 as                 of swaps activity included at least one
                                            efficient risk transference to earn a                   well as by most commenters that                       registered SD—greater than 99 percent
                                            spread and, in doing so, lower costs for                addressed this aspect of the Proposal,129             for IRS, CDS, FX swaps, and equity
                                            investors through increased price                       the policy objectives underlying SD                   swaps. The Commission notes that the
                                            competition and more transparency in                    regulation—reducing systemic risk,                    2017 Counterparty Coverage was
                                            the market.                                             increasing counterparty protections, and              approximately 83.5 percent—i.e.,
                                               IIB stated that entities that have                   increasing market efficiency,                         approximately 16.5 percent of the
                                            discontinued new swap dealing activity                                                                        counterparties in the swap market did
                                                                                                    orderliness, and transparency—would
                                            should not have to count towards their                                                                        not transact with at least one registered
                                                                                                    not be significantly advanced if the
                                            AGNA threshold certain transactions                                                                           SD on at least one swap (6,440
                                                                                                    threshold decreased to $3 billion.
                                            that modify legacy swaps entered into                                                                         counterparties out of a total of 39,107),
                                                                                                    Additionally, the policy objectives
                                            by those entities, including: (1) Partial                                                                     and therefore potentially did not benefit
                                                                                                    furthered by a de minimis exception—
                                            or full terminations; (2) modifications                                                                       from the counterparty protection aspects
                                                                                                    increasing efficiency, allowing limited
                                            that shorten the duration of an                                                                               of SD regulations.131 However, given the
                                                                                                    ancillary dealing, encouraging new
                                            outstanding swap; (3) partial or full                                                                         2017 AGNA Coverage and 2017
                                                                                                    participants, and focusing regulatory
                                            novations of legacy swap transactions;                                                                        Transaction Coverage statistics, these
                                                                                                    resources—would not be significantly
                                            or (4) swaps submitted for clearing.123                                                                       6,440 entities had limited overall swaps
                                                                                                    advanced, and may be impaired to some
                                            (iv) Cross-Border Issues                                extent, if the threshold decreased.                   activity. Accordingly, to the extent these
                                                                                                    Generally, as discussed in the Proposal               6,440 entities were engaged in swap
                                               With respect to cross-border issues,                                                                       dealing activities, such activity was
                                            JBA stated that the market has been                                                                           likely ancillary and in connection with
                                                                                                      124 See JBA comment letter.
                                            divided into two groups because non-SD                    125 See                                             other client services, potentially
                                                                                                              Western Union comment letter (referring
                                            entities outside of the U.S. avoid                      to Cross-Border Application of the Registration       advancing the policy rationales behind
                                                                                                    Thresholds and External Business Conduct              a de minimis exception. This data
                                              119 See Virtu comment letter.                         Standards Applicable to Swap Dealers and Major
                                              120 See                                               Swap Participants, 81 FR 71946 (proposed Oct. 18,
                                                                                                                                                          signifies that nearly all swaps already
                                                      JBA comment letter.
                                              121 See BDA comment letter.                           2016)). Western Union also stated that the proposed   benefited from the policy considerations
                                              122 See Virtu comment letter. Virtu noted that,       application of the foreign consolidated subsidiary    discussed above (e.g., reducing systemic
                                            while in aggregate the number of transactions           definition to SD registration is inconsistent with
                                            engaged in by market makers might exceed the $8         principles of international comity and would create      130 See generally supra section II.B.1; 83 FR

                                            billion threshold, the net risk of these trades would   an unfair competitive disadvantage for certain        27450–58. See also Final Staff Report, supra note
                                            not have the same potential impact to overall           market participants.                                  19; Preliminary Staff Report, supra note 17.
                                                                                                      126 See IIB comment letter.
                                            systemic risk because exempt market makers’ open                                                                 131 The actual number of entities without a single
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                                                                                                      127 The Commission also notes that the data
                                            net positions in otherwise non-exempt transactions                                                            transaction with a registered SD was likely lower
                                            would be capped at $1 billion over a rolling 12-        analysis discussed in this adopting release and the   than 6,440. Of the 6,440 entities, 1,780 had invalid
                                            month period. Additionally, certain market makers       Proposal confirmed the analysis conducted for the     identifiers that staff was unable to manually replace
                                            access the market through prime brokers—who are         Staff Reports. See generally 83 FR 27449–58; Final    with a valid LEI. It is possible that these 1,780
                                            registered SDs—and, as such, these transactions         Staff Report, supra note 19; Preliminary Staff        invalid identifiers actually represented fewer than
                                            would be included in the prime brokers’ regulatory      Report, supra note 17.                                1,780 distinct counterparties because one
                                            reports and subject to CFTC oversight.                    128 See generally 83 FR 27450–58.
                                                                                                                                                          counterparty may be associated with multiple
                                              123 See IIB comment letter.                             129 See supra section II.B.1.                       invalid identifiers. See 83 FR 27451.



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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                 56675

                                            risk, increasing counterparty                           including, but not limited to, small and                 exemption, which is more directly
                                            protections, and increasing market                      mid-sized end-users who use swaps for                    applicable to the NFC asset class than to
                                            efficiency, orderliness, and                            hedging purposes. Reduced swap                           other swaps.138
                                            transparency) at the existing $8 billion                dealing activity could lead to increased
                                                                                                                                                             (iii) Response to Commenters
                                            threshold.132                                           concentration in the swap dealing
                                                                                                                                                             Advocating Lower Threshold
                                                                                                    market, reduced availability of potential
                                            (ii) Minimal Additional Regulatory                      swap counterparties, reduced liquidity,                     The Commission disagrees with the
                                            Coverage at Lower Threshold                             increased volatility, increased systemic                 few commenters that stated that the
                                               Given the high percentage of swaps                   risk, and/or higher fees or reduced                      AGNA threshold should decrease to $3
                                            that were subject to SD regulation at the               competitive pricing. The end-user                        billion.139
                                            existing $8 billion threshold during the                counterparties of these smaller swap                        Better Markets stated that the high
                                            review period, a lower threshold of $3                  dealing entities may be adversely                        regulatory coverage ratios are not
                                            billion would result in only a small                    impacted by the above consequences                       indicative of the absolute level of swap
                                            amount of additional activity being                     and could face a reduced ability to use                  dealing activities relevant to SD
                                            directly subjected to SD regulation.                    swaps to manage their business risks.135                 registration, and asserted that
                                            Specifically, the Estimated AGNA                        Additionally, as noted by some                           maintaining an $8 billion threshold
                                            Coverage would have increased from                      commenters, the nature of the swaps                      would have more than a limited
                                            approximately $221,020 billion (99.95                   activity entered into by certain entities                detrimental effect on counterparty
                                            percent) to $221,039 billion (99.96                     poses less systemic risk—e.g.,                           protections.140 The Commission notes
                                            percent)—an increase of $19 billion (a                  commercial banks that have swap                          that the statutory requirements do not
                                            0.01 percentage point increase). The                    dealing activity below $8 billion and                    dictate a specific methodology for
                                            Estimated Transaction Coverage would                    entities that primarily enter into NFC                   assessing the de minimis exception,
                                            have increased from 3,795,330 trades                    swaps.136                                                such as the focus on the absolute level
                                            (99.77 percent) to 3,797,734 trades                        Further, although approximately 86                    of swap dealing suggested by Better
                                            (99.83 percent)—an increase of 2,404                    percent of NFC swaps involved at least                   Markets. Rather, the CEA requires the
                                            trades (a 0.06 percentage point                         one registered SD compared to                            Commission to promulgate regulations
                                            increase). The Estimated Counterparty                   approximately 99 percent for other asset                 to establish factors with respect to the
                                            Coverage would have increased from                      classes, as discussed in the Proposal, the               making of a determination to exempt
                                            30,879 counterparties (88.80 percent) to                Commission is of the view that lower                     from designation as an SD an entity
                                            31,559 counterparties (90.75 percent)—                  SD regulatory coverage is acceptable                     engaged in a de minimis quantity of
                                            an increase of 680 counterparties (a 1.96               given the special characteristics of the                 swap dealing, without stating additional
                                            percentage point increase). These small                 NFC swap market. A reduced threshold                     requirements.141
                                                                                                    likely would have negative impacts on                       Additionally, as stated in the SD
                                            increases in Estimated Regulatory
                                                                                                    NFC swap liquidity as some entities                      Definition Proposing Release and the SD
                                            Coverage indicate that the systemic risk
                                                                                                    (e.g., small and mid-sized banks and/or                  Definition Adopting Release, the de
                                            mitigation, counterparty protection, and                                                                         minimis exception ‘‘should be
                                            market efficiency benefits of SD                        non-financial entities) reduce dealing to
                                                                                                    avoid registration and its related costs.                interpreted to address amounts of
                                            regulation would be enhanced in only a                                                                           dealing activity that are sufficiently
                                            very limited manner if the threshold                    This would be detrimental to the end-
                                                                                                    users who do not have trading                            small that they do not warrant
                                            decreased from $8 billion to $3 billion.                                                                         registration to address concerns
                                            Additionally, the limited regulatory and                relationships with larger, financial-
                                                                                                    entity SDs, and who rely on small to                     implicated by the regulations governing
                                            market benefits of a $3 billion threshold                                                                        swap dealers and security-based swap
                                            should be considered in conjunction                     mid-sized banks and/or non-financial
                                                                                                    entities to access liquidity in the wider                dealers. In other words, the exception
                                            with the costs associated with a lower                                                                           should apply only when an entity’s
                                            threshold (e.g., costs of implementing                  swap market. Additionally, even if the
                                                                                                    threshold decreased, the available data                  dealing activity is so minimal that
                                            policies and procedures, technology                                                                              applying dealer regulations to the entity
                                            systems, and training programs to                       leaves it unclear if or to what extent the
                                                                                                    2017 Counterparty Coverage statistic of                  would not be warranted.’’ 142 This
                                            address requirements imposed by SD                                                                               decision inherently requires judgment,
                                            regulations).133                                        86 percent would increase for NFC
                                                                                                    swaps since several of those entities                    and for that reason the Commission has
                                               Additionally, as discussed by the                                                                             considered whether entities that have
                                                                                                    may already have less than $3 billion in
                                            Commission and most commenters, a $3                                                                             less than $8 billion in swap dealing
                                                                                                    AGNA of swap dealing activity. Further,
                                            billion AGNA threshold could lead                                                                                activity meet this standard. Given the
                                                                                                    many of the entities engaged in limited
                                            certain entities to reduce or cease swap                                                                         nature of the swap market and the
                                                                                                    swap dealing activity for NFC swaps
                                            dealing activity to avoid registration and                                                                       Commission’s analysis of the data,
                                                                                                    appear to have a specialized role in the
                                            its related costs.134 Generally, the costs                                                                       requiring an entity that has less than $8
                                                                                                    market, in that their primary business is
                                            associated with registering as an SD may                                                                         billion in swap dealing activity to
                                                                                                    generally non-financial in nature and
                                            exceed the profits from dealing swaps                                                                            register as an SD is not warranted
                                                                                                    the swap dealing activity is ancillary to
                                            for entities with limited dealing                                                                                because it would not appreciably impact
                                                                                                    their primary role in the market.137
                                            activities. This could lead to negative                                                                          the systemic risk, counterparty
                                            impacts for swap market participants,                   Finally, entities that are active in the
                                                                                                    NFC swap market may utilize the                          protection, and market efficiency
                                              132 This analysis is discussed in greater detail in   existing physical position hedging                       considerations of SD regulation, but
                                            the Proposal, and was also addressed by
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                                                                                                                                                               138 See 17 CFR 1.3, Swap dealer, paragraph
                                            commenters. See supra section II.B.1; 83 FR 27450–        135 See  supra section II.B.1; 83 FR 27452–54.
                                            52.                                                       136 See  supra section II.B.1; Citizens, IECA,         (6)(iii); 83 FR 27456–57.
                                              133 This analysis is discussed in greater detail in                                                              139 See supra section II.B.3.
                                                                                                    NRECA/APPA, NGSA, and SVB comment letters.
                                                                                                                                                               140 See supra section II.B.3; Better Markets
                                            the Proposal, and was also addressed by                    137 This analysis is discussed in greater detail in
                                            commenters. See supra section II.B.1; 83 FR 27452–      the Proposal, and was also addressed by                  comment letter.
                                            54.                                                     commenters. See supra section II.B.1; 83 FR 27452–         141 7 U.S.C. 1a(49)(D).
                                              134 See supra section II.B.1; 83 FR 27452–54. See     57. See also CMC, IECA, and NGSA comment                   142 SD Definition Adopting Release, 77 FR 30626;

                                            also Final Staff Report, supra note 19.                 letters.                                                 SD Definition Proposing Release, 75 FR 80179.



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                                            56676            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            would negatively impact the policy                         Also as noted above, with respect to               counterparties is irrelevant.’’ 150 The
                                            considerations underlying the de                        the data analysis methodology, Better                 Commission notes that staff used the
                                            minimis exception by reducing the                       Markets and the Senators stated that the              minimum 10 counterparty count only
                                            amount of swap dealing allowed under                    data insufficiently or misleadingly                   for analytical purposes, as a heuristic to
                                            the exception.143 Thus, the Commission                  justifies maintaining the threshold at $8             help isolate those entities that appeared
                                            concludes that the $8 billion threshold                 billion.148 Better Markets also asserted              to be dealing. Lacking a dealing field in
                                            is consistent with a key rationale behind               that: (1) The CFTC should have                        the data, for the reasons set forth above,
                                            the de minimis exception because it                     provided an opportunity for public                    staff selected a minimum of 10
                                            would permit ‘‘amounts of dealing                       comment on alternative assumptions;                   counterparties as a conservative
                                            activity that are sufficiently small that               (2) there is some ambiguity in the terms              estimate to improve the analysis and
                                            they do not warrant registration.’’ 144 No              used in the CFTC’s analysis; (3) the                  better identify entities likely engaged in
                                            individual policy factor was dispositive                CFTC’s reliance upon a 10 unique                      swap dealing.151
                                            in the Commission’s analysis. Rather,                   counterparty filter is based on fatally                  The Commission also believes that the
                                            the Commission considered all of the                    flawed logic; (4) the data limitations                10 counterparty filter is appropriate for
                                            policy factors when assessing the                       argue for better field-level and affiliate            purposes of this analysis based on its
                                            regulatory coverage ratios.145                          reporting of swaps, which would give                  observations of registered SDs and
                                                                                                    the CFTC an informed basis to consider                unregistered entities active in the swap
                                               As noted above in section II.B.3,                                                                          market. As noted in the Proposal, data
                                                                                                    changes to a $3 billion threshold; and
                                            Better Markets also asserted that the                                                                         analysis showed that 83 percent of
                                                                                                    (5) the CFTC must first amend its swap
                                            statutory provision regarding the de                                                                          registered SDs had 10 or more
                                                                                                    data and chief compliance officer
                                            minimis exception authorizes the CFTC                                                                         counterparties, without weighting the
                                                                                                    reporting regulations to ensure it has
                                            to issue exemptive orders for individual                                                                      results.152 In other words, since the
                                                                                                    sufficient data to provide an informed
                                            or similarly-situated legal entities based                                                                    analysis was performed using a non-
                                                                                                    basis for administrative action.149 Each
                                            upon generally applicable factors for                                                                         weighted ranking, SDs with thousands
                                                                                                    of these comments will be addressed in
                                            determining whether such entities may                                                                         of counterparties did not bias the
                                                                                                    turn.
                                            be involved in de minimis swap dealing                                                                        results.
                                            activities. Better Markets contends that                   First, with respect to Better Markets’
                                                                                                                                                             Fourth, the Commission does not
                                            it is unreasonable to conclude that                     comment that the Commission should
                                                                                                                                                          believe that the data limitations warrant
                                            Congress intended a wholesale                           have provided an opportunity for public
                                                                                                                                                          a delay in setting the threshold at $8
                                            exemption from registration that is                     comment on alternative assumptions for
                                                                                                                                                          billion. As discussed, the data has
                                            divorced from the particular                            the data analysis, the Commission notes
                                                                                                                                                          improved since the analysis in the Staff
                                            circumstances of any one petitioner.146                 that the methodology used by
                                                                                                                                                          Reports. Further, the Commission
                                            As noted, however, the CEA states that                  Commission staff to analyze data in
                                                                                                                                                          believes its analysis was appropriately
                                            the Commission shall promulgate                         relation to the de minimis threshold was
                                                                                                                                                          conservative, particularly given that the
                                            factors, through regulation, regarding                  first laid out in the Preliminary Staff
                                                                                                                                                          volume of activity it analyzed was over-
                                                                                                    Report, on which the public had the
                                            the De Minimis Exception                                                                                      inclusive (since hedging and other non-
                                                                                                    opportunity to comment. The Final Staff
                                            determination. Nothing in the statutory                                                                       dealing activity could not be excluded),
                                                                                                    Report updated that analysis, and then
                                            language prohibits the Commission from                                                                        and given that its entity-level exclusions
                                                                                                    the Proposal explained how the data
                                            establishing a de minimis exception that                                                                      were based on an informed assessment
                                                                                                    related specifically to the proposal to
                                            is self-effectuating. The Commission                                                                          of the likely activity of swap market
                                                                                                    maintain the $8 billion threshold. As
                                            believes that the $8 billion threshold                                                                        participants.
                                                                                                    discussed in the Proposal, the updated                   In the SD Definition Adopting
                                            appropriately excludes entities ‘‘whose
                                                                                                    analysis largely confirmed the analysis               Release, the Commission noted that
                                            dealing activity is sufficiently modest in
                                                                                                    conducted for the Staff Reports.                      ‘‘comprehensive information regarding
                                            light of the total size, concentration and
                                                                                                    However, there is greater confidence in               the total size of the domestic swap
                                            other attributes’’ of the swap market and
                                                                                                    the results given the improved data and               market is incomplete, with more
                                            for which SD regulation ‘‘would not be
                                                                                                    refined methodology. The Commission                   information available with respect to
                                            expected to contribute significantly to
                                                                                                    believes that the public has had an                   certain asset classes than others.’’ 153 In
                                            advancing the customer protection,
                                                                                                    appropriate opportunity to comment on
                                            market efficiency and transparency                                                                            2012, the Commission evaluated the
                                                                                                    the data, the methodology, the
                                            objectives of dealer regulation.’’ 147 The                                                                    appropriateness of the initial $3 billion
                                                                                                    assumptions about the data, and how
                                            Commission sees no basis in the record                                                                        AGNA threshold using three primary
                                                                                                    the data relates to the maintenance of
                                            or requirement in the statute to treat                                                                        sources of data: (1) Index CDS; (2) the
                                                                                                    the $8 billion threshold.
                                            entities differently when they are                                                                            Quarterly Report on Bank Trading and
                                            similarly situated in this respect.                        Second, the Commission cannot                      Derivatives Activities issued by the
                                                                                                    assess Better Markets’ comment that the               Office of the Comptroller of the
                                              143 As discussed, the analysis conducted in           analysis discussed in the Proposal                    Currency (‘‘OCC’’); and (3) public
                                            connection with the Proposal was consistent with        contained ambiguous terms because                     comments to the 2010 SD Definition
                                            the analysis conducted in connection with the Staff     Better Markets does not state which                   Proposing Release.154 At the time,
                                            Reports. See generally 83 FR 27449–58; Final Staff      terms were ambiguous.
                                            Report, supra note 19; Preliminary Staff Report,                                                              granular, transaction-level swaps data
                                            supra note 17.                                             Third, the Commission disagrees with               across all swap asset classes was not yet
                                              144 77 FR 30626. See also 75 FR 80179.                Better Markets’ comment that ‘‘the fact               available for review by the Commission.
                                              145 As noted in the SD Definition Adopting            that CFTC-registered swap dealers,                    The data now available is significantly
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                                            Release, ‘‘implementing the de minimis exception        including every major Wall Street bank,               more detailed than what was available
                                            requires a careful balancing that considers the
                                            regulatory interests that could be undermined by an
                                                                                                    tend to have more than 10
                                                                                                                                                            150 See  Better Markets comment letter.
                                            unduly broad exception as well as those regulatory
                                                                                                                                                            151 See  supra section II.A; 83 FR 27449–50.
                                            interests that may be promoted by an appropriately        148 See supra section II.B.3; Better Markets and
                                            limited exception.’’ 77 FR 30628.                       Senators comment letters.                               152 See 83 FR 27449.
                                              146 See Better Markets comment letter.                  149 See supra section II.B.3; Better Markets          153 77 FR 30632.
                                              147 77 FR 30629–30.                                   comment letter.                                         154 Id. at 30632–33.




