Swap Dealer

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A swap dealer is an entity that acts as a market maker for swap transactions. Prior to the Dodd-Frank Act, swap dealer was a general term used to describe the people and firms involved in the pricing and trading of swaps. Major banking institutions such as J.P. Morgan, Bank of America, and Barclays Capital, as well as investment bankers such as Goldman Sachs would be considered swap dealers. The Dodd-Frank Act calls for significant regulation of swap dealers and major swap participants. As such, specific rules have been proposed and finalized by the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) to define the terms "swap dealer," "security-based swap dealer" and major swap participant.[1]

Definitions According to the Final Rules

A swap dealer or security-based swap dealer is a person or entity that:

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

The deadline for public comments on the proposed rule was February 22, 2011. Final swap dealer rules under the Dodd-Frank Act have been approved at CFTC meetings in late 2011 and early 2012, and were completed in April 2012. For more information, see the CFTC/SEC joint rule page in MarketsReformWiki.

Final Rules to Provide Clarity

On Sept. 16, 2010, CFTC Chairman Gary Gensler spoke before the International Swaps and Derivatives Association (ISDA) regional conference. According Gensler, initial estimates are that there could be "in excess of 200 entities" identified as swap dealers under final rules. These may include:

  • "Primary Members" of the ISDA, which comprises of global and regional banks known to offer swaps;
  • Affiliates of such institutions that offer swaps on commodities, equities, and other swaps;
  • Nonbank swap dealers currently offering commodity and other swaps; and
  • Potential new market makers that wish to become swap dealers.[2]

On April 11, 2012 the CFTC announced that it would consider final rulemakings on swap entity definitions such as "swap dealer," "security-based swap dealer," and "major swap participant" at its April 18, 2012 open meeting. At issue is the annual notional volume threshold by which an entity is considered to be a swap dealer (the de minimis exemption). In the initially proposed rules, the threshold was set at $100 million, but it was expected that the final rules would set the threshold much higher, as high as $8 billion.[3]

On April 18, 2012, the CFTC and the SEC finalized the joint rule, which defines the terms "swap dealer" and "major swap participant" under the Commodity Exchange Act, and “security-based swap dealer” and “major security-based swap participant” as part of the Securities Exchange Act of 1934.[4][5] Under the final rulemaking, the de minimis thresholds will be phased in as follows:

  • $400 million initially for security based swaps that are not credit default swaps (CDS), resetting to $150 million after the phase-in period;
  • 25 million for swaps with pensions and municipals (so-called "special entities,"); and
  • $8 billion initially for CDS and all other swaps, resetting to $3 billion after the phase-in period.


References

  1. SEC Proposes Joint Rules with CFTC to Define Swap Related Terms. Securities and Exchange Commission.
  2. Remarks Before ISDA Regional Conference Chairman Gary Gensler. CFTC Press Room.
  3. U.S. weighs higher threshold for swap dealers. Reuters.
  4. SEC Adopts Rule Defining Swaps-Related Terms for Regulating Derivatives. SEC.
  5. CFTC to Hold Open Meeting to Consider Two Final Rules. CFTC.