CFTC Publishes Rules for Swap Dealers and Major Swap Participants

Final Rule on Capital Requirements of Swap Dealers and Major Swap Participants

The final rule provides swap dealers with the option to elect one of three alternative methods to establish and meet minimum capital requirements, depending on the characteristics of their business:

• A net liquid assets method, which is based primarily on existing capital requirements for futures commission merchants, and on the capital requirements adopted by the SEC for security-based swap dealers and major security-based swap participants
• A bank-based method, which is based primarily on existing capital requirements for bank holding companies under the supervision of FED
• A tangible net worth method, designed specifically for swap dealers which are part of a larger commercial enterprise

Major swap participants are required to maintain positive tangible net worth. The final rule also makes several amendments to existing capital requirements for futures commission merchants to impose specific requirements for swaps and security-based swaps. In addition, the final rule includes a comprehensive model approval process; accompanying financial reporting, recordkeeping, and notification requirements; and a substituted compliance determination process for those swap dealers which may already be required to maintain capital in accordance with a foreign regulator. 

Final Rule on Cross-Border Application of Certain Swap Provisions under the CEA

CFTC adopted a final rule that addresses the cross-border application of the swap dealer and major swap participant registration thresholds and certain requirements applicable to swap dealers and major swap participants. The final rule also establishes a formal process for requesting comparability determinations for the requirements from CFTC, and defines key terms for the purpose of applying the CEA’s swaps provisions to cross-border transactions. The final rule includes a risk-based approach that advances the goals of Title VII of Dodd-Frank Act’s swap reforms, while fostering greater liquidity and competitive markets, promoting enhanced regulatory cooperation, and improving the global harmonization of swap regulation. This approach considers international comity principles and CFTC’s interest in focusing its authority on potential significant risks to the U.S. financial system. 

Amendment Order Regarding EU Trading Facilities

CFTC approved an amended order that exempted sixteen additional multilateral trading facilities and organized trading facilities authorized within EU from the requirement to register as swap execution facilities. The order also clarified the application of the existing order to UK based multilateral trading facilities and organized trading facilities during the UK’s Brexit transition period. Under the existing order, CFTC allowed EC to request that additional multilateral trading facilities and organized trading facilities, which satisfy certain legal requirements, be added to the list of multilateral trading facilities and organized trading facilities that were granted exempt swap execution facility status under the order. Entities covered by the exemption are subject to certain continuing statutory standards and other requirements under the CEA and CFTC regulations. CEA section 5h(g) provides that the CFTC may grant an exemption from swap execution facility registration if it determines that a foreign facility is subject to comparable supervision and regulation by the appropriate governmental authorities in the facility’s home country. The amended order is effective from July 23, 2020.

Related Links

• Federal Register Notice on Capital Requirements of Swap Dealers and Major Swap Participants
• Federal Register Notice on Cross-Border Application

Effective Date: November 16, 2020/November 13, 2020/July 23, 2020

Keywords: Europe, Americas, EU, UK, US, Banking, Securities, Regulatory Capital, Swap Dealers, Dodd-Frank Act, Commodity Exchange Act, Reporting, Cross-Border, Swaps, Swap Execution Facility, Brexit Transition, CFTC