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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                  56677

                                            to the Commission when the $3 billion                   though the Proposal noted the ‘‘unique                 advance of any comments submitted in
                                            threshold was originally established.                   characteristics’’ of NFC swaps, the                    response to Project KISS.163
                                            The data now includes details such as                   analysis provided indicated a series of
                                                                                                                                                           2. Rationale for Not Increasing AGNA
                                            counterparty pairs, product identifiers,                assumptions and possibilities rather
                                                                                                                                                           Threshold
                                            transaction-level data for those market                 than concrete data. The Senators also
                                            participants active in more asset classes               questioned whether, given the lack of                     Although several commenters
                                            than only index CDS, and transaction-                   relevant data for NFC swaps, it is                     suggested a higher threshold, the
                                            level data (not just quarterly position                 necessary to reduce the threshold for                  Commission is declining to increase the
                                            data) involving market participants                     SDs involved with energy-related                       AGNA threshold from the current $8
                                            beyond banks subject to OCC reporting.                  swaps. However, as discussed in section                billion level. As discussed in the
                                            In light of the additional, more detailed               II.C.1.ii, the Commission believes that a              Proposal,164 at a $100 billion threshold:
                                            data, the Commission believes that the                  reduced threshold would have a                         (1) The Estimated AGNA Coverage
                                            $8 billion threshold continues to be                    negative impact on NFC swap market                     would have decreased from
                                            appropriately calibrated to the policy                  liquidity as some entities may reduce                  approximately $221,020 billion (99.95
                                            goals of SD registration and the de                     dealing to avoid registration and its                  percent) to $220,877 billion (99.88
                                            minimis exception.155                                   related costs. Additionally, as noted,                 percent)—a decrease of $143 billion (a
                                               Fifth, for similar reasons, the                      entities active in the NFC swap market                 0.06 percentage point decrease); 165 (2)
                                            Commission does not believe it should                   may utilize the existing physical                      the Estimated Transaction Coverage
                                            wait to amend its swap data and chief                   position hedging exemption, which is                   would have decreased from 3,795,330
                                            compliance officer reporting regulations                more directly applicable to the NFC                    trades (99.77 percent) to 3,773,440
                                            before setting the threshold at $8 billion.             asset class than other swaps.159                       trades (99.20 percent)—a decrease of
                                            As noted above, the Commission                             Further, AFR stated that, though the                21,890 trades (a 0.58 percentage point
                                            believes that it does have sufficient data              improved data adds weight to the claim                 decrease); 166 and (3) the Estimated
                                            to support this action, so it is not                    that an $8 billion threshold is                        Counterparty Coverage would have
                                            necessary to wait for future changes to                 appropriate for some financial swaps,                  decreased from 30,879 counterparties
                                            the data reporting regime.156                           arguments against the $8 billion                       (88.80 percent) to 28,234 counterparties
                                               As noted above, Better Markets also                  threshold are particularly strong in the               (81.19 percent)—a decrease of 2,645
                                            commented that the de minimis                           case of NFC swaps.160 The Commission                   counterparties (a 7.61 percentage point
                                            threshold framework should be revised                   does not believe a lower threshold for                 decrease).167
                                            to focus on strict, observable measures                 NFC swaps would advance the policy                        As the Commission and commenters
                                            like total notional amount or                           goals of SD registration or the de                     have stated, the small decrease in
                                            transactional activities, rather than a                 minimis exception. As noted by the                     Estimated AGNA Coverage and
                                            subset of such activities that potential                Commission and several commenters,                     Estimated Transaction Coverage at
                                            registrants are able to interpret for                   the nature of the NFC swap market                      higher thresholds potentially indicates
                                            themselves, and are not presently                       poses less systemic risk than financial                that increasing the threshold to up to
                                            required by regulation to monitor,                      swaps.161 Additionally, the Commission                 $100 billion may have a limited adverse
                                            report, or internally track across the                  notes the concerns of reduced liquidity                effect on the systemic risk and market
                                            firm.157 However, the Commission notes                  if the threshold is reduced for NFC                    efficiency policy considerations of SD
                                            that the statutory definition of ‘‘swap                 swaps, including an increased                          regulation.168 Additionally, a higher
                                            dealer’’ itself limits the scope to swap                concentration in the market, which                     threshold could enhance the benefits
                                            dealing activity, and therefore, using                  could adversely affect end-users who                   associated with a de minimis exception,
                                            total notional amount would not be                      rely on small and mid-sized SDs that do                for example by allowing entities to
                                            appropriate.                                            not have to register at an $8 billion                  increase ancillary dealing activity.
                                               As noted, the Senators stated that the               threshold.                                             However, the Commission is of the view
                                                                                                       Lastly, the Commission disagrees with               that the decrease in Estimated
                                            data that was available for NFC swaps
                                                                                                    IATP’s assertion that promoting                        Counterparty Coverage indicates that
                                            shows significantly less coverage for
                                                                                                    improved price discovery is not the true               fewer entities would be transacting with
                                            that asset class under an $8 billion
                                                                                                    rationale for maintaining an $8 billion                registered SDs, reducing the
                                            threshold compared to other asset
                                                                                                    threshold, and that rather, the                        counterparty protection benefits of SD
                                            classes.158 In justifying the $8 billion
                                                                                                    motivation is the regulatory compliance                regulation if the AGNA threshold
                                            proposal, the Senators commented that
                                                                                                    cost and burden reduction objective of                 increased from $8 billion to $20 billion,
                                               155 Additionally, Commission staff attempted to      Project KISS.162 The Commission has                    $50 billion, or $100 billion.169 The
                                            accurately identify those entities that, based on       laid out above the various policy-related
                                            their observable business activities, are potentially   considerations that justify maintaining                  163 See Final Staff Report, supra note 19;
                                            engaged in swap dealing activity versus those likely    an $8 billion threshold; these relate to
                                            engaged in other kinds of transactions. See supra                                                              Preliminary Staff Report, supra note 17.
                                            section II.A; 83 FR 27449.                              the regulatory goals of both SD                          164 See 83 FR 27454–56.

                                               156 The Commission also notes that it recently       registration in general and of the de                    165 The decrease would be lower at thresholds of

                                            adopted amendments to its chief compliance officer      minimis exception in particular.                       $20 billion and $50 billion, at 0.01 percentage
                                            requirements. See Chief Compliance Officer Duties                                                              points and 0.04 percentage points, respectively.
                                                                                                    Additionally, these goals were                           166 The decrease would be lower at thresholds of
                                            and Annual Report Requirements for Futures
                                            Commission Merchants, Swap Dealers, and Major
                                                                                                    discussed in the Staff Reports, well in                $20 billion and $50 billion, at 0.05 percentage
                                            Swap Participants, 83 FR 43519 (Aug. 27, 2018).                                                                points and 0.42 percentage points, respectively.
                                               157 See supra section II.B.3; Better Markets           159 See 17 CFR 1.3, Swap dealer, paragraph             167 The decrease would be lower at thresholds of
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                                            comment letter.                                         (6)(iii); supra section II.C.1.ii; 83 FR 27456–57.     $20 billion and $50 billion, at 2.80 percentage
                                               158 See supra section II.B.3; Senators comment         160 See supra section II.B.3; AFR comment letter.    points and 5.71 percentage points, respectively.
                                                                                                      161 See supra section II.B.1. See, e.g., IECA and      168 See supra section II.B.2; 83 FR 27455.
                                            letter. As noted above, for NFC swaps,
                                            approximately 86 percent of transactions involved       NGSA comment letters. See also 83 FR 27456–57;           169 As noted, the decrease in Estimated

                                            at least one registered SD as a counterparty,           Final Staff Report, supra note 19, at 12 (citing       Counterparty Coverage would be 2.80 percentage
                                            compared to greater than 99 percent for IRS, CDS,       comment letters submitted in response to               points, 5.71 percentage points, 7.61 percentage
                                            FX swaps, and equity swaps. See supra section           Preliminary Staff Report, supra note 17).              points, at thresholds of $20 billion, $50 billion, and
                                            II.C.1.i.                                                 162 See supra section II.B.3; IATP comment letter.   $100 billion, respectively.



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                                            56678            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            Commission also notes that increasing                     would expect that a change could entail                 that regard, commenters generally stated
                                            the threshold could result in changes in                  costs as market participants adjust their               that the IDI De Minimis Provision better
                                            market behavior that could lead to the                    de minimis threshold calculation                        aligns the regulatory framework with
                                            regulatory coverage decreasing more                       processes.                                              the risk mitigation demands of bank
                                            than the analysis indicated.                                 Additionally, any modification to the                customers.177
                                              Further, maintaining the status quo                     special entity threshold is outside of the
                                                                                                                                                                 Commenters generally supported
                                            signals long-term stability of the de                     scope of the Proposal,174 but as with
                                                                                                                                                              proposed new paragraph (4)(i)(C)(1),178
                                            minimis threshold, and should provide                     other suggestions, the Commission may
                                                                                                                                                              which provided that a swap must be
                                            for the efficient application of the SD                   consider this in the future. Lastly, with
                                                                                                                                                              entered into no earlier than 90 days
                                            Definition, as it allows for long-term                    respect to comments asking that the
                                            planning based on the current AGNA                        Commission address cross-border                         before execution of the loan agreement,
                                            threshold.170                                             issues,175 this issue is also outside of the            or before transfer of principal to the
                                                                                                      scope of this rulemaking.                               customer, unless an executed
                                            3. Response to Other Comments                                                                                     commitment or forward agreement for
                                               With respect to BDA’s comment                          III. Proposed Rule Amendments Not                       the applicable loan exists. In that event,
                                            regarding permitting month-end only                       Adopted                                                 the 90-day restriction does not apply. In
                                            testing for the de minimis threshold, the                 A. Swaps Entered Into by Insured                        comparison, the IDI Swap Dealing
                                            Commission notes that several                             Depository Institutions in Connection                   Exclusion in paragraph (5) of the SD
                                            commenters indicated that the market                      With Loans to Customers                                 Definition requires that a swap must be
                                            has adapted to the current requirements                                                                           entered into no more than 90 days
                                            and that changes would not be                             1. Proposal                                             before or 180 days after the date of
                                            beneficial.171 In particular, the                            The Commission proposed adding an                    execution of the loan agreement (or date
                                            Commission agrees with commenters                         IDI loan-related factor in the De Minimis               of transfer of principal to the
                                            that the current test is relatively simple                Exception (the ‘‘IDI De Minimis                         customer).179 On the other hand, three
                                            to administer, and the 12-month testing                   Provision’’) to address concerns that                   commenters recommended removing
                                            period helps to smooth out any short-                     there are circumstances where swaps                     the 90-day restriction because it would
                                            term variations in activity. The                          not covered by the IDI loan-related swap                be detrimental to the IDIs and/or
                                            Commission does not believe that                          exclusion in paragraph (5) of the SD                    borrowers.180 Additionally, two
                                            allowing month-end only testing would                     Definition (the ‘‘IDI Swap Dealing                      commenters suggested revisions to the
                                            reduce burdens since persons should                       Exclusion’’) should be excluded from                    ‘‘executed commitment’’ or ‘‘forward
                                            already have systems in place to                          the de minimis calculation. Specifically,               agreement’’ exception to the 90-day
                                            regularly track the level of their swap                   the Commission proposed to add                          restriction.181
                                            dealing activity. Therefore, the                          specific characteristics that an IDI can
                                                                                                                                                                 Proposed new paragraph (4)(i)(C)(2)
                                            Commission is not adopting this                           consider when assessing whether swaps
                                                                                                                                                              stated that for purposes of the IDI De
                                            alternative. Additionally, in response to                 entered into with customers in
                                                                                                                                                              Minimis Provision, a swap is ‘‘in
                                            BDA, the Commission notes that for                        connection with loans to those
                                                                                                      customers must be counted towards the                   connection with’’ a loan if: (1) The rate,
                                            purposes of the $8 billion threshold                                                                              asset, liability or other term underlying
                                            calculation, an entity must count                         IDI’s de minimis calculation. The
                                                                                                      proposed IDI De Minimis Provision                       such swap is, or is related to, a financial
                                            activity that took place in the                                                                                   term of such loan; or (2) if such swap
                                            immediately preceding 12 months.                          would have encompassed a broader
                                                                                                      scope of loan-related swaps than the IDI                is required as a condition of the loan,
                                               Similarly, in response to the
                                                                                                      Swap Dealing Exclusion. The proposed                    either under the IDI’s loan underwriting
                                            commenters that recommended
                                                                                                      IDI De Minimis Provision included: (1)                  criteria or as is commercially
                                            alternatives to the single AGNA
                                                                                                      A lengthier timing requirement for                      appropriate, in order to hedge risks
                                            threshold or other calculation
                                                                                                      when the swap must be entered into; (2)                 incidental to the borrower’s business
                                            changes,172 the Commission points out
                                                                                                      an expansion of the types of swaps that                 (other than for risks associated with an
                                            that systems and processes have been
                                                                                                      are eligible; (3) a reduced syndication                 excluded commodity) that may affect
                                            established for the current
                                                                                                      percentage requirement; and (4) an                      the borrower’s ability to repay the loan.
                                            requirements,173 and therefore the
                                                                                                      elimination of the notional amount cap.                 Two commenters requested clarification
                                            Commission is not adopting the
                                                                                                      The IDI could exclude qualifying swaps                  regarding the proposed ‘‘condition of
                                            proposed adjustments at this time. The
                                                                                                      from the de minimis calculation                         the loan’’ language.182
                                            Commission may take subsequent action
                                            or conduct further study with respect to                  pursuant to the IDI De Minimis                             Proposed new paragraph (4)(i)(C)(3)
                                            alternative approaches to the single                      Provision regardless of whether the                     stated that the termination date of the
                                            AGNA threshold, including moving                          swaps would qualify for the IDI Swap                    swap cannot extend beyond termination
                                            toward a risk-based SD registration                       Dealing Exclusion.                                      of the loan. A few commenters stated
                                            metric in the future. The Commission                      2. Summary of Comments                                  that circumstances can be anticipated at
                                                                                                                                                              the time of loan origination that would
                                              170 See 83 FR 27456–57.
                                                                                                         Almost all commenters that addressed                 support permitting the termination date
                                              171 See supra section II.B.4.i. Potentially, month-     the IDI De Minimis Provision expressed                  of the swap to extend beyond
                                            end only testing could marginally encourage               general support for the proposed
                                            competition because newly-established swap                amendment.176 Commenters often                             177 See Capital One, Frost Bank, M&T, Regions
                                            dealing businesses (as contrasted to the existing         compared the IDI De Minimis Provision
                                            businesses that have adapted to current                                                                           comment letters.
                                                                                                      to the IDI Swap Dealing Exclusion. In
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                                                                                                                                                                 178 See Capital One, Citizens, Frost Bank, M&T,
                                            requirements) could set up only month-end testing
                                            as opposed to regular testing. However, the                                                                       and Regions comment letters.
                                                                                                                                                                 179 17 CFR 1.3, Swap dealer, paragraph (5)(i)(A).
                                            Commission believes that maintaining the current            174 See supra section II.B.4.iii; supra note 12; 83

                                            requirements is appropriate even in view of any           FR 27445 n.14.                                             180 See BDA, CDEU, and ISDA/SFIMA comment

                                            marginal encouragement of competition that could            175 See supra section II.B.4.iv.                      letters.
                                            result from the suggested change.                           176 See ABA, BDA, Capital One, CDEU, Citizens,           181 See Capital One and Frost Bank comment
                                              172 See supra sections II.B.4.ii and II.B.4.iii.                                                                letters.
                                                                                                      Frost Bank, IIB, ISDA/SIFMA, JBA, M&T, and
                                              173 See, e.g., supra sections II.B.4.i and II.B.4.ii.   Regions comment letters.                                   182 See ABA and Regions comment letters.




