As the CFTC wraps up its Dodd-Frank-mandated rulemakings, Commissioner Scott O’Malia has sought to make corrections to some of the rules, including a fix to the swap dealer definition.
The swap dealer definition, which is based partly on firms’ self-admission as swaps dealers, seeks to ensure that over-the-counter derivatives participants are subject to new reporting and clearing requirements under Dodd-Frank. The definition establishes the threshold to be designated as a swap dealer at $8 billion over one year, which O’Malia said is an overly vague figure, Risk.net reports.
“We missed an opportunity to really define that space and explain to the market what swap dealing is relative to commercial hedging,” O’Malia said, according to Risk.net. “We gave the market a vague $8 billion notional threshold and then further muddled the issue by being vague as to how you count to that threshold.”
Some swaps activitiy, including swaps executed with borrowers, does not count towards the $8 billion threshold, but O’Malia said the relief should also be extended to swaps passed through central clearinghouses.
“If you put a trade in a clearing house, why doesn’t that mitigate the risk presented by that participant?” O’Malia said, Risk.net reports. “We didn’t meet the high standard we were hoping for, and I would like to revisit the swap dealer rule and have some clarity about clearing and how that mitigates risk.”
The CFTC has yet to finalize rules on swap execution facilities—or Sefs, one of two types of trading platforms through which over-the-counter derivatives may be transacted under the provisions laid out in Dodd-Frank. A proposed rule was issued in January, but the regulator has yet to take formal action on the rule.
“We really need to get Sefs up and running,” O’Malia said, according to Risk.net. “I’ve spoken with trading platforms that have spent millions trying to build the best Sef they can, as they understand the term. People are desperate to know how they are supposed to trade ahead of the next round of mandatory clearing that is coming up in June. That is not inconsequential, and unlike the ease with which March 11 came and went, with no blow-ups, bringing on new customers in the second round will probably be a much more dicey proposition.”