Swap Regulators Said to Weigh Dealer Threshold of $8 Billion

U.S. derivatives regulators are considering a threshold as high as $8 billion for determining which banks, hedge funds and energy firms are swap dealers under the Dodd-Frank Act, according to two people briefed on the rule.

The Securities and Exchange Commission and Commodity Futures Trading Commission are debating when the aggregate gross notional value of a company’s transactions should require registration as a swap dealer, according to the people, who spoke on condition of anonymity because the rulemaking process isn’t public. The agencies proposed a $100 million threshold in 2010, then this year considered setting a $3 billion rule and are debating a threshold as high as $8 billion, the people said.

Dodd-Frank, the regulatory overhaul enacted in 2010, requires the CFTC and SEC to determine when companies are dealers and should face the highest capital and collateral requirements. The law was intended to reduce risk and increase transparency in the $708 trillion global swaps market after largely unregulated trades helped fuel the 2008 credit crisis.

Judith Burns, an SEC spokeswoman, declined to comment. David Gary, a CFTC spokesman, declined to comment.

Swap-dealer regulation has been among the more contentious measures required by Dodd-Frank, prompting hundreds of meetings and comment letters to the CFTC. JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc. control 95 percent of cash and derivatives trading for U.S. bank holding companies as of Dec. 31, according to the Office of the Comptroller of the Currency.


A threshold of $3 billion or more could exclude energy companies and proprietary traders from swap-dealer regulations, according to Marcus Stanley, policy director for Americans for Financial Reform, a Washington-based coalition including labor unions that oppose setting the bar that high.

“They’re trying to push it open enough between the exemptions and de minimis level where some significant players can get through,” Stanley said today in a telephone interview.

Shell Energy North America LP and Vitol Inc. are among energy companies that have told the CFTC the dealer rule is too broad and would limit their ability to use derivatives to hedge risks tied to underlying assets such as oil and natural gas.

“The intent of the legislation was to reduce the risk posed by the largest financial companies and not to complicate and retard well-functioning markets,” Sam C. Henry, president and chief executive officer of IPR-GDF Suez Energy Marketing North America Inc., said in a Feb. 7 letter to the CFTC. “A swap dealer should be defined as a company with ten billion dollars or more in gross notional swaps.”

Derivatives, including swaps, are financial contracts tied to an underlying interest rate, commodity or event, such as the default of a company.

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