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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                56679

                                            termination of the loan.183 Additionally,                   swap confirmations reference a specific              ‘‘price maker condition’’). In addition,
                                            in response to a question in the                            loan because doing so would add                      the proposed Hedging De Minimis
                                            Proposal, a few commenters stated that                      operational complexity for little or no              Provision included in paragraphs (D)(3)
                                            in order to qualify for the IDI De                          benefit.190                                          through (D)(5) the following conditions
                                            Minimis Provision, IDIs should not be                          Two commenters discussed whether                  that are similar to conditions in the
                                            required to terminate loan-related swaps                    the IDI De Minimis Provision could be                physical hedging exclusion in paragraph
                                            if a loan is called, put, accelerated, or                   promulgated without a joint                          (6)(iii) of the SD Definition: (1) The
                                            goes into default before scheduled                          rulemaking.191 ABA stated that the                   swap must be economically appropriate
                                            termination.184                                             Commission is not required to                        to the reduction of risks that may arise
                                               Proposed new paragraph (4)(i)(C)(4)(i)                   promulgate the IDI De Minimis                        in the conduct and management of an
                                            required an IDI to be, under the terms                      Provision through joint rulemaking with              enterprise engaged in the type of
                                            of the agreements related to the loan, the                  the SEC.192 However, Better Markets                  business in which the person is
                                            source of at least five percent of the                      asserted that the CFTC’s position that a             engaged; (2) the swap must be entered
                                            maximum principal amount under the                          ‘‘joint rulemaking is not required with              into in accordance with sound business
                                            loan for a related swap not to be                           respect to changes to the de minimis                 practices; and (3) the swap must not be
                                            counted towards its de minimis                              exception-related factors’’ is invalid and           entered into in connection with activity
                                            calculation, and proposed new                               ‘‘would impermissibly enable the CFTC                structured to evade designation as an
                                            paragraph (4)(i)(C)(4)(ii) stated that if an                to conduct an end-run around the                     SD.
                                            IDI is a source of less than a five percent                 statutory joint rulemaking requirement.’’
                                            of the maximum principal amount of                          In particular, Better Markets stated that            2. Summary of Comments
                                            the loan, the notional amount of all                        language potentially permitting                         Most commenters supported
                                            swaps the IDI enters into in connection                     unilateral action on the de minimis                  including an express hedging exception
                                            with the financial terms of the loan                        threshold itself does not permit                     that would clarify which physical and
                                            cannot exceed the principal amount of                       unilateral regulatory actions affecting              financial hedging swaps do not need to
                                            the IDI’s loan in order to qualify for the                  core definitional issues that must be                be included in the AGNA threshold
                                            IDI De Minimis Provision. A few                             accomplished through joint                           calculation.195 These commenters
                                            commenters stated that the five percent                     rulemaking.193                                       agreed with the Commission that there
                                            participation requirement should be                                                                              is currently some uncertainty and
                                            eliminated from the IDI De Minimis                          3. Commission Response
                                                                                                                                                             confusion among market participants
                                            Provision,185 while two commenters                             The Commission has determined not                 regarding this determination. However,
                                            generally supported the five percent                        to adopt the IDI De Minimis Provision                many of these commenters raised issues
                                            requirement.186                                             at this time. The Commission continues               with the particular conditions identified
                                               The proposed IDI De Minimis                              to consider the issues raised by                     in the proposed Hedging De Minimis
                                            Provision did not include the                               commenters. For example, the various                 Provision, and two other commenters
                                            requirement in the IDI Swap Dealing                         contexts in which IDIs enter into swaps              objected to inclusion of the Hedging De
                                            Exclusion that the AGNA of swaps                            with their loan customers, and the                   Minimis Provision.196 Among other
                                            entered into in connection with the loan                    relation between those swaps and the                 issues, the two commenters viewed the
                                            not exceed the principal amount                             larger swap market, may merit further                Hedging De Minimis Provision as a
                                            outstanding,187 and two commenters                          consideration.                                       major expansion of the De Minimis
                                            agreed that there are circumstances                                                                              Exception.
                                            where the AGNA of loan-related swaps                        B. Swaps Entered Into to Hedge
                                                                                                        Financial or Physical Positions                         Generally, commenters supported
                                            can exceed the outstanding principal                                                                             adding the Hedging De Minimis
                                            amount of the loan.188                                      1. Proposal                                          Provision to the De Minimis Exception
                                               In response to a question in the                                                                              to provide more certainty and/or clarity
                                                                                                           The Commission proposed adding a
                                            Proposal, three commenters stated that                                                                           regarding the treatment of hedging
                                                                                                        provision in new paragraph (4)(i)(D) of
                                            the CFTC should not impose any prior                                                                             activity.197 On the other hand, AFR and
                                                                                                        the De Minimis Exception, to include as
                                            notice requirement or other conditions                                                                           Better Markets stated that excepting
                                                                                                        a factor whether a swap was entered
                                            on the ability of IDIs to rely on the                                                                            hedges of swap dealing positions from
                                                                                                        into primarily for the purpose of
                                            proposed IDI De Minimis Provision.189                                                                            the de minimis threshold could exclude
                                                                                                        hedging and met certain related
                                            In response to another question in the                                                                           swaps that appear to be hedges, but are
                                            Proposal, three commenters stated that                      conditions (the ‘‘Hedging De Minimis
                                                                                                        Provision’’).194 As proposed, to qualify             actually dealing swaps.198 Furthermore,
                                            there should not be a requirement that                                                                           Better Markets asserted that a hedge of
                                                                                                        for the Hedging De Minimis Provision,
                                               183 See ABA, BDA, CDEU, Citizens, and M&T                the primary purpose for the swap would               client facing swap is ‘‘inextricably’’ tied
                                            comment letters.                                            need to be to reduce or otherwise                    to accommodating customer
                                               184 See ABA, BDA, Capital One, CDEU, IIB, and            mitigate one or more specific risks to               demands.199
                                            ISDA/SIFMA comment letters.                                 which the person is subject. Proposed                   Several commenters noted that the
                                               185 See ABA, BDA, Citizens, and ISDA/SIFMA
                                                                                                        paragraph (4)(i)(D)(2) provided that the             price maker condition included in the
                                            comment letters.                                                                                                 proposed Hedging De Minimis
                                               186 See Capital One and M&T comment letters.
                                                                                                        person entering into the hedging swap
                                               187 17 CFR 1.3, Swap dealer, paragraph (5)(i)(E).        could not be the price maker of the                  Provision could be viewed as more
                                            However, as discussed, pursuant to proposed                 hedging swap and receive or collect a
                                                                                                                                                               195 See ABA, AGA, AFEX/GPS, BDA, Capital One,
                                            paragraph (4)(i)(C)(4)(ii), if an IDI is a source of less   bid/ask spread, fee, or other commission
                                            than a five percent of the maximum principal                                                                     CDEU, COPE, CMC, EEI/EPSA, Frost Bank, FIA, IIB,
                                                                                                        for entering into the hedging swap (the
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                                            amount of the loan, the notional amount of all                                                                   IECA, ISDA/SIFMA, JBA, NRECA/APPA, NGSA,
                                            swaps the IDI enters into in connection with the                                                                 Virtu, and Western Union comment letters.
                                                                                                           190 See ABA, BDA, and Capital One comment           196 See AFR and Better Markets comment letters.
                                            financial terms of the loan cannot exceed the
                                            principal amount of the IDI’s loan. See also 83 FR          letters.                                               197 See ABA, AGA, BDA, Capital One, Citizens,
                                                                                                           191 See ABA and Better Markets comment letter.
                                            27461.                                                                                                           CDEU, EEI/EPSA, Frost Bank, FIA, NGSA, NRECA/
                                               188 See Capital One and M&T comment letters.                192 See ABA comment letter.                       APPA, Virtu, and Western Union comment letters.
                                               189 See ABA, Capital One, and M&T comment                   193 See Better Markets comment letter.              198 See AFR and Better Markets comment letters.

                                            letters.                                                       194 See 83 FR 27462–63.                             199 See Better Markets comment letter.




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                                            56680            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            limiting than the existing physical swap                Commission misinterpreted its prior                    the person does not enter into the
                                            hedging exclusion.200 Many                              statements about the use of swaps to                   multilateral portfolio compression
                                            commenters expressed concern that the                   hedge dealing positions. However, in                   exercise in connection with activity
                                            proposed condition would be overly                      doing so, Better Markets cited to                      structured to evade designation as an
                                            prescriptive, ambiguous, and/or could                   language in the joint SD Definition                    SD. The Proposal was consistent with
                                            inadvertently require certain hedging                   Adopting Release that addressed the                    DSIO no-action relief issued on
                                            activity to be treated as swap dealing                  definition of ‘‘security-based swap                    December 21, 2012 (‘‘Staff Letter 12–
                                            activity.201 In particular, commenters                  dealer,’’ not ‘‘swap dealer.’’ 208                     62’’).211
                                            asked that the bid/ask spread limitation                  AFR and Better Markets also asserted
                                                                                                    that the Hedging De Minimis Provision                  2. Summary of Comments
                                            be deleted or clarified.202 Conversely,
                                            two commenters expressed some                           should not be included in the De                          Most commenters addressing this
                                            support for this condition as                           Minimis Exception because enforcement                  aspect of the Proposal supported
                                            proposed.203                                            of the conditions would be                             excepting from the de minimis
                                               ISDA/SIFMA was of the view that the                  impractical.209                                        threshold swaps that result from
                                            requirement that the primary purpose                                                                           multilateral portfolio compression
                                                                                                    3. Commission Response                                 exercises,212 stating that multilateral
                                            for entering into the swap must be to
                                            reduce or otherwise mitigate one or                        The comments generally confirmed                    portfolio compression: (1) Advances the
                                            more ‘‘specific’’ risks is unreasonably                 that nuanced facts and circumstances                   Commission’s policy goals of reducing
                                            restrictive.204 ISDA/SIFMA suggested                    may be relevant to determining whether                 counterparty credit risks by allowing
                                            that the Commission should remove the                   a swap that hedges financial risk, but                 swap market participants with large
                                            term ‘‘specific’’ from the regulatory text              also has dealing characteristics or is                 portfolios to net down the size and
                                            to better achieve the Commission’s                      connected to dealing activities, should                number of swaps among them, thus
                                            policy objective of encouraging greater                 be counted toward the AGNA threshold.                  lowering the AGNA of outstanding
                                            use of swaps to hedge risks. On the                     However, the comments also raised                      swaps; 213 and (2) does not involve
                                            other hand, NRECA/APPA noted that                       specific implementation and                            dealing activity, but rather allows
                                            the specific, but non-exclusive, risks                  compliance issues. For these reasons,                  market participants to reduce their risk
                                            identified in paragraph (4)(i)(D)(1) are                the Commission has determined not to                   without implicating any of the other
                                            consistent with the types of commercial                 adopt the Hedging De Minimis                           considerations related to SD
                                            risks that an end-user would hedge.205                  Provision at this time.                                regulation.214
                                               AFR and Better Markets objected to                      The Commission confirms that the                       Several commenters also stated that,
                                            the Hedging De Minimis Provision,                       ‘‘relevant facts and circumstances’’ test              given the policy-related similarities
                                            stating that it could allow even large                  established in the SD Definition                       between bilateral and multilateral
                                            dealers to escape registration, and that                Adopting Release and further discussed                 portfolio compression, the Commission
                                            the exclusion of anticipatory hedges                    in the DSIO FAQ Guidance 210                           should also exclude from counting
                                            allows too much discretion to                           continues to be in effect. In doing so, the            towards the De Minimis Exception
                                            institutional judgment.206                              Commission emphasizes that market                      swaps that result from bilateral portfolio
                                               Better Markets expressed concern that                participants should continue to evaluate               compression exercises.215 One
                                            the Hedging De Minimis Provision                        such swaps without consideration of the                commenter asserted that reliance on the
                                            promotes unregulated swap dealing and                   proposed Hedging De Minimis                            ‘‘multilateral portfolio compression
                                            is therefore ‘‘not a valid statutory                    Provision.                                             exercise’’ definition in § 23.500(h) of
                                            objective.’’ Furthermore, Better Markets                C. Swaps Resulting From Multilateral                   Commission regulations may be too
                                            stated that the Commission does not                     Portfolio Compression Exercises                        limiting.216
                                            need to provide clarity for the existing                                                                          On the other hand, AFR and IATP
                                                                                                    1. Proposal                                            expressed concerns with the MPCE De
                                            hedging exemption because the existing
                                            standard of using facts and                                The Commission proposed new                         Minimis Provision.217 AFR stated that
                                            circumstances to distinguish dealing                    paragraph (4)(i)(E) of the De Minimis                  the definition of portfolio compression
                                            swaps is a ‘‘well-settled framework.’’ 207              Exception, which would add as a factor                 appears overbroad since it goes beyond
                                                                                                    in the de minimis calculation whether                  the termination of fully offsetting swaps
                                            Better Markets also asserted that the
                                                                                                    a swap results from multilateral                       to include any exercise which would
                                               200 See CEWG, CMC, FIA, and IECA comment             portfolio compression exercises (‘‘MPCE                result in the reduction of current market
                                            letters.                                                De Minimis Provision’’). Specifically,                 risks for a set of swaps, even if the
                                               201 See CDEU, EEI/EPSA, IECA, and Western
                                                                                                    the Proposal stated that for purposes of               exercise might actually increase credit
                                            Union comment letters.                                                                                         exposure or market risk under stressed
                                               202 See ABA, BDA, EEI/EPSA, IECA, IIB, NRECA/
                                                                                                    determining whether a person has
                                                                                                    exceeded the AGNA threshold set forth                  market conditions.218 IATP noted that
                                            APPA, and Western Union comment letters.
                                               203 See COPE and NRECA/APPA comment letters.         in paragraph (4)(i)(A), the person may                 entities should be required to document
                                               204 See ISDA/SIFMA comment letter.                   exclude swaps that result from                         and report the results of multilateral
                                               205 See NRECA/APPA comment letter.
                                                                                                    multilateral portfolio compression                     compression exercises to qualify for the
                                               206 See AFR and Better Markets comment letters.
                                                                                                    exercises, as defined in § 23.500 of                   exception. Additionally, IATP stated
                                               207 See Better Markets comment letter. Better
                                                                                                    Commission regulations, to the extent
                                            Markets noted that, in October 2012, DSIO                                                                        211 CFTC    Staff Letter No. 12–62, supra note 47.
                                            addressed whether hedging activity is included in                                                                212 See  ABA, IIB, ISDA/SIFMA, JBA, and NEX
                                                                                                      208 77 FR 30619 n.280 (stating that security-based
                                            calculating the de minimis amount when it stated                                                               comment letters.
                                            that ‘‘a person must consider the swap in light of      swaps activity for hedging purposes ‘‘unrelated to
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                                                                                                                                                              213 See ABA, ISDA/SIFMA, and NEX comment
                                            all other relevant facts and circumstances to           activities that constitute dealing’’ would not be
                                                                                                    expected to lead the person to be a security-based     letters.
                                            determine whether such hedging activity is swap                                                                   214 See IIB comment letter.
                                            dealing activity. . . .’’ See Frequently Asked          swap dealer).
                                                                                                      209 See AFR and Better Markets comment letters.         215 See ABA, IIB, ISDA/SIFMA, and JBA comment
                                            Questions (FAQ)—[DSIO] Responds to FAQs About
                                            Swap Entities (Oct. 12, 2012) (‘‘DSIO FAQ               AFR described the potential need for a swap-by-        letters.
                                                                                                                                                              216 See IIB comment letter.
                                            Guidance’’), available at https://www.cftc.gov/idc/     swap analysis and the potential for disputes
                                            groups/public/@newsroom/documents/file/                 regarding the proposed anti-evasion provision.            217 See AFR and IATP comment letters.

                                            swapentities_faq_final.pdf.                               210 See supra note 207.                                 218 See AFR comment letter.




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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                           56681

