Articles Tagged with Swaps

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The global compliance deadline for implementation of variation margin requirements for uncleared swap transactions is March 1, 2017.  Unless an exception is available, the rules generally require swap dealers to collect and post variation margin with no credit threshold.  The rules require the parties to enter into new or amended credit support documentation, limit the types of collateral that may be posted, prescribe minimum transfer amounts and effectively require new operational processes to be put in place.  Moreover, different rules can apply depending on who the swap dealer’s regulator is and/or the jurisdiction of the counterparty.  Not surprisingly, many market participants, particularly smaller financial firms, buy-side firms, asset managers, pension funds and insurance companies are unlikely to be compliant by the March 1 deadline.  This has caused immense consternation among buy-side market participants who feared that they would be unable to trade until they came into compliance.

On February 23, 2017, following requests from numerous trade associations, U.S. banking regulators and IOSCO, the umbrella body for global securities regulators, issued statements encouraging leniency in enforcement of the documentation requirements.  More specifically, the Federal Reserve provided guidance to examiners of CFTC-registered swap dealers that, except for transactions with financial end users that present “significant exposures” (which must still comply with the March 1 deadline), examiners should focus on swap dealer’s good faith efforts to comply as soon as possible but no later than September 1, 2017.   Similarly, though less explicitly, IOSCO issued a statement that, while it expects all parties to make every effort to meet the March 1 deadline, it believes that the global regulators should take “appropriate measures … to ensure fair and orderly markets during the introduction and application of such variation margin requirements.”   These statements follow the release by the CFTC on February 13, 2017 of a time-limited no-action letter delaying compliance by swap dealers under their jurisdiction until September 1, 2017.

There are a number of paths to compliance for buy-side firms, including negotiating bilateral agreements or amendments directly with swap dealers or using an industry-wide questionnaire-style protocol developed by ISDA and available through their ISDA Amend automated service run jointly with Markit.

If you have questions regarding the current deadlines or need assistance with compliance, please contact our derivatives partner, Daniel Budofsky (, or your regular Pillsbury contact.

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On November 18, 2015, the staff from the U.S. Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight issued a swap dealer de minimis exception preliminary report (“Preliminary Report”).

The Preliminary Report was issued pursuant to the SEC and CFTC joint regulation defining the term “swap dealer” and providing for a de minimis exception to the swap dealer definition. Under the regulation, a person shall not be deemed to be a swap dealer unless its swap dealing activity exceeds an aggregate gross notional amount threshold of $3 billion (measured over the prior 12-month period), subject to a phase-in period during which the gross notional amount threshold is set at $8 billion. Under the terms of the regulation, the phase-in period will terminate on December 31, 2017, and the de minimis threshold will fall to $3 billion, unless the CFTC sets a different termination date for the phase-in period or modifies the de minimis exception.

The Preliminary Report discusses:

  • Relevant statutory and regulatory provisions defining the term “swap dealer” and implementing the de minimis exception.
  • Data considered in preparing the Preliminary Report.
  • Policies underlying swap dealer registration and regulation and the de minimis exception that form the basis for evaluating the swap market data.
  • Data in light of alternative approaches to a de minimis exception.

Comments on the Preliminary Report must be submitted on or before January 19, 2016 and may be submitted electronically via the CFTC’s Comment Online Process. The staff will complete and publish for public comment a final report after considering the comments it receives on the Preliminary Report.

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Written by: Jeffrey Stern and Anthony H. Schouten

The Commodity Futures Trading Commission has issued new “know your customer” and external business conduct rules to give effect to certain provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under these rules, major dealers in swaps and derivatives (“Swap Dealers”) will be required to, among other things, conduct diligence on counterparties, verify their status as “eligible contract participants” and ensure that swap recommendations are suitable for them. In addition, these rules impose heightened duties on Swap Dealers that trade with employee benefit plans subject to Title I of the Employee Retirement Income Security Act of 1974, governmental plans as defined in ERISA Section 3, endowments, state and federal agencies, and other protected counterparties (“Special Entities”).


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Written by: Jay B. Gould and Peter Chess

On April 18, 2012, the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) voted to adopt rules defining “swap dealer,” “security-based swap dealer,” “major swap participant,” and “major security-based swap participant,” among other terms, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  The Dodd-Frank Act assigns to the SEC the regulatory authority for security-based swaps[1] and assigns to the CFTC the regulatory authority for swaps. 

Under the adopted rules, the definitions are as follows:

A swap dealer is defined as any person who:

  • Holds itself out as a dealer in swaps;
  • Makes a market in swaps;
  • Regularly enters into swaps with counterparties as an ordinary course of business for its own account; or
  • Engages in activity causing itself to be commonly known in the trade as a dealer or market maker in swaps.

The definition of security-based swap dealer tracks the definition of swap dealer, with “security-based swap” inserted where “swap” appears.

