The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") provided no-action relief to floor traders from counting certain swaps towards the de minimis threshold for purposes of determining whether registration as a "swap dealer" is required.
The relief came in response to a request from the FIA Principal Traders Group ("FIA PTG"). According to FIA PTG, the existing conditions for a floor trader exemption under the definition of "swap dealer" in CFTC Rule 1.3(6)(iv) ("Definitions") are "unclear or unnecessarily restrictive." In particular, the FIA PTG cited the condition that floor traders must file risk reports as though subject to CFTC Rule 23.600(c)(2) ("Risk Management Program for swap dealers and major swap participants"). The letter provides for this aspect of the exception, as well as permitting a floor trader to (i) enter into swaps other than derivatives contract market and swap execution facility ("DCM/SEF") cleared swaps and (ii) negotiate the terms of non-DCM/SEF cleared swaps.
The relief is subject to the conditions that the floor trader comply with certain CFTC Regulations with respect to each of its swaps as if it were a registered swap dealer (see CFTC Rules 23.201 ("Required records"); 23.202 ("Daily trading records"); 23.203 ("Records; retention and inspection"); and 23.600 ("Risk Management Program for swap dealers and major swap participants"), with the exception of 23.600(c)(2)).
DSIO states that the letter is intended to permit floor traders to conduct the following activities:
- swap dealing pursuant to the floor trader exception, in particular, that DCM/SEF cleared swaps would not count toward the de minimis threshold;
- swap dealing for non-DCM/SEF cleared swaps; and
- non-dealing swaps activities.
CFTC Commissioner Dan M. Berkovitz issued a statement in support of the no-action letter. Mr. Berkovitz previously urged the CFTC to "fix" the floor trader provision, and argued that the relief would permit proprietary traders to act as market makers for swaps on SEFs and DCMs. However, Mr. Berkovitz said that the CFTC should take action to amend the rule in the long run, and noted that Chair J. Christopher Giancarlo has agreed to direct CFTC staff to draft a proposed rule amendment consistent with the no-action relief.
CFTC Commissioner Brian Quintenz objected to the no-action letter, saying that he believes in the implicit policy, but stating that "the floor trader exception is a dangerous vehicle, and that no-action relief is a poor process, by which to achieve this substantial and justified policy outcome." Mr. Quintenz viewed the letter as an "end-run around" revisiting the de minimis definition by distorting an "archaic floor trader regulatory concept to lure unregistered entities into a 'swap dealer light' registration scheme."
Commentary / Nihal Patel
The relief in this letter should be significant to a relatively small group of market participants at this time, but has the potential to expand. While the conditions of the existing exception are significantly relaxed, the requirement remains that any transactions relying on the floor trader exception must be entered into by a floor trader in its capacity as a floor trader or on a SEF. In addition, the CFTC left in place the condition that floor traders not be affiliated with a swap dealer, meaning that the exception will continue to be virtually useless for financial institutions.
The new conditions - primarily relating to recordkeeping - are burdensome (especially certain of the daily trading records requirements). However, it is difficult to see this rising to the level of being "swap dealer light," as Mr. Quintenz describes it. With that said, Mr. Quintenz's statement makes good process arguments, and his continued urging for the CFTC to more broadly reconsider the de minimis rule has a good amount of merit.
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