                                            that any de minimis exception-related                   does not provide the certainty that                   proper, it should add safeguards, such
                                            exemption must be in the public                         market participants need in order to run              as an appeal to the Commission,
                                            interest, and asked questions regarding                 their businesses efficiently.223 Further,             coupled with a stay of any contested
                                            the legal authority for the Commission                  FIA stated that the DSIO FAQ left open                staff determination, pending
                                            to propose the amendments included in                   a multitude of questions for market                   Commission action.233 One commenter
                                            the NPRM.219                                            participants attempting to calculate                  suggested that DSIO should be granted
                                                                                                    notional amount.224 Additionally,                     authority to respond to individual
                                            3. Commission Response
                                                                                                    NGSA requested that the CFTC provide                  dealer requests for guidance on how the
                                               The Commission has determined not                    a safe harbor for reliance on a notional              notional amount would be calculated
                                            to adopt the MPCE De Minimis                            amount calculation methodology that is                for a given transaction, and dealers
                                            Provision at this time. The Commission                  based on standard industry practice                   should be able to rely on any response
                                            believes that further action on this                    unless and until CFTC publishes notice                from DSIO.234
                                            provision may require additional                        that invalidates such a methodology or                   Several commenters stated that
                                            consideration of the various relevant                   prescribes a different methodology.225                notional calculation methodologies
                                            issues.220                                                 NRECA/APPA suggested that the                      should be subject to a formal public
                                            D. Methodology for Calculating Notional                 Commission should not determine the                   notice and comment process.235 A few
                                            Amounts                                                 methodology for calculating notional                  commenters also noted that notional
                                                                                                    amounts, stating that the word                        calculation methodologies should be
                                            1. Proposal                                             ‘‘determine’’ in proposed new paragraph               evaluated pursuant to a cost-benefit
                                               Given the variety of potential methods               (4)(vii) of the De Minimis Exception                  analysis.236 A few commenters
                                            that could be used to calculate the                     should be changed to ‘‘provide guidance               suggested that notional calculations be
                                            notional amount for certain swaps,                      with respect to.’’ 226                                guided by international standards,
                                            particularly for swaps where notional                      Several commenters did not support                 industry group comment letters, and the
                                            amount is not a contractual term of the                 the proposal to delegate to the Director              DSIO FAQ Guidance.237
                                            transaction (e.g., certain NFC swaps),                  of DSIO the authority to make notional                   Commenters also provided feedback
                                            the Commission proposed new                             calculation determinations.227                        regarding specific notional amount
                                            paragraph (4)(vii) of the De Minimis                    Specifically, some commenters stated                  calculation methodologies.238
                                            Exception, which sets out a mechanism                   that the Commission, rather than the                  3. Commission Response
                                            for the Commission, on its own or upon                  Director of DSIO, should determine the                   The comments raised a number of
                                            written request by a person, to                         methodology for calculating notional                  issues with the proposed authority and
                                            determine the methodology to be used                    amounts because the methodology used                  delegation regarding the methodology
                                            to calculate the notional amount for any                to determine the AGNA is a critical                   for calculating notional amounts. Given
                                            group, category, type, or class of swaps                component of the de minimis threshold,                the nature and significance of these
                                            for purposes of whether a person                        as it impacts which entities will be                  issues, the Commission has determined
                                            exceeds the AGNA threshold. The                         designated as SDs.228 Commenters also                 to not adopt this provision at this time.
                                            proposed rule required that such                        noted that the delegation, as proposed,
                                            methodology be economically                             would permit Commission staff to make                 IV. Other Matters Discussed in NPRM
                                            reasonable and analytically supported,                  substantive, and potentially critical,                   In the NPRM, the Commission did not
                                            and that any such determination be                      policy determinations in an informal                  propose, but sought comment on the
                                            posted on the CFTC website. Further, to                 process,229 and that Commissioners                    following additional potential changes
                                            ensure timely clarity to market                         should not remove themselves from that                to the De Minimis Exception: (1) Adding
                                            participants, the Commission proposed                   decision-making process, particularly                 a minimum dealing counterparty count
                                            to delegate to the Director of DSIO the                 given that one of the challenges related              threshold and/or a minimum dealing
                                            authority to make such determinations.                  to NFC swaps was lack of a standard for               transaction count threshold; (2)
                                            2. Summary of Comments                                  calculation of notional amount.230                    establishing as a factor in the de
                                                                                                       On the other hand, several                         minimis determination whether a given
                                               Several commenters generally                         commenters supported the proposal to                  swap was exchange-traded and/or
                                            supported Commission efforts to                         delegate to the Director of DSIO the                  cleared; and (3) establishing as a factor
                                            provide certainty and clarity regarding                 authority to make notional calculation                in the de minimis determination
                                            calculation of notional amounts.221                     determinations.231 However, many of                   whether a given swap is a non-
                                            Some of these commenters supported                      these commenters supported delegation                 deliverable forward transaction. The
                                            providing the Commission with the                       only if determinations were subject to a              Commission did not propose rule text
                                            explicit authority to approve or                        public notice and comment process.232                 for any of these topics.
                                            establish methodologies for calculating                 A few commenters noted that if the                       At this time, the Commission is not
                                            notional amount.222 Citizens                            Commission believes that delegation is                adopting final rules regarding any of
                                            specifically noted that the lack of clarity                                                                   these three potential changes. The
                                            regarding notional amount                                 223 See  Citizens comment letter.                   Commission may take subsequent action
                                            interpretations has persisted for too                     224 See  FIA comment letter.
                                            long, and what little guidance that exists                 225 See NGSA comment letter.                          233 See COPE, EEI/EPSA, and IECA comment
                                                                                                       226 See NRECA/APPA comment letter.
                                                                                                                                                          letters.
                                              219 See                                                  227 See AGA, AFR, COPE, EEI/EPSA, FIA, IATP,          234 See BDA comment letter.
                                                       IATP comment letter.
                                              220 The   Commission notes that Staff Letter 12–62    ISDA/SIFMA, JBA, NRECA/APPA, and Senators                235 See ABA, AGA, BDA, CDEU, CMC, EEI/EPSA,
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                                            is not affected by the Commission’s determination       comment letters.                                      FIA, IECA, IIB, ISDA/SIFMA, NRECA/APPA, and
                                                                                                       228 See AFR, AGA, and FIA comment letters.
                                            not to adopt the MPCE De Minimis Provision at this                                                            NGSA comment letters.
                                                                                                       229 See COPE comment letter.
                                            time.                                                                                                            236 See AGA, FIA, and ISDA/SIFMA comment
                                               221 See ABA, Citizens, CEWG, CMC, EEI/EPSA,             230 See Senators comment letter.                   letters.
                                            FIA, Frost Bank, IIB, NGSA, and Western Union              231 See Citizens, CDEU, CEWG, CMC, Frost Bank,        237 See ABA, EEI/EPSA, NRECA/APPA, and

                                            comment letters.                                        IIB, NGSA, and Western Union comment letters.         NGSA comment letters.
                                               222 See Citizens, EEI/EPSA, FIA, Frost Bank, and        232 See CDEU, CEWG, CMC, IIB, and NGSA                238 See BDA, CEWG, CMC, EEI/EPSA, and IECA

                                            Western Union comment letters.                          comment letters.                                      comment letters.



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                                            56682            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            or conduct further study with respect to                V. Related Matters                                        are outside the scope of rulemakings
                                            any of these issues. The Commission                                                                               related to the De Minimis Exception.247
                                            recognizes the public interest in moving                A. Regulatory Flexibility Act
                                                                                                                                                              C. Cost-Benefit Considerations
                                            forward with the aspects of the NPRM                       The Regulatory Flexibility Act
                                            that it is adopting in this release, rather                                                                          Section 15(a) of the CEA requires the
                                                                                                    (‘‘RFA’’) requires that agencies consider
                                            than delaying action on the NPRM as a                                                                             Commission to consider the costs and
                                                                                                    whether the regulations they propose                      benefits of its actions before
                                            whole in order to further consider any                  will have a significant economic impact
                                            of these additional topics.                                                                                       promulgating a regulation under the
                                                                                                    on a substantial number of small                          CEA or issuing certain orders.248
                                            A. Dealing Counterparty Count and                       entities.245 As noted in the Proposal, the                Section 15(a) further specifies that the
                                            Dealing Transaction Count Thresholds                    regulations adopted herein only affect                    costs and benefits shall be evaluated in
                                                                                                    certain entities that are close to the                    light of five broad areas of market and
                                               The Commission sought comment on
                                                                                                    AGNA threshold in the De Minimis                          public concern: (1) Protection of market
                                            whether an entity should be able to
                                                                                                    Exception. For example, the regulations                   participants and the public; (2)
                                            qualify for the de minimis exception if
                                                                                                    would affect entities with a relevant                     efficiency, competitiveness, and
                                            its level of swap dealing activity is
                                                                                                    AGNA of swap dealing activity between                     financial integrity of futures markets; (3)
                                            below any of the following three
                                                                                                    $3 billion and $8 billion. Moreover, they                 price discovery; (4) sound risk
                                            criteria: (1) An AGNA threshold, (2) a
                                            proposed dealing counterparty count                     would affect IDIs that enter into loan-                   management practices; and (5) other
                                            threshold, or (3) a proposed dealing                    related swaps. That is, the regulations                   public interest considerations. In this
                                            transaction count threshold. Although a                 are relevant to entities that engage in                   section, the Commission considers the
                                            few commenters expressed general                        swap dealing activity with a relevant                     costs and benefits resulting from its
                                            support for adding a dealing                            AGNA measured in the billions of                          determinations with respect to the
                                            counterparty or dealing transaction                     dollars. The Commission does not                          Section 15(a) factors.
                                            count threshold to the De Minimis                       believe that these entities would be                         In this adopting release, the
                                            Exception,239 most commenters did not                   small entities for purposes of the RFA.                   Commission is amending the De
                                            support the idea.240                                    Additionally, the Commission received                     Minimis Exception by setting the AGNA
                                                                                                    no comments on the Proposal’s RFA                         threshold at $8 billion in swap dealing
                                            B. Exception for Exchange-Traded and/                   discussion. Therefore, the regulations                    activity. The Proposal requested public
                                            or Cleared Swaps                                        being adopted herein will not have a                      comment on the costs and benefits of
                                              The Commission sought comment on                      significant economic impact on a                          the proposed regulations, and
                                            whether an exception from the de                        substantial number of small entities, as                  specifically invited comments on: (1)
                                            minimis calculation for swaps that are                  defined in the RFA.                                       The costs and benefits to market
                                            executed on an exchange (e.g., a SEF or                                                                           participants associated with each
                                                                                                       Accordingly, the Chairman, on behalf
                                            designated contract market (‘‘DCM’’))                                                                             change; (2) the direct costs associated
                                                                                                    of the Commission, hereby certifies
                                            and/or cleared by a derivatives clearing                                                                          with SD registration and compliance; (3)
                                                                                                    pursuant to 5 U.S.C. 605(b) that these                    the indirect benefits to registering as an
                                            organization is appropriate. Most                       regulations will not have a significant
                                            commenters supported including an                                                                                 SD; (4) the indirect costs to becoming a
                                                                                                    economic impact on a substantial                          registered SD; (5) whether entities with
                                            exception for exchange-traded and/or                    number of small entities.
                                            cleared trades,241 though two                                                                                     dealing activity between $3 billion and
                                            commenters were opposed to the                          B. Paperwork Reduction Act                                $8 billion incur similar registration and
                                            idea.242                                                                                                          compliance costs as compared to
                                                                                                       The Paperwork Reduction Act of 1955                    entities with dealing activity above $8
                                            C. Exception for Non-Deliverable                        (‘‘PRA’’) 246 imposes certain                             billion; (6) the costs and benefits to the
                                            Forwards                                                requirements on Federal agencies,                         public associated with each proposed
                                              The Commission sought comment on                      including the Commission, in                              change; (7) how each proposed change
                                            whether an exception from the de                        connection with their conducting or                       affects each of the Section 15(a) factors;
                                            minimis calculation for non-deliverable                 sponsoring any collection of                              (8) whether the Commission identified
                                            forwards is appropriate. Most                           information, as defined by the PRA. The                   all of the relevant categories of costs and
                                            commenters generally supported                          Commission may not conduct or                             benefits in its preliminary consideration
                                            including an exception for NDFs,243                     sponsor, and a person is not required to                  of the costs and benefits; and (9)
                                            though one commenter was opposed to                     respond to, a collection of information                   whether the costs and benefits of the
                                            the idea.244                                            unless it displays a currently valid                      proposed changes, as applied in cross-
                                                                                                    Office of Management and Budget                           border contexts, differ from those costs
                                               239 See generally BDA, IIB, and JBA comment          (‘‘OMB’’) control number. As discussed                    and benefits resulting from their
                                            letters.                                                in the Proposal, the final regulations                    domestic application, and, if so, in what
                                               240 See generally Citizens, CEWG, EEI/EPSA,          will not impose any new recordkeeping                     ways and to what extent.
                                            IATP, IECA, ISDA/SIFMA, and NGSA comment                or information collection requirements,                      As part of this cost-benefit
                                            letters.                                                                                                          consideration, the Commission will
                                               241 See generally 360 Trading, ABA, BDA, Daiwa,
                                                                                                    or other collections of information that
                                                                                                    require approval of OMB under the                         discuss the costs and benefits of the
                                            Cboe SEF, Citizens, CME/ICE, EEI/EPSA, FXPA,
                                            Frost Bank, FIA, IIB, IECA, JBA, MFA, Optiver, TR       PRA.                                                      adopted change and analyze the
                                            SEF, Virtu, and XTX comment letters.                                                                              amendment as it relates to each of the
                                               242 See generally AFR and Better Markets
                                                                                                       The Commission notes that all
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                                            comment letters.                                        reporting and recordkeeping                                  247 Parties wishing to review the CFTC’s
                                               243 See generally 360 Trading, ABA, AFEX/GPS,        requirements applicable to SDs result                     information collections on a global basis may do so
                                            AGC, BDA, Capital One, Cboe SEF, Citizens, CDEU,        from other rulemakings, for which the                     at www.reginfo.gov, at which OMB maintains an
                                            CMC, Covington, FXPA, FIA, IIB, IECA, ISDA/             CFTC has sought OMB approval, and                         inventory aggregating each of the CFTC’s currently
                                            SIFMA, JBA, Northern Trust, Optiver, Regions,                                                                     approved information collections, as well as the
                                            State Street, SVB, TR SEF, Virtu, Western Union,                                                                  information collections that presently are under
                                            and XTX comment letters.                                  245 5   U.S.C. 601 et seq.                              review.
                                               244 See Better Markets comment letter.                 246 44   U.S.C. 3501 et seq.                               248 7 U.S.C. 19(a).




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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                   56683

                                            15(a) factors. The Commission notes                     Exception is being fully relied upon by                  without being required to register,
                                            that this consideration of costs and                    market participants, the cost-benefit                    which could increase competition and
                                            benefits is based on the understanding                  discussion that follows also considers                   liquidity in the swap market. However,
                                            that the swap market functions                          the effects of that relief.                              a higher AGNA threshold could
                                            internationally, with many transactions                                                                          potentially decrease the number of
                                                                                                    1. General Costs and Benefits
                                            involving U.S. firms occurring across                                                                            registered SDs, which could have a
                                            different international jurisdictions,                     There are several policy objectives                   negative impact on achieving the
                                            with some prospective Commission                        underlying SD regulation and the de                      general benefits associated with the
                                            registrants organized outside the U.S.,                 minimis exception to SD registration,                    policy objectives of SD regulation. This
                                            and other entities operating both within                which have associated with them                          might adversely affect the swap market
                                            and outside the U.S., and commonly                      general costs and benefits depending on                  to some extent.253
                                            following substantially similar business                the level of the AGNA threshold. As
                                                                                                    discussed above in section I.A.3, costs                  (i) Maintaining the $8 Billion Threshold
                                            practices wherever located. Where the
                                            Commission does not specifically refer                  and benefits may be associated with the                     The comments received for this
                                            to matters of location, the discussion                  primary policy objectives of SD                          proposed amendment were generally
                                            below of the costs and benefits of the                  regulation, which include reducing                       supportive.254 As discussed in section
                                            regulations being adopted refers to their               systemic risk, increasing counterparty                   II.C.1.i, at the $8 billion threshold the
                                            effects on all subject swaps activity,                  protections, and increasing market                       2017 Transaction Coverage and 2017
                                            whether by virtue of the activity’s                     efficiency, orderliness, and                             AGNA Coverage ratios indicate that
                                            physical location in the United States or               transparency.249 The Commission also                     nearly all swaps were covered by SD
                                            by virtue of the activity’s connection                  considers the costs and benefits                         regulation, generally giving rise to the
                                            with or effect on U.S. commerce under                   associated with the policy objectives                    benefits of SD regulation discussed
                                            CEA section 2(i).                                       furthered by a de minimis exception,                     above. Almost all swap transactions
                                               As discussed above, the De Minimis                   which include increasing efficiency,                     involved at least one registered SD as a
                                            Exception provides an exception from                    allowing limited ancillary dealing,                      counterparty, approximately 99 percent
                                            the SD Definition for persons who                       encouraging new participants to enter                    or greater for IRS, CDS, FX swaps, and
                                            engage in a de minimis amount of swap                   the swap dealing market, and focusing                    equity swaps. For NFC swaps,
                                            dealing activity. Currently, a person                   regulatory resources.250                                 approximately 86 percent of
                                            shall not be deemed to be an SD unless                     As noted by the Commission and a                      transactions involved at least one
                                            swaps entered into in connection with                   few commenters, generally, the lower                     registered SD as a counterparty. Overall,
                                            swap dealing activity exceed an AGNA                    the threshold, the greater the number of                 approximately 98 percent of all swap
                                            threshold of $3 billion (measured over                  entities that are subject to the SD-related              transactions involved at least one
                                            the prior 12-month period), subject to a                regulatory requirements, which could                     registered SD. Further, almost all AGNA
                                            phase-in period that is currently in                    decrease systemic risk, increase                         of swaps activity included at least one
                                            effect, during which the AGNA                           counterparty protections, and promote                    registered SD, approximately 99 percent
                                            threshold is set at $8 billion. The                     swap market efficiency, orderliness, and                 or greater for IRS, CDS, FX swaps, and
                                            Commission is amending the De                           transparency.251 However, the                            equity swaps. Further, the Commission
                                            Minimis Exception to set the AGNA                       Commission and most commenters                           notes that the 6,440 entities that did not
                                            threshold at the current $8 billion                     recognize that a lower threshold could                   enter into any transactions with a
                                            phase-in level.                                         have offsetting costs for the market. For                registered SD had limited activity
                                               There are market-wide costs and                      example, it is likely that a lower                       overall. As discussed in the Proposal,
                                            benefits associated with setting the                    threshold would discourage new                           the 6,440 entities entered into 77,333
                                            AGNA threshold at $8 billion. In                        participants from entering into the swap                 transactions, representing
                                            addition, setting the threshold at $8                   market, and reduce the amount of                         approximately 1.7 percent of the overall
                                            billion would have specific monetary                    dealing activity in which swap market                    number of transactions during the
                                            costs and benefits as compared to a                     participants engage in connection with                   review period.255 Additionally,
                                            lower or higher threshold. The current                  their other businesses.252                               collectively, the 6,440 entities had $68
                                            $8 billion phase-in level threshold,                       On the other hand, and as discussed                   billion in AGNA of swaps activity,
                                            along with the prospect that the                        further below, the higher the threshold,                 representing approximately 0.03 percent
                                            threshold would decrease to $3 billion                  the greater the number of entities that                  of the overall AGNA of swaps activity
                                            after December 31, 2019, in the absence                 are able to engage in dealing activity                   during the review period.
                                            of further Commission action, sets the                                                                              The Commission believes that this
                                            baseline for the Commission’s                             249 See also SD Definition Adopting Release, 77        limited activity indicates that to the
                                            consideration of the costs and benefits                 FR 30628–30, 30707–08. To achieve these policy           extent these entities are engaging in
                                            of the proposed alternatives.                           objectives, registered SDs are subject to a broad
                                                                                                                                                             swap dealing activities, such activity is
                                            Accordingly, the Commission considers                   range of requirements which may carry their own
                                                                                                    costs and benefits. These requirements include,          likely ancillary and in connection with
                                            the costs and benefits that would result                among other things, registration, internal and           other client services, potentially
                                            from maintaining the current $8 billion                 external business conduct standards, reporting,          indicating that the benefits associated
                                            phase-in level threshold, or                            recordkeeping, risk management, posting and
                                                                                                                                                             with the policy objectives of SD
                                            alternatively, a threshold level below or               collecting margin on uncleared swaps, and chief
                                                                                                    compliance officer designation and responsibilities.     registration and the de minimis
                                            above the current $8 billion threshold.                 However, costs associated with regulatory
                                            The status quo baseline also includes                   requirements applicable to SDs result from other           253 See supra sections II.B.2 and II.C.2; 83 FR at
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                                            other aspects of existing rules related to              rulemakings and are outside the scope of                 27454–56.
                                            the De Minimis Exception. The analysis                  rulemakings related to the De Minimis Exception.           254 See supra section II.B.1. See also ABA, AGA,
                                                                                                      250 See id.
                                            also takes into account any relevant no-                                                                         AFEX/GPS, BDA, Capital One, Cboe SEF, Citizens,
                                                                                                      251 See supra sections I.A.3 and II.B.3; 83 FR         CDEU, COPE, CEWG, CMC, EEI/EPSA, FXPA, Frost
                                            action relief, to the extent such relief is
                                                                                                    27471–72; 77 FR 30628–30, 30703, 30707.                  Bank, FIA, IIB, IECA, ISDA/SIFMA, JBA, M&T,
                                            being relied upon. As the Commission                      252 See supra sections I.A.3, II.B.1, and II.C.1; 83   NCFC, NRECA/APPA, NGSA, Regions, SVB, Virtu,
                                            is of the belief that existing no-action                FR 27448–58, 27471–72; 77 FR 30628–30, 30703,            Western Union, and XTX comment letters.
                                            relief related to the De Minimis                        30707.                                                     255 83 FR 27451.




