The SEC and CFTC on Wednesday both defined which companies will face new oversight in the $708 trillion global swaps market.
A rule approved on a 4-1 vote by the Commodity Futures Trading Commission will initially define a regulated dealer as one that conducts swaps with a notional value of at least $8 billion in a 12-month period. The SEC approved a similar rule by a unanimous vote.
Companies defined as swap dealers will ultimately be subject to the highest capital and collateral requirements for market participants.
The $8 billion threshold will fall to $3 billion within five years unless new market data persuade regulators to use a different level. While a lower threshold will capture more dealers, it still exceeds the $100 million level initially proposed.
CFTC Chairman Gary Gensler said he was confident the rule would impose new requirements on the dominant players in the swaps market even though the threshold is higher than initially proposed.
The SEC and CFTC met separately Wednesday to weigh parallel versions of the rule. The rule was mandated by the Dodd-Frank Act of 2010 to govern clearing, trading, capital, collateral and internal compliance standards, as well as swap dealers’ relationships with clients including pension funds and cities.
A CFTC staff member who briefed reporters on Tuesday didn’t provide details on how many companies would be subject to the heightened oversight.
The rule also defines a smaller group of “major swap participants” that hold large positions in categories such as currency exchange rates or commodity swaps. One threshold for “substantial position” would be daily uncollateralized exposure of $1 billion in any major swaps category except for rate swaps, where $3 billion will be the mark.
Swap activity for portfolio hedging and anticipatory hedging wouldn’t be counted in the threshold calculation. Major swap participants will also be allowed to exclude hedging or the mitigation of commercial risk from their position total.
Companies won’t be subject to the new oversight immediately. The CFTC must define what a swap is before it can impose requirements on dealers. For securities-based dealers, the SEC must also complete registration rules.