A major swap participant is a person that satisfies any one of the three parts of the definition:

  • A person that maintains a “substantial position” in any of the major swap categories, excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan.
  • A person whose outstanding swaps create “substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.”
  • Any “financial entity” that is “highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking agency” and that maintains a “substantial position” in any of the major swap categories.

The definition of major security-based swap participant tracks the definition of major swap participant with “security based-swap” inserted where “swap” appears.

The newly adopted rules contain further definitions for the terms “substantial position,” “hedging or mitigating commercial risk,” “substantial counterparty exposure,” “financial entity,” “highly leveraged,” and “eligible contract participant.”  In addition, the adopting release provides interpretative guidance on the definitions of swap dealer and security-based swap dealer, and the CFTC provides further details on the exclusion for swaps in connection with originating a loan, the exclusion of certain hedging swaps and the exclusion of swaps between affiliates.  Finally, the new rules call for a de minimis exemption from the definition of swap dealer and security-based swap dealer wherein a person who engages in a de minimis amount of swap or security-based swap dealing will be exempt from the respective definition.  

The SEC and the CFTC adopted the new rules under joint rulemaking, and the SEC rules become effective 60 days after the date of publication in the Federal Register, although dealers and major participants will not have to register with the SEC until the dates that will be provided in the SEC’s final rules for the registration of dealers and major participants.  The CFTC must adopt further rules defining the term “swap,” and swap dealers and major swap participants will need to register by the later of July 16, 2012, or 60 days after the publication of CFTC rules defining “swap.”

The full text of the SEC press release and fact sheet is available here.  The full text of the CFTC release is available here.

[1]               Security-based swaps are broadly defined as swaps based on (i) a single security, (ii) a loan, (iii) a narrow-based group or index of securities, or (iv) events relating to a single issuer or issuers of securities in a narrow-based security index. 

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Written by Michael Wu

On December 7, 2010, the Securities and Exchange Commission (the “SEC”) proposed joint rules with the Commodity Futures Trading Commission (the “CFTC”) to define the types of swap traders that would be subject to the new derivatives regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The proposed rules attempt to implement the provisions of the Dodd-Frank Act, which established a comprehensive framework for regulating the over-the-counter swaps market.

The Dodd-Frank Act creates new categories of market participants that are subject to registration, capital and margin, record keeping, reporting and other regulatory requirements.  The proposed rules define the categories of market participants that would be deemed “Security-Based Swap Dealers” and “Major Security-Based Swap Participants.”

  • Security-Based Swap Dealers.  Under the Dodd-Frank Act, a Security-Based Swap Dealer is any person that holds itself out as a dealer in security-based swaps, makes a market in security-based swaps, enters into security-based swaps with counterparties in the ordinary course of its business, or is commonly known in the trade as a dealer or market maker in security-based swaps.  The CFTC proposal would exempt a firm from registration as a Security-Based Swap Dealer if (i) its notional aggregate amount of security-based swaps in the prior 12 months did not exceed $100 million (of which only $25 million can be with “special entities” as defined in the Commodity Exchange Act), (ii) it did not enter into security-based swaps as a dealer with more than 15 counterparties (other than security-based swap dealers) in the prior 12 months, and (iii) it did not enter into more than 20 security-based swaps as a dealer in the prior 12 months.
  • Major Security-Based Swap Participants.  Under the Dodd-Frank Act, a Major Security-Based Swap Participant is any person that is not a Security-Based Swap Dealer and has (i) a “substantial position” in any major security-based swap categories (held other than for hedging or mitigating risk), (ii) whose security-based swaps create “substantial counterparty exposure,” which could have a serious adverse effect on the financial stability of the United States banking systems or financial markets, or (iii) is a “financial entity” that is “highly leveraged” and that has a substantial position in any of the major security-based swap categories.
    • The CFTC proposed that a firm has a “substantial position” in swaps if it (i) has a daily average or current uncollateralized exposure of at least $1 billion on a net basis for credit, equity or commodity swaps or $3 billion for rate swaps, or (ii) has a daily average of current uncollaterized exposure and future exposure of at least $2 billion for credit, equity or commodity swaps or $6 billion for rate swaps.
    • The CFTC proposed that a firm has “substantial counterparty exposure” if it has uncollateralized exposure of more than $5 billion or current and future exposure exceeding $8 billion.
    • The CFTC proposed that a “financial entity” be defined under Section 3C(g)(3) of the Securities Exchange Act of 1934, as amended.
    • The CFTC proposed two definitions of “highly leveraged”; the first is an 8 to 1 ratio of total liabilities to equity determined in accordance with US GAAP and the second is a 15 to 1 ratio of total liabilities to equity determined in accordance with US GAAP.

In addition, the proposed rules permit clearinghouses to provide portfolio margining of futures and securities in futures accounts.  The proposed rules also require Security-Based Swap Dealers and Major Security-Based Swap Participants to keep daily trading records regarding the security-based swaps and all related records, which would be open to inspection by the CFTC.  The CFTC and the SEC are expected to vote on the final rule in July of 2011.