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                                            56684            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            exception are being advanced at the                     with 10 or more NFC swap                               threshold.263 It is possible that a portion
                                            current $8 billion threshold.                           counterparties represents approximately                of the swaps activity for some or all of
                                            Additionally, setting the AGNA at $8                    13 percent of the overall NFC swap                     these entities qualifies for the physical
                                            billion would foster efficiency and                     market by transaction count. However,                  hedging exclusion in paragraph (6)(iii)
                                            potentially reduce costs by allowing                    as compared to the existing 44                         of the SD Definition, and therefore
                                            persons to continue to use existing                     registered SDs with at least 10                        would not be considered swap dealing
                                            calculation procedures and business                     counterparties, these 42 In-Scope                      activity, regardless of the AGNA
                                            processes that are geared towards the $8                Entities have significantly lower mean                 threshold level.264
                                            billion threshold.                                      transaction and counterparty counts,                      As discussed, a lower AGNA
                                               Commenters generally agreed with the                 indicating that they may only be                       threshold could lead to certain entities
                                            Commission’s position. For example,                     providing ancillary dealing services to                reducing or ceasing swaps activity to
                                            many commenters noted that the                          accommodate commercial end-user                        avoid registration and its related
                                            current $8 billion threshold already                    clients, also potentially indicating that              costs.265 Although the magnitude of this
                                            subjects the vast majority of transactions              the benefits associated with the policy                effect is unclear, reduced swap dealing
                                            to SD regulation, or that a reduced                     objectives of the de minimis exception                 activity could lead to increased
                                            threshold would not capture significant                 are being advanced at the current $8                   concentration in the swap dealing
                                            additional dealing activity.256 Some                    billion threshold.261 The Commission                   market, reduced availability of potential
                                            commenters stated that the nature of the                believes these market-wide benefits                    swap counterparties, reduced liquidity,
                                            swaps activity entered into by certain                  demonstrate that maintaining an $8                     increased volatility, higher fees, wider
                                            entities poses less systemic risk (e.g.,                billion threshold is also appropriate                  bid/ask spreads, or reduced competitive
                                            commercial banks that have swap                         with respect to the NFC swap asset                     pricing. Systemic risk could actually
                                            dealing activity below $8 billion, and                  class.                                                 increase as a result. The end-user
                                            entities that primarily enter into NFC                                                                         counterparties of these smaller swap
                                                                                                    (ii) $3 Billion Threshold
                                            swaps).257                                                                                                     dealing entities may be adversely
                                               However, as discussed above, Better                     The Commission is of the view that                  impacted by the above consequences
                                            Markets stated that the high regulatory                 the systemic risk mitigation,                          and could face a reduced ability to use
                                            coverage ratios are not indicative of the               counterparty protection, and market                    swaps to manage their business risks.
                                            absolute level of swap dealing activities               efficiency benefits of SD regulation                      Most commenters generally agreed
                                            relevant to SD registration, and noted                  would be enhanced in only a very                       with the Commission’s position. For
                                            that maintaining an $8 billion threshold                limited manner if the AGNA threshold                   example, commenters indicated that
                                            would have more than a limited effect                   decreased from $8 billion to $3 billion,               there would be a market-wide costs
                                            on counterparty protections.258 The                     as would be the case if the current                    associated with a lower threshold given
                                            Commission believes that while either                   regulation and the existing Commission                 that if entities reduced or ceased swaps
                                            percentage of the market or absolute                    order establishing an end to the phase-                activity to avoid registration and its
                                            level of swaps activity are valid                       in period on December 31, 2019 were                    related costs, the small and mid-sized
                                            considerations, it is more relevant in                  left unchanged. As discussed, Estimated                end-users and commercial entities who
                                            this context of achieving a desirable                   AGNA Coverage would increase from                      utilize swaps for hedging purposes and
                                            balance of policy goals to consider the                 approximately $221,020 billion (99.95                  NFC swap market participants would
                                            level of activity as a percentage of the                percent) to $221,039 billion (99.96                    have fewer dealers available to them.266
                                            whole.                                                  percent), an increase of $19 billion (a                Two commenters indicated that the
                                               Additionally, the Senators stated that               0.01 percentage point increase);                       market-wide benefit of a lower
                                            though notional amount data for NFC                     Estimated Transaction Coverage would                   threshold would be limited because
                                            swaps was not used in considering the                   increase from 3,795,330 trades (99.77                  Commission regulations not related to
                                            Proposal, the data that was available for               percent) to 3,797,734 trades (99.83                    SD registration already apply to
                                            NFC swaps shows significantly less                      percent), an increase of 2,404 trades (a               unregistered entities, and therefore,
                                            coverage for NFC swaps under an $8                      0.06 percentage point increase); and                   many of the policy goals of SD
                                            billion threshold than in other asset                   Estimated Counterparty Coverage would                  registration are already being advanced
                                            classes.259 The Commission notes that                   increase from 30,879 counterparties                    with respect to swaps entered into by
                                            with respect to NFC swaps, registered                   (88.80 percent) to 31,559 counterparties               these unregistered entities.267
                                            SDs still entered into the significant                  (90.75 percent), an increase of 680                       IATP suggested that contrary to the
                                            majority (86 percent) of the overall                    counterparties (a 1.96 percentage point                assumption that small banks may avoid
                                            market’s total transactions and, as noted               increase).262 The effect of these limited              the swap market due to the costs of SD
                                            in the Proposal, faced 83 percent of                    increases is further mitigated by the fact             registration at a $3 billion threshold, the
                                            counterparties in at least one                          that at the current $8 billion phase-in                costs and obligations of SD registration
                                            transaction, indicating that the existing               threshold, the substantial majority of                 would not discourage swap dealing
                                            $8 billion threshold has helped extend                  transactions are already covered by SD
                                            the benefits of SD registration to much                 regulation—and related counterparty                      263 See 83 FR 27456. Hypothetically, if all 42

                                            of the NFC swap market.260 The trading                  protection requirements—because they                   entities registered, the percentage of all NFC swaps
                                                                                                    include at least one registered SD as a                facing at least one registered SD would rise from
                                            activity of the 42 unregistered entities                                                                       approximately 86 percent to 98 percent.
                                                                                                    counterparty. For NFC swaps, as                          264 See 17 CFR 1.3, Swap dealer, paragraph
                                               256 See supra section II.B.1. See also AGA, BDA,     discussed in the Proposal, without                     (6)(iii); supra section II.C.1.ii; 83 FR 27456–57.
                                            Capital One, CDEU, CMC, Frost Bank, IECA, M&T,          notional-equivalent data, it is unclear                  265 See supra sections II.B.1 and II.C.1.ii; 83 FR
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                                            SVB, and Western Union comment letters.                 how many of the 42 In-Scope Entities                   27452–54.
                                               257 See supra section II.B.1. See also Citizens,
                                                                                                    with 10 or more counterparties that are                  266 See supra section II.B.1. See also ABA, AGA,
                                            IECA, NRECA/APPA, NGSA, and SVB comment                                                                        AFEX/GPS, BDA, Capital One, Citizens, CDEU,
                                            letters.                                                not registered SDs would actually be
                                                                                                                                                           COPE, CEWG, CMC, EEI/EPSA, Frost Bank, IIB,
                                               258 See supra section II.B.3.                        subject to SD registration at a $3 billion             IECA, ISDA/SIFMA, JBA, M&T, NCFC, NRECA/
                                               259 See supra section II.B.3; Senators comment                                                              APPA, NGSA, SVB, Virtu, and Western Union
                                            letter.                                                   261 Id.                                              comment letters.
                                               260 83 FR 27456.                                       262 See   supra section II.C.1.ii; 83 FR 27452–54.     267 See Citizens and Virtu comment letters.




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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                 56685

                                            when there is strong market demand for                  number of transactions involving at                    Additionally, a higher threshold could
                                            innovative swap market risk                             least one registered SD is lower in the                enhance the benefits associated with a
                                            management products. IATP stated that                   NFC swap market than other asset                       de minimis exception, for example by
                                            the lack of participation in the swap                   classes (86 percent compared to over 99                allowing entities to increase ancillary
                                            market by smaller banks may be due to                   percent for the other four asset classes),             dealing activity.277 However, the
                                            the smaller banks preferring the price                  the Commission believes it would be                    decrease in Estimated Counterparty
                                            transparency of the futures and options                 inappropriate to lower the AGNA                        Coverage indicates that fewer entities
                                            markets as compared to the swap                         threshold to $3 billion only to                        would be transacting with registered
                                            market.268 However, as discussed, the                   potentially increase the registered SD                 SDs, reducing the counterparty
                                            Commission believes, and most                           coverage rate (as measured by                          protection benefits of SD regulation if
                                            commenters agree, that a lower                          transaction count) for the smallest of the             the threshold increased from $8 billion
                                            threshold could lead to certain entities                five asset classes as measured by                      to $20 billion, $50 billion, or $100
                                            reducing or ceasing swaps activity.                     outstanding notional amount per the                    billion.278 The Commission also notes
                                               However, the Senators questioned                     OCC Quarterly Report on Bank                           that increasing the threshold could
                                            why, given the lack of relevant data for                Derivatives Activities.                                result in changes in market behavior
                                            NFC swaps, it is necessary to remove                                                                           that could lead to the regulatory
                                                                                                    (iii) Higher Threshold
                                            the phase-in reduction of the AGNA                                                                             coverage decreasing more than the
                                            threshold for energy-related SDs.269 The                   Conversely, a higher AGNA threshold                 analysis indicated.
                                            Commission believes, and commenters                     would potentially decrease the number                     Additionally, though it did not
                                            generally agreed, that a reduced                        of registered SDs, which could have a                  conduct an analysis of AGNA activity
                                            threshold would have a cost in terms of                 negative impact on achieving the                       for NFC swaps, the Commission is of the
                                            a decrease in NFC swap market liquidity                 general benefits associated with the                   view that increasing the AGNA
                                            because some entities may reduce                        policy objectives of SD regulation. For                threshold could potentially lead to
                                            dealing to avoid registration.270 For                   example, a higher threshold would                      fewer registered SDs participating in in
                                            example, with respect to NFC swaps,                     allow a greater amount of swap dealing                 the NFC swap market, similar to its
                                            EEI/EPSA and NGSA expressed concern                     to be undertaken without certain                       observations with respect to IRS, CDS,
                                            that a lower AGNA threshold would                       counterparty protections.274 This might                FX swaps, and equity swaps discussed
                                            provide less accommodation for                          impact the integrity of the swap market                above in section II.C.2. This could
                                            increasing NFC prices, which could lead                 to some extent. However, the                           reduce the number of entities
                                            to market participants reducing their                   Commission is unable to quantify how                   transacting with registered SDs.
                                            swap dealing activity to remain below                   the integrity of swap market might be                     The cost of reduced protections for
                                            the threshold.271 Further, NGSA stated                  harmed. On the other hand, as noted by                 counterparties would be realized to the
                                            that a lower threshold may reduce                       the Commission and commenters, the                     extent that a higher threshold would
                                            ancillary swap dealing in commodity                     higher the AGNA threshold, the greater                 result in fewer swaps involving at least
                                            markets and reduce counterparty                         the number of entities that are able to                one registered SD. Additionally,
                                            diversity for end-users.272                             engage in dealing activity without being               depending on how the swap market
                                               The Commission notes that although                   required to register, which could                      adapts to a higher threshold, it is also
                                            AGNA data was not available for NFC                     increase competition and liquidity in                  possible that the reduction in Estimated
                                            swaps, the OCC publishes the Quarterly                  the swap market.275 A higher threshold                 Regulatory Coverage would be greater
                                            Report on Bank Derivatives Activities,                  could also allow the Commission to                     than the data indicates to the extent that
                                            including end-of-quarter gross notional                 expend its resources on entities with                  a higher threshold leads to an increased
                                            amount position data from call reports                  larger swap dealing activities that                    amount of swap dealing activity
                                            filed by insured U.S. commercial banks                  warrant more oversight.                                between entities that are not registered
                                            and savings associations. Although                         Some commenters agreed that the                     SDs. In such a scenario, Estimated
                                            point-in-time position data is not                      small decrease in Estimated AGNA                       Regulatory Coverage could potentially
                                            directly comparable to the transaction                  Coverage and Estimated Transaction                     decrease more than the data indicates,
                                            volume calculations that are required                   Coverage at higher thresholds                          increasing the general costs associated
                                            for evaluating AGNA threshold                           potentially indicates that increasing the              with the De Minimis Exception.
                                            calculations, the report does provide                   threshold to up to $100 billion may
                                                                                                    have a limited effect on the systemic                  2. Direct Cost and Benefits
                                            outstanding commodity notional
                                            amount position totals in comparison                    risk and market efficiency-related                        As discussed in the Proposal, for any
                                            with IRS, CDS, FX swaps, and equity                     benefits of SD regulation.276                          AGNA threshold, some firms will have
                                            swaps. According to the OCC, as of the                                                                         AGNA of swap dealing activity
                                            end of 2017, NFC swaps represented                      available at https://www.occ.gov/topics/capital-       sufficiently close to the threshold so as
                                                                                                    markets/financial-markets/derivatives/dq318.pdf.       to require analysis to determine whether
                                            $1,373 billion out of the $171,964                        274 See supra section II.C.2; 83 FR 27454–56.
                                            billion total notional amount reported                    275 See supra sections II.B.2 and II.C.2; 83 FR
                                                                                                                                                           their activity qualifies as de minimis.
                                            outstanding, or approximately 0.8                       27454–56.                                              Hence, (1) with a $3 billion threshold,
                                            percent of the total.273 Although the                     276 See supra section II.B.2. As discussed, in
                                                                                                                                                              277 See supra sections II.B.2 and II.C.2; 83 FR
                                                                                                    comparison to an $8 billion threshold, a $100
                                              268 See                                               billion threshold would reduce the Estimated           27455.
                                                       IATP comment letter.
                                               269 See supra section II.B.3; Senators comment       AGNA Coverage from approximately $221,020                 278 As discussed, the data also indicates that at

                                                                                                    billion (99.95 percent) to $220,877 billion (99.88     higher thresholds, there is a more pronounced
                                            letter.
                                                                                                    percent), a decrease of $143 billion (a 0.06           decrease in Estimated Counterparty Coverage. The
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                                               270 See supra sections II.B.1 and II.C.1.ii.
                                                                                                    percentage point decrease). In comparison to an $8     Estimated Counterparty Coverage would decrease
                                               271 See supra section II.B.1; EEI/EPSA and NGSA
                                                                                                    billion threshold, a $100 billion threshold would      from 30,879 counterparties (88.80 percent) to
                                            comment letters. As stated by EEI/EPSA, if NFC          reduce the Estimated Transaction Coverage from         28,234 counterparties (81.19 percent), a decrease of
                                            prices increase, the same level of swaps activity       3,795,330 trades (99.77 percent) to 3,773,440 trades   2,645 counterparties (a 7.61 percentage point
                                            would potentially have a higher notional amount.        (99.20 percent), a decrease of 21,890 trades (a 0.58   decrease). The decrease would be lower at
                                               272 See NGSA comment letter.
                                                                                                    percentage point decrease). The decreases would be     thresholds of $20 billion and $50 billion, at 2.80
                                               273 See OCC, Quarterly Report on Bank Trading        more limited at higher thresholds of $20 billion or    percentage points and 5.71 percentage points,
                                            and Derivatives Activities (Fourth Quarter 2017),       $50 billion. See supra section II.C.2; 83 FR 27455.    respectively. See supra section II.C.2; 83 FR 27455.



