Jul 13, 2012
The Commodity Futures Trading Commission and the Securities Exchange Commission have adopted joint final Rules further defining the key Dodd-Frank entity definitions “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant” and “eligible contract participant.”
The Rules represent a fundamental piece of the emerging regulatory framework for derivatives under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the Dodd-Frank Act and implementing regulations, Dealers and MSPs will be required to register with the CFTC or SEC, as applicable, and will be subject to comprehensive regulation, including as to capital, margin, reporting and business conduct requirements.
The Rules address to varying degrees certain significant concerns expressed by market participants about the proposed rules. Specifically, the Rules:
The Rules and the accompanying adopting release also leave several key questions unanswered, including the application of the Dealer and MSP registration requirements to non-U.S. entities. Both the CFTC and SEC have indicated that they intend to provide further guidance in this area (both as to registration and as to the application of the regulatory requirements for Dealers and MSPs located outside of the United States and/or acting on a cross-border basis. Additional interpretive questions are likely to arise as institutions try to apply the de minimis exemptions in the context of groups with operations in multiple jurisdictions and seek limited designation of dealer or MSP status for only a part of an entity’s business.
With respect to the Dealer definition, this publication provides an overview of (i) the general analysis for identifying dealing activity involving Swaps; (ii) the exclusion of the Swaps in connection with the origination of loans by insured depository institutions from the Dealer definition analysis; (iii) the treatment of inter-affiliate Swaps; (iv) the application of the de minimis exception from the dealer definitions; and (v) the potential for limited designation of Dealers and SBSDs. With respect to the MSP definition, this publication will provide an overview of (i) the “major” categories of Swaps; (ii) the meaning of “substantial position;” (iii) the meaning of “hedging or mitigating commercial risk;” (iv) the meaning of “substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets;” and (v) the meanings of “financial entity” and “highly leveraged.”