CFTC approved a final rule imposing new capital requirements on swap dealers and major swap participants that are not subject to supervision by a banking regulator and imposing financial reporting requirements for swap dealers and major swap participants; this final rule will be effective from November 16, 2020. Market participants must be compliant by October 06, 2021. CFTC also approved a final rule on the cross-border application of certain swap provisions under the Commodity Exchange Act (CEA); this final rule will be effective from November 13, 2020. In addition, CFTC approved an Amendment Order that exempted certain EU trading facilities from the requirement to register as swap execution facilities.
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.
- 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
Previous ArticleBNM Increases Focus on Addressing Climate Risks in Financial Sector
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.
The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.
The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.
The European Banking Authority (EBA) published a methodological guide to mystery shopping.
The Australian Prudential Regulation Authority (APRA) released a letter to authorized deposit-taking institutions to provide an update on key policy settings for the capital framework reforms, which will come into effect from January 01, 2023.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report that assesses the business continuity planning activities of financial market infrastructures or FMIs.
The Bank of England (BoE) published questions and answers (Q&A) on OSCA to BEEDS migration for statistical reporting as well a presentation from the project overview session held with statistical reporters.
The Basel Committee on Banking Supervision (BCBS) is consulting on a technical amendment to the Basel Framework to reflect a new process reviewing the global systemically important bank (G-SIB) assessment methodology.