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                                            56686            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            some set of entities would likely have to                Commission estimates that the potential                 whether a bank holding company has
                                            incur the direct costs of analyzing                      annual direct cost of conducting these                  exceeded the AGNA threshold, under
                                            whether they would exceed the                            ongoing analyses for those 11 entities                  various scenarios.286 To arrive at
                                            threshold, (2) with an $8 billion                        would be approximately $40,000 per                      aggregate estimates, NERA estimated the
                                            threshold, a (mostly) different set of                   entity, or $440,000 in the aggregate.282                per entity costs of initial and ongoing
                                            entities would have to continue to incur                 The projected 11 entities that may                      SD registration determination analyses,
                                            costs of analyzing their activity, and (3)               conduct periodic de minimis                             and also provided its estimates of the
                                            with a higher threshold, some entities                   calculations represents a net figure, as                number of registrants at various AGNA
                                            would no longer need to conduct an                       some entities may need to conduct a                     thresholds, which Commission staff
                                            ongoing analysis of whether they would                   periodic de minimis calculation, while                  used to estimate the additional costs or
                                            be above the new threshold, while other                  on the other hand, some entities with                   cost savings at different AGNA
                                            entities may begin conducting such an                    AGNA near $8 billion might be able to                   thresholds, as compared to an $8 billion
                                            analysis.                                                avoid periodic de minimis calculation                   threshold.
                                              Based on the available data, the                       costs because they will be certain that                   First, to estimate initial and ongoing
                                            Commission estimates that if the AGNA                    their AGNA exceeds the $3 billion                       SD registration determination costs,
                                            threshold were set at $3 billion,                        threshold.                                              NERA sent a survey to 22 bank holding
                                            approximately 22 currently unregistered                     Conversely, the Commission assumes                   companies that participate in the swap
                                            entities would need to conduct an                        that a higher threshold would permit                    market and received eight responses.287
                                            initial analysis of whether they would                   certain entities to no longer incur                     Based on these responses, NERA
                                            be above the threshold.279 The                           ongoing costs of assessing whether they                 estimated average, one-time, upfront SD
                                            Commission estimates that the potential                  are above the threshold. The                            determination costs of $657,696 per
                                            total direct cost of conducting the initial              Commission estimates the savings that                   entity 288 (as compared to the
                                            analysis for the 22 entities would                       would result from a higher AGNA                         Commission’s estimate of approximately
                                            average approximately $79,000 per                        threshold of $20 billion. Based on the                  $79,000 per entity on average). Further,
                                            entity, or approximately $1.7 million in                 available data, the Commission                          NERA estimated average, ongoing, SD
                                            the aggregate.280                                        estimates that if the threshold were set                determination costs of $89,209 per
                                              Certain of those entities with ongoing                 at $20 billion, approximately 29 entities               entity 289 (as compared to the
                                            swap dealing activity that is near a $3                  would no longer need to conduct an                      Commission’s estimate of approximately
                                            billion threshold may also need to                       ongoing analysis of whether they would                  $40,000 per entity on average).290
                                            conduct periodic de minimis                              be above the new threshold, while 4                       NERA’s survey of banking entities
                                            calculation analyses to assess whether                   entities may begin conducting such an                   indicates significantly higher initial and
                                            they qualify for the exception. The                      analysis.283 The Commission estimates                   ongoing SD determination monitoring
                                            Commission estimates that                                that the ongoing cost savings for the net               costs than the Commission’s cost
                                            approximately 11 entities may need to                    25 entities that would no longer be                     estimates on a per entity annualized
                                            conduct such analyses.281 Further, the                   conducting periodic de minimis                          basis. NERA’s per entity cost estimates
                                                                                                     threshold analyses would average                        were based on the eight responses to
                                               279 Commission staff analyzed the swaps activity      approximately $40,000 per entity, or $1                 their survey, while the Commission’s
                                            of market participants over a one-year period to         million in the aggregate per year.284
                                            develop this estimate. The estimate includes 22 In-                                                              estimates were based on: (1) Estimates
                                                                                                        The Commission notes that ABA
                                            Scope Entities that had 10 or more counterparties
                                            and between $1 billion and $5 billion in AGNA of         submitted a study that evaluated the                       286 Although addressed by the NERA study, the

                                            swaps activity in IRS, CDS, FX swaps, and equity         costs and benefits of SD registration for               costs associated with SD regulatory requirements
                                            swaps. Entities that were already registered SDs         member banks at various AGNA                            (e.g., margin, reporting, technology, etc.) are not
                                            were excluded. The estimate does not account for         thresholds, prepared by NERA                            considered in this analysis. Costs associated with
                                            entities that primarily are entering into NFC swaps                                                              regulatory requirements applicable to SDs result
                                            because notional amount information was not
                                                                                                     Economic Consulting (‘‘NERA’’).285                      from other rulemakings and are outside the scope
                                            available for that asset class. See 83 FR 27474 n.191.   NERA’s study provided cost estimates                    of rulemakings related to the De Minimis Exception.
                                               280 This estimate is based on the following staff     for initial and ongoing testing of                         287 See ABA comment letter (attaching NERA

                                            requirements for this determination: 25 hours for an                                                             study). To estimate activity, NERA applied a 1.5
                                            OTC principal trader at $695/hour, 40 hours for a        that many entities would, following the initial         assumed turnover ratio to swap position data from
                                            compliance attorney at $335/hour, 35 hours for a         analysis, determine that they would either need to      the Federal Reserve Bank of Chicago’s ‘‘Holding
                                            chief compliance officer at $556/hour, 80 hours for      register or choose not to engage in enough dealing      Company Data’’ for bank holding companies with
                                            an operations manager at $290/hour, and 20 hours         activity to require ongoing monitoring. See 83 FR       greater than $10 billion in assets on a consolidated
                                            for a business analyst at $273/hour. These               27474 n.193.                                            basis. The 1.5 adjustment factor was based on
                                            individuals would be responsible for identifying,          282 The Commission estimates that the ongoing         NERA’s estimate of the typical turnover/notional
                                            analyzing, and aggregating the swap dealing activity     analysis would be streamlined as a result of the        holdings ratio to convert periodic position data into
                                            of a firm and its affiliates. The estimates of the       initial analysis, and therefore would be less costly.   an annualized estimate of AGNA transaction
                                            number of personnel hours required have been             For purposes of this calculation, the Commission        volume.
                                            updated from the SD Definition Adopting Release          estimates that the cost of the ongoing analysis            288 NERA estimated median, one-time, upfront SD
                                            in light of the Commission’s experience in               would be approximately 50 percent of the cost of        determination costs of $188,095 per entity,
                                            implementing the SD Definition.                          the initial analysis. See 83 FR 27474 n.194.            significantly lower than the average cost of
                                               The estimates of the hourly costs for these             283 Commission staff analyzed the swaps activity      $657,696. NERA noted that initial SD determination
                                            personnel are from SIFMA’s Management &                  of market participants over a one-year period to        costs were distributed widely, but the variation did
                                            Professional Earnings in the Securities Industry         develop this estimate. The estimate includes 29 In-     not appear related to institution size or magnitude
                                            2013 survey, modified to account for an 1800-hour        Scope Entities that had between $3 billion and $15      of annual swaps activity.
                                            work-year and multiplied by 5.35 to account for          billion, and 4 In-Scope Entities that had between          289 NERA estimated median, ongoing, SD
                                            firm size, employee benefits, and overhead, which        $15 billion and $25 billion, in AGNA of swaps           determination costs of $83,430 per entity.
                                            is the same multiplier that was used when the SD         activity in IRS, CDS, FX swaps, and equity swaps,          290 NERA also calculated a 10 year net present
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                                            Definition was adopted. See 77 FR 30712 n.1347.          and at least 10 counterparties. The estimate does       value estimate of the ongoing monitoring costs.
                                               The Commission recognizes that particular             not account for entities that primarily are entering    NERA estimated the present value of ongoing
                                            entities may, based on their circumstances, incur        into NFC swaps because notional amount                  determination costs to be $723,562 per bank
                                            costs substantially greater or less than the estimated   information was not available for that asset class.     holding company using the average estimate.
                                            averages. See 83 FR 27474 n.192.                         See 83 FR 27474 n.195.                                  Additionally, NERA’s analysis included 10 year net
                                               281 The estimate of 11 entities is approximately 50     284 See supra note 282.
                                                                                                                                                             present value estimates of business conduct and
                                            percent of the 22 entities that would need to              285 See ABA comment letter (attaching NERA            margin costs, which was outside of the scope of the
                                            undertake an initial analysis. This estimate assumes     study).                                                 CFTC’s analysis.



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                                                                Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                                       56687

                                            of the number of personnel hours                                      required to register at $3 billion and $15                       entities that may have less operational
                                            required in light of the Commission’s                                 billion thresholds, as compared to an $8                         complexity and therefore may incur
                                            experience in implementing the SD                                     billion threshold, would also be the                             lower costs in making determinations.
                                            Definition; and (2) modified costs from                               number of entities that would incur                              Additionally, the Commission’s
                                            SIFMA’s Management & Professional                                     ongoing costs or cost savings related to                         estimates of the number of entities that
                                            Earnings in the Securities Industry 2013                              assessing whether they would be                                  would incur costs related to SD
                                            survey.291 Additionally, NERA’s                                       required to register as SDs. Depending                           registration analyses are based on non-
                                            analysis evaluated bank holding                                       on the scenario evaluated, the                                   public SDR data on AGNA activity,
                                            companies on a consolidated basis,                                    Commission believes that NERA                                    while NERA’s implied estimates are
                                            while the Commission’s analysis                                       estimated that 13 to 17 additional bank                          based on publicly available swap
                                            included subsidiaries of banks prior to                               holding companies would conduct                                  position data from the Federal Reserve
                                            consolidation and firms unrelated to                                  ongoing SD registration-related analyses                         Bank of Chicago’s ‘‘Holding Company
                                            banks.                                                                at the $3 billion threshold as compared                          Data’’ for bank holding companies with
                                               Second, to estimate the number of                                  to the $8 billion threshold.292                                  greater than $10 billion in assets on a
                                            entities that would be required to                                    Conversely, depending on the scenario,                           consolidated basis.
                                            register at different AGNA thresholds,                                the Commission believes that NERA                                  However, given the different methods
                                            NERA evaluated four different                                         estimated that 7 to 10 bank holding                              and sources of information utilized, the
                                            scenarios, including various                                          companies would no longer incur                                  Commission is providing a range of
                                            combinations of an AGNA threshold, a                                  ongoing monitoring costs at a $15                                estimated costs or cost savings that
                                            risk-based threshold, and amendments                                  billion threshold compared to an $8                              combine the per entity costs and the
                                            to date restrictions related to the IDI                               billion threshold.293                                            counts of the number of entities
                                            Swap Dealing Exclusion. At various                                       In general, the Commission believes                           required to conduct SD registration
                                            AGNA thresholds—including $3 billion,                                 that its per entity estimated costs reflect                      analyses, as estimated by the
                                            $8 billion, and $15 billion—NERA                                      the broader nature of the types of                               Commission and NERA. The tables
                                            estimated the number of bank holding                                  entities that would need to conduct                              below summarize the estimates for
                                            companies expected to register as SDs                                 such an analysis. For example, NERA’s                            initial and ongoing SD determination
                                            for each scenario it evaluated. To allow                              analysis focused on survey responses                             costs. Since NERA conducted estimates
                                            for a more direct comparison with the                                 from consolidated bank holding                                   using four different scenarios, the tables
                                            Commission’s estimates, the                                           companies, whereas the Commission’s                              below include information based on the
                                            Commission made an assumption that                                    estimates also account for smaller                               highest and lowest number of entities
                                            the difference in the number of entities                              financial institutions and non-financial                         estimated by NERA at given thresholds.

                                                                TABLE 1—ESTIMATE OF ADDITIONAL COSTS INCURRED FOR INITIAL SD DETERMINATION ANALYSES
                                                                                                                                   [$3 Billion threshold] 294

                                                                                                                                                                                                  NERA                    NERA
                                                                                                                                                                           CFTC
                                                                               Per entity average cost estimate                                                                               low estimate            high estimate
                                                                                                                                                                        (22 entities)          (13 entities)           (17 entities)

                                            CFTC—$79,000 .........................................................................................................          $1,738,000             $1,027,000               $1,343,000
                                            NERA—$657,696 ......................................................................................................            14,469,312              8,550,048               11,180,832


                                                              TABLE 2—ESTIMATE OF ADDITIONAL COSTS INCURRED FOR ONGOING SD DETERMINATION ANALYSES
                                                                                                                                     [$3 Billion threshold]

                                                                                                                                                                                                  NERA                    NERA
                                                                                                                                                                           CFTC
                                                                               Per entity average cost estimate                                                                               low estimate            high estimate
                                                                                                                                                                        (11 entities)          (13 entities)           (17 entities)

                                            CFTC—$40,000 .........................................................................................................            $440,000               $520,000                $680,000
                                            NERA—89,209 ..........................................................................................................             981,299               1,159,717               1,516,553


                                                          TABLE 3—ESTIMATE OF COST SAVINGS FOR NOT CONDUCTING ONGOING SD DETERMINATION ANALYSES
                                                                                                                        [$15 Billion or $20 billion threshold] 295

                                                                                                                                                                                                  NERA                    NERA
                                                                                                                                                                           CFTC               low estimate            high estimate
                                                                               Per entity average cost estimate                                                         ($20 billion)          ($15 billion)           ($15 billion)
                                                                                                                                                                        (25 entities)           (7 entities)           (10 entities)

                                            CFTC—$40,000 .........................................................................................................          $1,000,000                $280,000                $400,000

                                              291 See supra note 280.                                                293 This is based on NERA’s ‘‘Number of Banks                   294 For Tables 1 through 3, aggregate cost or cost
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                                              292 This is based on NERA’s ‘‘Number of Banks                       Required To Register As Swap Dealer’’ estimates at               savings estimates are calculated using a given
                                            Required To Register As Swap Dealer’’ estimates at                    $15 billion compared to $8 billion under the                     scenario’s per entity average cost estimate
                                            $3 billion compared to $8 billion under the various                   various scenarios. Note that NERA did not provide                multiplied by the relevant entity count. For
                                            scenarios. NERA did not explicitly calculate the                      estimates at a $20 billion threshold, and its                    example, in Table 1, $79,000 multiplied by 22
                                            number of entities that may yet incur initial                                                                                          entities equals $1,738,000.
                                                                                                                  estimates at the $15 billion threshold are the closest
                                            determination costs, but instead estimated the                                                                                           295 As discussed, the Commission considered a
                                                                                                                  for relevant comparison with Commission estimates
                                            number of entities that would be required to register                                                                                  higher threshold of $20 billion, while NERA
                                            at various thresholds.                                                at $20 billion.                                                  considered a higher threshold of $15 billion.



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                                            56688               Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                               TABLE 3—ESTIMATE OF COST SAVINGS FOR NOT CONDUCTING ONGOING SD DETERMINATION ANALYSES—Continued
                                                                                                                        [$15 Billion or $20 billion threshold] 295

                                                                                                                                                                                                NERA              NERA
                                                                                                                                                                           CFTC             low estimate      high estimate
                                                                               Per entity average cost estimate                                                         ($20 billion)        ($15 billion)     ($15 billion)
                                                                                                                                                                        (25 entities)         (7 entities)     (10 entities)

                                            NERA—89,209 ..........................................................................................................           2,230,225              624,463           892,090



                                               Based on its analysis, and                                         actions in light of the following five                              SD registration is also intended to
                                            incorporating information provided by                                 factors:                                                         reduce systemic risk in the swap
                                            NERA, the Commission estimates that                                                                                                    market. Pursuant to the Dodd-Frank Act,
                                                                                                                  (i) Protection of Market Participants and
                                            for the 13 to 22 entities at a $3 billion                                                                                              the Commission has proposed or
                                                                                                                  the Public
                                            AGNA threshold that may need to                                                                                                        adopted regulations for SDs, including
                                            conduct an initial SD registration                                       Providing regulatory protections for                          margin and risk management
                                            analyses, at per entity average costs of                              swap counterparties who may be less                              requirements, designed to mitigate the
                                            $79,000 to $657,696, the estimated                                    experienced or knowledgeable about the                           potential systemic risk inherent in the
                                            aggregate initial determination cost                                  swap products offered by SDs                                     swap market. Therefore, the
                                            ranges from $1,027,000 to $14,469,312,                                (particularly end-users who use swaps                            Commission recognizes that a lower
                                            as indicated in Table 1.296                                           for hedging or investment purposes) is                           threshold may result in more entities
                                               Additionally, for the 11 to 17 entities                            a fundamental benefit advanced by                                being required to register as SDs,
                                            at a $3 billion AGNA threshold that may                               registration of SDs. For example,                                thereby potentially further reducing
                                            need to conduct ongoing SD registration                               registered SDs are required to provide                           systemic risk. Conversely, a higher
                                            analyses, at per entity average costs of                              mid-mark quotes and perform scenario                             threshold may result in fewer entities
                                            $40,000 to $89,209, the estimated                                     analyses. However, these requirements                            being required to register an SD and,
                                            aggregate annual ongoing monitoring                                   are not in standard ISDA agreements                              thus, possibly increase systemic risk.
                                            cost ranges from $440,000 to $1,516,553,                              and are not required of entities that deal
                                                                                                                  a de minimis amount of swaps.                                       However, the data appears to indicate
                                            as indicated in Table 2.                                                                                                               that the additional entities that would
                                               Lastly, for the 7 to 25 entities at a $15                             The Commission is maintaining the
                                                                                                                  current de minimis phase-in threshold                            need to register at the $3 billion
                                            billion or $20 billion AGNA threshold                                                                                                  threshold are engaged in a
                                            that would no longer need to conduct                                  of $8 billion in AGNA of swap dealing
                                                                                                                  activity. As discussed above, the                                comparatively smaller amount of swap
                                            ongoing SD registration analyses, at per                                                                                               dealing activity. Many of these entities
                                            entity average cost savings of $40,000 to                             Commission recognizes that a $3 billion
                                                                                                                  threshold may result in more entities                            might be expected to have fewer
                                            $89,209, the estimated aggregate annual                                                                                                counterparties and smaller overall risk
                                            ongoing monitoring cost savings ranges                                being required to register as SDs
                                                                                                                  compared to the proposed (and                                    exposures as compared to the SDs that
                                            from $280,000 to $2,230,225, as                                                                                                        engage in swap dealing in excess of the
                                            indicated in Table 3.                                                 currently in-effect) $8 billion threshold,
                                                                                                                  thereby extending counterparty                                   $8 billion level. Accordingly, the
                                               The Commission notes that the                                                                                                       Commission believes that that the
                                            aggregate estimates of initial and                                    protections to a greater number of
                                                                                                                  market participants. However, this                               incremental reduction in systemic risk
                                            ongoing SD determination and                                                                                                           that may be achieved by registering
                                            monitoring costs, based on either the                                 benefit is relatively small because, at the
                                                                                                                  current $8 billion phase-in threshold,                           dealers that engage in dealing between
                                            Commission or NERA’s per entity cost                                                                                                   the $3 billion and $8 billion thresholds
                                            estimates or marginal entity count                                    the substantial majority of transactions
                                                                                                                  are already covered by SD regulation—                            is limited.
                                            estimates, buttress the Commission’s
                                            decision to adopt an $8 billion                                       and related counterparty protection                                 The data also indicates that at higher
                                            threshold and not let it decrease to $3                               requirements—since they include at                               thresholds of $20 billion, $50 billion, or
                                            billion. Additionally, the Commission is                              least one registered SD as a                                     $100 billion, fewer entities would be
                                            of the view that the cost savings at $15                              counterparty.297                                                 required to register as SDs, though the
                                                                                                                     On the other hand, as noted above, a                          change in regulatory coverage as
                                            billion or $20 billion thresholds would
                                                                                                                  threshold above $8 billion may result in                         measured by Estimated AGNA Coverage
                                            not sway its decision to maintain the
                                                                                                                  fewer entities being required to register                        and Estimated Transaction Coverage
                                            threshold at $8 billion given the general
                                                                                                                  as SDs, thus extending counterparty                              would be small. Thus, the Commission
                                            costs and benefits discussed above.
                                                                                                                  protections to a fewer number of market                          believes that the increase in systemic
                                            Lastly, in light of all the considerations,
                                                                                                                  participants. Although the Estimated                             risk that may occur due to a higher
                                            the Commission would come to the
                                                                                                                  Transaction Coverage and Estimated                               threshold would not be significant.
                                            same conclusion, regardless of where                                  AGNA Coverage would not decrease
                                            the most accurate cost falls in the range                                                                                              However, depending on how the market
                                                                                                                  much at higher thresholds of up to $100                          adapts to a higher threshold, the level of
                                            of potential initial and ongoing costs.                               billion, the decrease in Estimated                               regulatory coverage could potentially
                                            3. Section 15(a)                                                      Counterparty Coverage is more                                    decrease more than the data indicates.
                                               Section 15(a) of the CEA requires the                              pronounced at higher AGNA thresholds,                               The Commission believes that setting
                                                                                                                  potentially indicating that the benefit of
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                                            Commission to consider the effects of its                                                                                              the AGNA threshold at $8 billion will
                                                                                                                  SD counterparty protections                                      not substantially diminish the
                                              296 Using a different methodology, NERA
                                                                                                                  requirements could be reduced at higher                          protection of market participants and
                                            estimated $2,623,925 (median estimate) to                             thresholds.                                                      the public as compared to a $3 billion
                                            $9,174,855 (average estimate) in remaining
                                            aggregate initial determination costs. The                              297 As discussed in section II.C.1.i, the 2017
                                                                                                                                                                                   threshold. Further, as discussed, the
                                            Commission notes that this estimate is within the                     Transaction Coverage ratio was approximately 98                  Commission does not expect that an
                                            $1,027,000 to $14,469,312 range calculated above.                     percent.                                                         increase in the threshold would


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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                              56689

                                            substantially increase the protection of                in swap dealing activities below the                    interest to be protected by the antitrust
                                            market participants and the public.                     threshold would not need to incur the                   laws is generally to protect competition.
                                                                                                    direct costs of registration until they                    The Commission has considered this
                                            (ii) Efficiency, Competitiveness, and
                                                                                                    exceeded a higher threshold.                            final rule to determine whether it is
                                            Financial Integrity of Markets
                                                                                                       Similarly, raising the threshold above               anti-competitive and has identified no
                                               Another goal of SD registration is                                                                           anti-competitive effects. Because the
                                                                                                    $8 billion could lead to even more
                                            swap market efficiency, orderliness, and                                                                        Commission has determined that the
                                                                                                    entities engaging in ancillary dealing.
                                            transparency. These market benefits are                                                                         final rulemaking is not anti-competitive
                                            achieved through regulations regarding,                    The Commission notes that some                       and has no anti-competitive effects, the
                                            for example, recordkeeping, reporting,                  counterparties might be more likely to                  Commission has not identified any less
                                            disclosure, and risk management.                        transact at off-market prices if they trade             anti-competitive means of achieving the
                                               As compared to a $3 billion threshold,               with an entity that does not provide                    purposes of the CEA.
                                            an $8 billion threshold may have a                      mid-market quotes or scenario analyses,
                                            negative effect on the efficiency and                   as would be required if the entity were                 List of Subjects in 17 CFR Part 1
                                            integrity of the markets as fewer entities              a registered SD. If so, such transactions                 Commodity futures, Definitions, De
                                            are required to register as SDs and fewer               might harm post-trade price discovery                   minimis exception, Insured depository
                                            transactions become subject to SD-                      since these transactions would occur at                 institutions, Swaps, Swap dealers.
                                            related regulations. However, the                       off-market prices.                                        For the reasons stated in the
                                            Commission also recognizes that the                                                                             preamble, the Commodity Futures
                                                                                                    (iv) Sound Risk Management
                                            efficiency and competitiveness of the                                                                           Trading Commission amends 17 CFR
                                            swap market may be negatively                              The Commission notes that a higher                   part 1 as follows:
                                            impacted if the AGNA threshold is set                   AGNA threshold could lead to impaired
                                            too low, by potentially increasing                      risk management practices because a                     PART 1—GENERAL REGULATIONS
                                            barriers to entry that may stifle                       lower number of entities would be                       UNDER THE COMMODITY EXCHANGE
                                            competition and reduce swap market                      required by regulation to: (1) Develop                  ACT
                                            efficiency. For example, if entities                    and implement detailed risk
                                            choose to reduce or cease their swap                    management programs; (2) adhere to                      ■ 1. The authority citation for part 1
                                            dealing activities in response to the $3                business conduct standards that reduce                  continues to read as follows:
                                            billion threshold, the number or                        operational and other risks; and (3)                      Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
                                            availability of market makers for swaps                 satisfy margin requirements for                         6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p,
                                            may be reduced, which could lead to                     uncleared swaps. For the same reason,                   6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12,
                                            increased costs for potential                           a lower threshold could positively                      12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and
                                            counterparties and end-users.                                                                                   24 (2012).
                                                                                                    impact risk management since more
                                            Conversely, a higher threshold may                      entities would be required to comply                    ■ 2. In § 1.3, amend the definition of the
                                            increase market liquidity, efficiency,                  with the above mentioned risk-related                   term ‘‘Swap dealer’’ by revising
                                            and competition as more entities engage                 SD regulations. The Commission also                     paragraph (4)(i)(A) and removing and
                                            in swap dealing without SD registration                 notes that to the extent an entity that is              reserving paragraph (4)(ii).
                                            as a barrier to entry. However, a higher                not required to register as an SD at a                    The revision reads as follows:
                                            threshold may also result in fewer                      higher threshold is a prudentially
                                            swaps being subject to SD-related                                                                               § 1.3    Definitions.
                                                                                                    regulated bank, that entity would be
                                            regulations, potentially reducing the                   subject to the risk management                          *      *    *      *     *
                                            financial integrity of markets.                                                                                    Swap Dealer. * * *
                                                                                                    requirements of its prudential regulator.
                                               Considering these countervailing                                                                                (4) De minimis exception—(i)(A) In
                                            factors, the Commission believes that                   (v) Other Public Interest Considerations                general. Except as provided in
                                            setting the AGNA threshold at $8 billion                                                                        paragraph (4)(vi) of this definition, a
                                                                                                      The Commission has not identified                     person that is not currently registered as
                                            will not significantly diminish the
                                                                                                    any other public interest considerations                a swap dealer shall be deemed not to be
                                            efficiency, competitiveness, and
                                                                                                    with respect to setting the AGNA                        a swap dealer as a result of its swap
                                            financial integrity of markets as
                                                                                                    threshold at $8 billion in swap dealing                 dealing activity involving
                                            compared to a $3 billion threshold.
                                                                                                    activity.                                               counterparties, so long as the swaps
                                            Further, as discussed, an increase in the
                                            threshold would potentially have both                   D. Antitrust Considerations                             connected with those dealing activities
                                            positive and negative effects to the                                                                            into which the person—or any other
                                            efficiency, competitiveness, and                           Section 15(b) of the CEA requires the                entity controlling, controlled by or
                                            financial integrity of the markets.                     Commission to take into consideration                   under common control with the
                                                                                                    the public interest to be protected by the              person—enters over the course of the
                                            (iii) Price Discovery                                   antitrust laws and endeavor to take the                 immediately preceding 12 months have
                                               All else being equal, the Commission                 least anticompetitive means of                          an aggregate gross notional amount of
                                            believes that price discovery will not be               achieving the purposes of the CEA, in                   no more than $8 billion, and an
                                            harmed and might be improved if there                   issuing any order or adopting any                       aggregate gross notional amount of no
                                            are more entities engaging in ancillary                 Commission rule or regulation                           more than $25 million with regard to
                                            dealing due to increased                                (including any exemption under section                  swaps in which the counterparty is a
                                            competitiveness among swap                              4(c) or 4c(b)), or in requiring or                      ‘‘special entity’’ (as that term is defined
                                                                                                    approving any bylaw, rule, or regulation
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                                            counterparties. The Commission is of                                                                            in section 4s(h)(2)(C) of the Act, 7 U.S.C.
                                            the view that, as compared to a $3                      of a contract market or registered futures              6s(h)(2)(C), and § 23.401(c) of this
                                            billion threshold, an $8 billion                        association established pursuant to                     chapter), except as provided in
                                            threshold would encourage                               section 17 of the CEA.298 The                           paragraph (4)(i)(B) of this definition. For
                                            participation of new swap dealing                       Commission believes that the public                     purposes of this definition, if the stated
                                            businesses and promote ancillary                                                                                notional amount of a swap is leveraged
                                            dealing because those entities engaged                    298 7   U.S.C. 19(b).                                 or enhanced by the structure of the


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                                            56690            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            swap, the calculation shall be based on                 joint consideration with the U.S. Securities             captures entities that engage in low volume,
                                            the effective notional amount of the                    and Exchange Commission (SEC).                           low risk activity with high notional amounts,
                                            swap rather than on the stated notional                    Be assured that SEC Chairman Clayton and              and places those firms under the same
                                                                                                    I—and our fellow CFTC and SEC                            regulatory regime as the world’s largest, most
                                            amount.
                                                                                                    Commissioners—are committed to working                   complex financial institutions that deal in
                                            *     *     *     *    *                                together on robust harmonization where                   trillions of dollars’ worth of swaps.3 The end
                                              Issued in Washington, DC, on November 6,              appropriate and working jointly where                    result is that smaller firms are
                                            2018, by the Commission.                                necessary on these and other matters.                    disincentivized from engaging in lower risk
                                                                                                       With respect to IDIs, staff has informed me           activity when faced with justifying the cost
                                            Robert Sidman,
                                                                                                    that they would consider no-action relief for            of swap dealer registration.
                                            Deputy Secretary of the Commission.                     IDIs pending formal Commission action                       I have heard anecdotally from certain small
                                              Note: The following appendicies will not              should they receive a meritorious request.               to mid-sized players in the swap markets that
                                            appear in the Code of Federal Regulations.                 In sum, I am hopeful that we will today               the breakeven point of the costs of swap
                                                                                                    provide market certainty that the de minimis             dealer registration as measured by a level of
                                                                                                    threshold will not fall below its current level.         notional swap dealing activity is much
                                            Appendicies to De Minimis Exception                        Surely, it has taken a while to reach this            higher than the $8 billion level in this rule.
                                            to the Swap Dealer Definition—                          point. Yet, I am hopeful that we may achieve             If that is the case, the current $8 billion
                                            Commission Voting Summary,                              it with a good degree of consensus across the            notional threshold effectively forces these
                                            Chairman’s Statement, and                               full Commission. Assuming so, then we have               smaller players to curtail their swap dealing
                                            Commissioners’ Statements                               increased market certainty—a very good                   business, thereby limiting competition and
                                                                                                    thing in trading markets.                                further concentrating swaps activity with
                                            Appendix 1—Commission Voting                               Sometimes it’s worth the wait.                        their larger competitors.4
                                            Summary                                                                                                             In my view, an appropriately calibrated de
                                                                                                    Appendix 3—Statement of                                  minimis exception would better align the
                                              On this matter, Chairman Giancarlo, and
                                            Commissioners Quintenz, Behnam, Stump,
                                                                                                    Commissioner Brian D. Quintenz                           criteria of the de minimisthreshold with the
                                            and Berkovitz voted in the affirmative. No                 I support today’s final rule to rescind the           costs of swap dealer regulation, particularly
                                            Commissioner voted in the negative.                     de minimis threshold’s scheduled reduction               the largest costs tied to mitigating systemic
                                                                                                    to $3 billion of gross notional swap dealing             risk, like capital and margin. A de minimis
                                            Appendix 2—Statement of Chairman J.                     activity. Every iteration of data analysis               threshold based on metrics more closely
                                            Christopher Giancarlo                                   completed by CFTC staff on this issue, from              correlated with the risk of the products
                                                                                                    the 2015 Preliminary Report,1 to the 2016                traded, as opposed to the current risk-
                                               Today’s final rule on the numeric                                                                             insensitive notional value metric, would
                                            threshold for swap dealer de minimis will               Final Report,2 to the updated data and
                                                                                                    analysis in the 2018 June proposed rule, and             better measure dealing activity and more
                                            provide the market with certainty that the                                                                       appropriately capture the entities warranting
                                            threshold will not fall from $8 billion to $3           to the data presented in this final rule, clearly
                                                                                                    and unequivocally supported eliminating                  Commission oversight.
                                            billion. I fully support the proposed final                                                                         I am pleased the Chairman continues to
                                            rule.                                                   this ill-conceived reduction. I am pleased
                                                                                                    that today’s action will remove a large source           recognize this and has directed staff to study
                                               The action before us is without prejudice                                                                     many of the alternative risk-based
                                            to all other items in the Commission’s June             of negative regulatory uncertainty for market
                                                                                                    participants in managing their swaps                     registration metrics that were suggested in
                                            2018 NPRM. That includes various proposed                                                                        the proposed rule. The staff report will
                                            rule amendments and other topics for                    business and serving their customers.
                                                                                                       However, this is just the first of many               provide the Commission with additional data
                                            consideration. Those proposals and                                                                               and insights into the impact that alternative
                                            considerations are clearly of wide ranging              necessary steps toward correcting what I
                                                                                                    believe is a flawed swap dealer registration             approaches may have on swap dealer
                                            interest as evidenced by the public comments                                                                     registration. For example, staff’s analysis
                                            received. They remain under staff                       policy. Therefore, it is my hope that today’s
                                                                                                    final rule should be viewed with finality only           should show how removing or haircutting
                                            consideration pending further Commission                                                                         cleared swaps from the de minimis
                                            action.                                                 in this one regard.
                                                                                                       The Dodd-Frank Act advanced three main                calculation would impact the number and
                                               Indeed, I will direct CFTC staff to continue                                                                  composition of firms required to register as
                                            their analysis of the range of matters raised           and substantial policy objectives for swap
                                                                                                    dealer registration: Systemic risk reduction,            swap dealers. The report will also provide
                                            in the June 2018 NPRM and comments                                                                               staff with an opportunity to consider, for the
                                            submitted by the public.                                counterparty protection, and enhanced swap
                                                                                                    market transparency and efficiency. As I have            first time, how a registration threshold tied
                                               I will specifically ask staff to conduct a                                                                    to initial margin for cleared swaps could
                                            study on possible alternative metrics for the           emphasized on many prior occasions, given
                                                                                                    the significant costs of swap dealer                     better represent a de minimis quantity of
                                            calculation of the swap dealer de minimis                                                                        swap dealing activity. For uncleared
                                            threshold drawing upon proposals in the                 regulation, it is critical that the de minimis
                                                                                                    exception be appropriately calibrated to                 products, staff can examine the impact of
                                            June 2018 NPRM, including the feasibility of:                                                                    using entity-netted notional amounts, a more
                                            (i) Removing cleared swaps from the current             ensure that the correct market group—those
                                                                                                    best situated to realize the corresponding               accurate measure of a firm’s risk and market
                                            de minimis calculation; (ii) haircutting                                                                         size, as a metric of swap dealing activity. The
                                            cleared swaps included in the current de                policy goals of registration—shoulders the
                                                                                                    burdens of swap dealer regulations.                      results of the staff report will be critical to
                                            minimis calculation; (iii) adopting a new,                                                                       any future Commission consideration of a
                                            bifurcated de minimis calculation that uses                As I have also said repeatedly in the past,
                                            initial margin amounts for cleared swaps and            notional value is a poor measure of activity,
                                            entity-netted notional amounts for uncleared            and it is a meaningless measure of risk.                    3 See Office of the Comptroller of the Currency,

                                                                                                    Therefore, by itself, notional value is an               ‘‘Quarterly Report on Bank Trading and Derivatives
                                            swaps; and (iv) applying other risk-based                                                                        Activities, Second Quarter 2018,’’ available at:
                                            approaches that the staff may recommend. I              incredibly deficient metric by which to
                                                                                                    impose large costs and achieve substantial               https://www.occ.gov/topics/capital-markets/
                                            will be asking the staff for specific deadlines                                                                  financial-markets/derivatives/dq218.pdf.
                                            and deliverables for this work. Once staff has          policy objectives. A one-size-fits-all notional             4 For further discussion, see comment letter to

                                            reviewed and analyzed the data, I expect that           value test for swap dealer registration                  CFTC from Financial Services Roundtable dated
                                            the study will be made public for further                                                                        January 19, 2016 (‘‘We do not see a benefit to
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                                                                                                       1 See Swap Dealer De Minimis Exception
                                            discussion and possible Commission                                                                               requiring an entity that enters into a small number
                                                                                                    Preliminary Report (‘‘Preliminary Report’’), http://     of swaps with a large notional amount but little
                                            consideration.                                          www.cftc.gov/idc/groups/public/@swaps/                   exposure to choose between exiting the market or
                                               I deliberately decline at this time to               documents/file/dfreport_sddeminis_1115.pdf.              registering as a swap dealer, nor should entities that
                                            express any view on the appropriateness of                 2 See Swap Dealer De Minimis Exception Final          are taking on very large exposures without crossing
                                            whether any of the proposals in the June                Report (‘‘Final Report’’), https://www.cftc.gov/sites/   a notional threshold, or a trade or counterparty
                                            2018 NPRM not before us today should be                 default/files/idc/groups/public/@swaps/documents/        count metric, be unregulated because they have
                                            addressed by CFTC unilateral rulemaking or              file/dfreport_sddeminis081516.pdf.                       concentrated risk in a small number of trades.’’).



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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                                   56691

                                            more risk-sensitive swap dealer registration            detrimental to market participants. To the             (‘‘Commission’’) and the U.S. Securities and
                                            threshold.                                              extent the Commission continues to consider            Exchange Commission (‘‘SEC’’) to jointly
                                               In addition, many of the policy                      addressing long standing concerns with the             further define, among other things, the term
                                            recommendations discussed in the proposed               IDI Swap Dealing Exclusion,2 ambiguity                 ‘‘swap dealer.’’ 1 At the same time, Congress
                                            rule, such as better allowing insured                   regarding the treatment of swaps used for              enacted Section 1a(49)(D) of the Commodity
                                            depository institutions to assist their                 hedging, or relief applicable to swaps that            Exchange Act (‘‘CEA’’), which directed the
                                            customers in hedging loan-related risks and             result from multilateral portfolio                     Commission to exempt from designation as a
                                            excluding non-deliverable forwards from an              compression exercises, it should do so jointly         swap dealer entities that engage in a de
                                            entity’s de minimis count—would advance                 with the SEC.                                          minimis quantity of swap dealing.
                                            the policy goals of the de minimis exception                                                                      In 2012, the Commission—jointly with the
                                            by encouraging greater participation and                NFC Swap Data                                          SEC—adopted the further definition of the
                                            competition in the swap markets. I would                   Today’s decision to maintain the AGNA               term swap dealer. In this rulemaking, the de
                                            eagerly anticipate the Commission’s action              threshold at $8 billion follows a period of            minimis swap dealing threshold was set at $3
                                            on these important reforms. As the                      prolonged uncertainty during which                     billion. However, recognizing that a lack of
                                            Commission’s recent no-action letter to a               Commission staff conducted more complete               swap trading data made it difficult to set an
                                            Main Street bank this past August shows, the            data analysis regarding the de minimis                 appropriate threshold, the Commission
                                            deficiencies of the current de minimis                  exception.3 While swap data repository                 implemented a long phase-in period during
                                            exception are beginning to squeeze firms’               (‘‘SDR’’) data quality has improved, AGNA              which the threshold was set at $8 billion.2
                                            activity and constrain their ability to serve           data was unavailable for non-financial                 The regulation directed Commission staff to
                                            clients.5                                               commodity (‘‘NFC’’) swaps.4 Nevertheless,              study the data on swap dealing activity that
                                               Any de minimis threshold must always be              Commission staff used counterparty and                 would be collected through swap data
                                            put into context of the broader swaps market            transaction counts and a series of                     repositories (‘‘SDRs’’) and publish a report
                                            regulatory regime. The Commission is not                assumptions to analyze likely swap dealing             for public comment, enabling the
                                            establishing the de minimis exception in a              activity in the NFC swap market and                    Commission at a later time to make a data-
                                            vacuum. Since the swap dealer definition                concluded that reducing the $8 billion AGNA            based judgment regarding the de minimis
                                            was adopted in 2012, a broad range of                   threshold could lead to reduced liquidity in           quantity threshold.3
                                            rigorous regulatory requirements have gone              NFC swaps, negatively impacting end-users                 To this end, the staff built a comprehensive
                                            into effect which also advance the goals of             and commercial entities who utilize NFC                database to aggregate data from all four SDRs.
                                            swap dealer registration, such as mandatory             swaps for hedging.5 The Commission further             Over several years, the staff developed and
                                            clearing, SEF trading, swap data reporting,             relied upon findings and comments that the             refined new techniques to sort and evaluate
                                            and margin requirements for uncleared                   unique characteristics of the NFC swap                 the data, published two reports on the de
                                            swaps.                                                  market pose less systemic risk than financial          minimis exception, and continued to revise
                                               The Commission’s regulatory framework                swaps.6                                                its analysis in response to public comments.
                                            for the swap market has greatly evolved from               It is my hope that Commission staff will            This process was not without considerable
                                            its state six years ago; it is only common              continue to examine and monitor data and               challenges, but the staff worked diligently to
                                            sense that the swap dealer registration                 activities in the NFC swap market to ensure            produce meaningful, data-driven information
                                            threshold should evolve as well. It will be a           that concentrated activity by unregistered             to guide the Commission’s decision-making
                                            great day when financial regulators,                    NFC counterparties in segments of that swap            regarding the appropriate de minimis
                                            including the CFTC, finally move away from              market, such as in energy-related swaps, do            threshold.
                                            gross notional value as any sort of metric or           not present outsized risk or harm to end-                 This effort provided a highly significant
                                            test of derivatives exposure, activity, or risk.        users, and most importantly, the general               data point: Approximately 98 percent of all
                                            I look forward to that day, and I am                    public.                                                swap transactions involved at least one
                                            committed to working with the Chairman,                                                                        registered swap dealer. We now know that at
                                                                                                    Appendix 5—Statement of                                the $8 billion threshold, nearly all swap
                                            my fellow Commissioners, and our staff to
                                                                                                    Commissioner Dan M. Berkovitz                          transactions benefit from swap dealer
                                            make sure we get the swap dealer de minimis
                                            exception policy right.                                    I support amending the swap dealer de               regulation.
                                                                                                    minimis exception to set the threshold at $8              The staff’s analysis also showed that
                                            Appendix 4—Concurring Statement of                      billion. This limited amendment relies on              reducing the threshold to $3 billion would
                                            Commissioner Rostin Behnam                              extensive data analysis to achieve a balance           have a minimal impact on the amount of
                                                                                                    between the policy objectives of the de                swaps activity that would be subject to swap
                                               Today, the Commission acts decisively to                                                                    dealer regulation. Indeed, based on the
                                            set the aggregate gross notional amount                 minimis exception and the registration of
                                                                                                    swap dealers.                                          analysis, reducing the threshold to $3 billion
                                            (‘‘AGNA’’) threshold for the de minimis                                                                        would only add swap dealer coverage to less
                                            exception at $8 billion in swap dealing                    At the outset, I would like to acknowledge
                                                                                                    the leadership of Chairman Giancarlo and the           than one-tenth of one percent of reported
                                            activity entered into by a person over the                                                                     swaps. By the same token, the analysis
                                            preceding 12 months. I am comfortable                   efforts of my fellow Commissioners to
                                                                                                    achieve consensus on this rulemaking. I look           demonstrated that increasing the threshold
                                            supporting today’s final rule because it is                                                                    quantity above $8 billion would have almost
                                            limited to establishing a clear and certain de          forward to working together to continue to
                                                                                                    find areas of agreement where it makes sense           no impact on the amount of swaps subject to
                                            minimis threshold. While I was unable to                                                                       dealer regulation until that threshold reaches
                                                                                                    for our markets and the American people.
                                            support the proposed rule—which moved the                                                                      a significantly higher level. At those levels,
                                            Commission far beyond the task before it                Data-Driven Rulemaking                                 the effect on specific categories of swaps—
                                            towards unilaterally redefining swap dealing              Title VII of the Dodd-Frank Act directed             notably non-financial commodity swaps
                                            activity absent meaningful, congressionally-            the Commodity Futures Trading Commission               (‘‘NFC’’)—becomes much more significant.
                                            required collaboration with the Securities                                                                        When considering amending a rule, the
                                            and Exchange Commission (‘‘SEC’’)—I am                    2 If the proposed IDI Minimis Provision truly        Commission should consider both the
                                            gratified that the Commission is not moving
                                                                                                    better aligns the swap dealer regulatory framework
                                            forward with aspects of the Proposal which              with the risk mitigation demands of bank                 1 Dodd-Frank Wall Street Reform and Consumer
                                            would have further complicated the                      customers, as commenters suggested, then it would      Protection Act, section 712(d)(1), Public Law 111–
                                            distinction between dealing and non-dealing             seem that there should be few hurdles in the way       203, 124 Stat. 1376 (2010) (the ‘‘Dodd-Frank Act’’).
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                                            activities.1 Such action would have been                of the CFTC and SEC engaging to reconsider the           2 See 17 CFR 1.3, Swap dealer, paragraph
                                                                                                    parameters of the IDI Swap Dealing Exclusion.          (4)(i)(A); see also Further Definition of ‘‘Swap
                                              5 CFTC No-Action Letter 18–20 (August 28, 2018),        3 83 FR 27445–6.
                                                                                                                                                           Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major
                                                                                                      4 83 FR 27445.
                                            https://www.cftc.gov/PressRoom/PressReleases/                                                                  Swap Participant,’’ ‘‘Major Security-Based Swap
                                            7775-18.                                                  5 83 FR 27450, 27456–7.                              Participant’’ and ‘‘Eligible Contract Participant,’’ 77
                                              1 De Minimis Exception to the Swap Dealer               6 83 FR 27457; Final Rule, De Minimis Exception      FR 30596, 30633–34 (May 23, 2012) (‘‘SD Adopting
                                            Definition, 83 FR 27444, 27481–2 (proposed June         to the Swap Dealer Definition, section II.C.1.ii (to   Release’’).
                                            12, 2018).                                              be codified at 17 CFR pt. 1).                            3 17 CFR 1.3, Swap dealer, paragraph (4)(ii)(B).




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                                            56692            Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations

                                            benefits and costs from those rule changes.             aggregate gross notional amount of NFC                   investors.7 To underscore this point,
                                            Here, data analysis has shown that the                  swaps. Instead, the staff used counterparty              Congress noted that rules prescribed jointly
                                            benefits of changing the current $8 billion             and transaction counts to approximate swap               by the Commission and the SEC under Title
                                            threshold are relatively small because nearly           dealing activity for NFC swaps. The staff’s              VII must be ‘‘comparable to the maximum
                                            all swap activity is already covered by dealer          analysis indicated that fewer NFC swap                   extent possible,’’ and that any interpretation
                                            regulation.                                             transactions—86 percent—involved at least                of, or guidance regarding, a provision of the
                                               On the other hand, decreasing the                    one registered swap dealer, as opposed to 99             Dodd-Frank Act would be effective only if
                                            threshold from its current level would                  percent for other swap categories.                       issued jointly by the Commission and the
                                            impose tangible costs on market participants.              The market participants who use physical              SEC.8 Pursuant to this statutory directive, the
                                            If the threshold were lowered to $3 billion,            commodity swaps to hedge their risks                     agencies adopted a joint rulemaking to define
                                            unregistered dealers that are currently under           typically include farmers, ranchers, farm                ‘‘swap dealer’’ and ‘‘security-based swap
                                            the $8 billion level, but that could exceed the         product processors, energy producers and                 dealer.’’
                                            $3 billion threshold, would have to re-                 consumers, manufacturers, and other end                     Congress created one exception to the joint
                                            evaluate whether swap dealing in excess of              users. These consumer-facing businesses                  rulemaking requirement. CEA subsection
                                            $3 billion would continue to make business              need a properly functioning physical                     1a(49)(D) authorizes ‘‘the Commission’’ to
                                            sense. The de minimis rulemaking proposal 4             commodity derivatives marketplace to                     exempt from designation as a swap dealer
                                            noted that this issue is particularly important         maintain consistent prices for their                     ‘‘an entity that engages in a de minimis
                                            in the NFC swap market. The staff’s data                customers. Ultimately, the American people               quantity of swap dealing’’ and ‘‘to establish
                                            analysis showed that many of the smaller                benefit from stable prices on the products               factors with respect to the making of this
                                            swap dealers for physical commodities are               that these businesses produce and distribute.            determination to exempt.’’ 9 The Commission
                                            physical commodity producers, distributors,                I am therefore calling on the Commission              included this de minimis exception in
                                            consumers, or merchandizers. Swap dealing               to continue to focus on improving our data               paragraph 4 of the swap dealer definition,
                                            is an ancillary business for them. Where the            collection and analysis for NFC swaps. More              notably separate from other provisions in the
                                            costs of registering as a swap dealer exceed            robust data collection will help us improve              definition addressing the IDI exclusion
                                            anticipated benefits, it is likely that many of         regulation in this space, including                      (paragraph 5) and the physical hedging
                                            these entities would withdraw from                      considering ways to balance the benefits of              exclusion (paragraph 6).
                                            providing swap dealing services to their                de minimis swap dealing in physical                         By its terms, the de minimis exception
                                            customers. That would leave many end users              commodities with the need for customer                   relates solely to exempting a numerical
                                            looking to hedge their risks with either no             protections and the other benefits of swap               quantity of swap dealing activity. Under the
                                            dealers available, or very few dealers to               dealer registration.                                     statutory structure, the Commission and the
                                            provide competitive pricing.                                                                                     SEC must jointly determine which activities
                                               The Commission should seek to preserve               Joint Rulemaking Required for Swap Dealer                are dealing activities and therefore must be
                                            and foster competition for swap dealer                  Definition                                               counted toward the threshold; the
                                            services. One of the fundamental purposes of               I am voting today solely in favor of setting          Commission itself may set a numerical
                                            the CEA is to ‘‘promote . . . fair competition          the de minimis exception threshold quantity              quantity of such dealing as a threshold for
                                            among boards of trade, other markets and                at $8 billion because it is within the                   registration. Put simply, deciding ‘‘which’’
                                            market participants.’’ 5 American businesses            Commission’s authority to do so. Looking                 activity gets counted must be done jointly;
                                            throughout the country that need to use                 forward, however, I will not support other               deciding ‘‘how much’’ of that activity triggers
                                            swaps to hedge their risks should not be                amendments to the swap dealer definition                 the registration requirement may be done
                                            forced to rely solely on large Wall Street                                                                       singly.
                                                                                                    without a joint rulemaking with the SEC, as
                                            banks. Retaining the de minimis threshold at                                                                        The proposal framed these additional
                                                                                                    required by the Dodd-Frank Act.
                                            $8 billion will help preserve competition and                                                                    proposed changes to the swap dealer
                                                                                                       In addition to setting the threshold level,
                                            choice for American businesses for these                                                                         definition as ‘‘factors’’ in the de minimis
                                                                                                    the proposal sought to alter the swap dealer
                                            swap dealing services.                                                                                           threshold determination. In doing so, the
                                                                                                    definition by excluding from counting
                                               It is important to note that this rulemaking                                                                  proposal sought to use the Commission’s
                                                                                                    toward that de minimis threshold: (1) Swaps
                                            represents one of the first times in which the                                                                   unilateral authority to ‘‘establish factors’’ as
                                                                                                    entered into by an insured depository                    provided in the second sentence in CEA
                                            Commission has relied on SDR data to set                institution (‘‘IDI’’) in connection with
                                            policy, and the staff that undertook this                                                                        subsection 1a(49)(D). However, that
                                                                                                    originating loans; (2) swaps hedging financial           interpretation is a misreading of the statutory
                                            principled and thorough analysis should be              or physical positions; and (3) swaps resulting
                                            commended for their efforts. Given the                                                                           provision. The second sentence in CEA
                                                                                                    from multilateral portfolio compression                  subsection 1a(49)(D) authorizes the
                                            technological advancements in data                      exercises. The proposal also asked questions
                                            collection and analysis, effective use of data                                                                   Commission to promulgate regulations to
                                                                                                    about excluding from the threshold                       ‘‘establish factors with respect to the making
                                            to inform policy making is critical for the
                                                                                                    calculation swaps that are cleared and/or                of this determination to exempt.’’ 10 The
                                            Commission to meet its policy objectives of
                                                                                                    exchange traded and non-deliverable                      words ‘‘this determination’’ clearly refer to
                                            fostering open, transparent, competitive, and
                                                                                                    forwards.                                                the quantity determination in the first
                                            financially sound markets.
                                                                                                       Although the Commission is not adopting               sentence of the subsection: ‘‘[t]he
                                               In sum, the data demonstrates that the
                                                                                                    these provisions today, my view is that any              Commission shall exempt from designation
                                            current de minimis threshold level is largely
                                                                                                    such changes would effectively amount to an              as a swap dealer an entity that engages in a
                                            accomplishing its intended purposes. Where
                                                                                                    amendment of the swap dealer definition, not             de minimis quantity of swap dealing in
                                            the current regulations are working,
                                                                                                    the de minimis exception. Doing so                       connection with transactions with or on
                                            regulatory stability also is an important
                                                                                                    unilaterally and not as a joint rulemaking               behalf of its customers.’’ 11 In other words,
                                            objective. Accordingly, after considering the
                                            results of the swap data analysis, relevant             with the SEC would be contrary to the                    the ‘‘factors’’ referred to in the second
                                            policy implications, and limited benefits and           statutory language and inconsistent with                 sentence relate to the numerical quantity
                                            potential costs of altering the de minimis              Congressional intent.                                    determination in the first sentence; this
                                            threshold quantity, I believe that maintaining             When Congress enacted Title VII of the                sentence does not create a distinct directive
                                            the threshold at $8 billion is appropriate and          Dodd-Frank Act, its intent was clear: ‘‘[T]he            authorizing the Commission to
                                            sound public policy.                                    [Commission] and the [SEC], in consultation              independently determine what constitutes
                                                                                                    with the Board of Governors, shall further               swap dealing.12
                                            Physical Commodity Swaps                                define the term[] . . . ‘swap dealer,’ ’’ among
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                                              The proposal noted that Commission staff              other terms.6 Congress clarified that the                  7 Dodd-Frank   Act, section 712(d)(2)(A).
                                            encountered challenges in measuring the                 Commission must use the joint rulemaking                   8 Dodd-Frank   Act, section 712(d)(2)(D).
                                                                                                    process to make any other rules regarding                  9 7 U.S.C. 1a(49)(D) (emphasis added).

                                              4 Notice of proposed rulemaking, De Minimis           these definitions that it and the SEC                      10 Id.

                                            Exception to the Swap Dealer Definition, 83 FR          determine are necessary for the protection of              11 Id. (emphasis added).

                                            27444 (June 12, 2018).                                                                                             12 In the preamble of the SD Adopting Release,
                                              5 7 U.S.C. 5(b).                                        6 Dodd-Frank    Act, section 712(d)(1).                the Commission discussed the factors envisioned by



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                                                             Federal Register / Vol. 83, No. 219 / Tuesday, November 13, 2018 / Rules and Regulations                                             56693

                                              This point is clear when we examine what              exercises, cleared and/or exchange traded,            dealing. The de minimis exception would
                                            would happen if each of the five categories             and non-deliverable forwards) were removed            swallow the swap dealer definition. This
                                            of swap dealing activity identified in the              from the definition of swap dealing through           result cannot be reconciled with the Dodd-
                                            proposal as ‘‘factors’’ (i.e., IDI, physical            this interpretation of the de minimis                 Frank Act’s joint rulemaking requirement.
                                            hedging, multilateral portfolio compression             exception. Combined, these five categories of           For these reasons, while I am amenable to
                                                                                                    swaps likely total more than half of the              considering further refinements to the swap
                                            Section 1a(49)(D). For example, the preamble            notional amount traded. There would appear            dealer definition and what gets counted as
                                            provided that the Commission could consider             to be no limit to what dealing activity could
                                            whether the de minimis exception would ‘‘lead[] to                                                            dealing, I am of the view that this cannot be
                                                                                                    be excluded from dealer regulation through            accomplished without joint rulemaking with
                                            an undue amount of dealing activity to fall outside
                                            the ambit of Title VII regulatory framework, or
                                                                                                    the de minimis exception by framing whole             the SEC.
                                            lead[] to inappropriate reductions in counterparty      categories of swaps to be excluded as
                                            protections (including protections for special          ‘‘factors.’’ The Commission could effectively         [FR Doc. 2018–24579 Filed 11–9–18; 8:45 am]
                                            entities).’’ SD Adopting Release, 77 FR 30635.          determine unilaterally what constitutes swap          BILLING CODE 6351–01–P
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Document Created: 2018-11-10 03:19:03
Document Modified: 2018-11-10 03:19:03
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionRules and Regulations
ActionFinal rule.
DatesThis rule is effective November 13, 2018.
ContactMatthew Kulkin, Director, 202-418- 5213, [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; or 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.
FR Citation83 FR 56666 
RIN Number3038-AE68
CFR AssociatedCommodity Futures; Definitions; De Minimis Exception; Insured Depository Institutions; Swaps and Swap Dealers

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