Swaps Definitions Regulation - Comment Letters

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Gavel.png FINAL RULE: CFTC/SEC Joint Final Rule on Swap Entity Definitions Approved at CFTC Open Meeting, April 18, 2012 and SEC Open Meeting, April 18, 2012
Gavel.png FINAL RULE: CFTC/SEC Joint Final Rule on Swap Product Definitions approved at July 10, 2012 open meeting, and by the SEC on July 6, 2012
Dodd-Frank Timeline, Swaps Definitions - ANPR
Proposal Date Comment Deadline Final Rule Issue
August 20, 2010 September 20, 2010 Late 2011
Dodd-Frank Timeline, Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant”
Final Rule Issue Effective Date Compliance Date
May 23, 2012 July 23/Dec. 31, 2012 October 12, 2012
Dodd-Frank Timeline, Further Definitions of Swaps, CFTC/SEC
Proposal Date Comment Deadline Final Rule Issue
May 23, 2011 July 22, 2011 Late 2011/Early 2012

Comment letters addressing the definition of swap-related terms. Letters dated prior to September 20, 2010, address the swaps definitions ANPR; letters dated January-February 2011 address the "Further Definitions" proposal from the December 1, 2010 CFTC open meeting; letters dated May-July 2011 address the joint CFTC/SEC "Further Definitions" proposal from the April 27, 2011 SEC open meeting.

Contents

Joint CFTC/SEC Proposal: Further Definitions of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement‘‘ ("Product Definitions")

SIFMA - July 22, 2011

Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping
July 22, 2011

In the letter, SIFMA comments on 14 points; topics include foreign exchange swaps and forwards, futures on foreign government debt, "publicly available information" ("PAI") tests, credit default swaps, total return swaps, and "look-through" provisions.

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Investment Company Institute/ABA Securities Association - July 22, 2011

Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping
July 22, 2011

From the comment letter:

"As participants in the swaps markets, including the FX forwards and swaps markets, ICI and ABASA members have a strong interest in ensuring that these markets are suitably regulated to maintain highly competitive, transparent and efficient operations and do not threaten the financial stability of the United States. The Commissions’ proposal would clarify that NDFs are not FX forwards or swaps as those terms are defined in the Commodity Exchange Act (“CEA”). This clarification would ignore domestic and international market practice with respect to NDFs and also threaten the viability of the NDF market in the United States through a series of unintended consequences, as discussed below. We therefore recommend that the Commissions coordinate with the Department of the Treasury (“Treasury”) to interpret the definition of FX forwards to include both deliverable and non-deliverable forwards because they are functionally and economically indistinguishable."

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ISDA - July 22, 2011

Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping
July 22, 2011

From the comment letter:

"We may summarize our comments overall as an invocation of simplicity and clarity. The questions embedded in the Proposal are complex. That complexity, however, begs responses simple enough to be applied at reasonable cost in fluid business environments. We urge the question of “insurance or swap?” be answered with a basic two-question test whenever possible. We advocate that the welcome interpolation of the Brent Interpretation in the forward contract exclusion be with minimal restrictive overlay. The treatment of consumer and commercial agreements should be simplified to avoid chilling non-swap endeavors. The narrow-based index definition, the borderline between the two Commissions’ jurisdictions should be simplified as a matter of the highest priority. Finally, the CFTC’s proposed anti-evasion regulation overreaches. It would threaten reasonable business decision-making in any venture that might use swaps, and should be withdrawn."

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Managed Funds Association - July 22, 2011

Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping
July 22, 2011

From the comment letter:

  • "We strongly support the CFTC‟s consistent interpretation of the Forward Contract Exclusion and its treatment of the book-out contracts prevalent in certain commodities markets. We also write to request clarification about the CFTC‟s proposed withdrawal of the Energy Exemption, particularly the implications of this action for market participants."
  • "We respectfully urge the Commissions to ensure that all loan participations fall outside the scope of the definition of a Swap. We believe that defining any loan participations as a Swap could disrupt, or even destroy, the market for these agreements, and harm loan markets."
  • "We also believe that the impact imposed on European investors by Dodd-Frank, if LMA-style participations were defined as security-based swaps, would have a detrimental effect on liquidity in the U.S. market."
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CME Group- July 22, 2011

Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping
July 22, 2011

From the comment letter:

"...we recommend that the CFTC clarify that nothing in the Release is intended to limit a designated contract market‘s (DCM"s) ability to list for trading as a contract of sale for future delivery any contract regardless of whether that same contract could be characterized as a swap if traded OTC or on a SEF. We further recommend that the Commission clarify that, for purposes of its proposed anti-evasion rules, a market participant may enter into a transaction or structure an instrument or entity to avoid higher regulatory burdens and attendant costs as long as the transaction or entity has an overriding business purpose."

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Markit - July 22, 2011

Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping
July 22, 2011

From the comment letter:

"Markit believes that some of the definitions in the Proposed Rule may not provide sufficient certainty to market participants as to whether a certain product will be classified as a narrow- or broad-based index. Because several practical implications will arise given this determination, we provide our comments below to contribute to greater regulatory certainty in the Proposed Rule."

"We believe that the [Public Information Availability] (PIA) Test will create significant uncertainty regarding whether an index is narrow- or broad-based, and urge the Commissions to ensure that the classification process under the final rule is clear."

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MarketAxess - July 22, 2011

Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping
July 22, 2011

Summary of key points from the comment letter:

  • The same regulatory standards should apply for all credit default swaps (CDS).
  • Anti-evasion rules should not apply to transactions executed on a swap execution facility (SEF) or a security-based swap execution facility (SB-SEF).
  • Consistent with current market practice, multiple single-name CDS transactions simultaneously executed between two parties and documented with separate confirmations should not be treated as an Index CDS.
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Coalition for Derivatives End-Users - July 22, 2011

Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping
July 22, 2011

From the comment letter:

"The Coalition appreciates the Commissions’ effort to reduce uncertainty by proposing guidance that we believe could be useful for evaluating whether an agreement may be regulated as a swap. As proposed, however, the guidance is not sufficient to provide market participants with certainty that standard commercial loan arrangements and agreements closely related thereto will not be regulated as swaps. The Coalition thus requests that the Commissions confirm that standard features of commercial loans or the loans themselves are not swaps. Such confirmation would reduce market-inhibiting and inadvertent uncertainty and ensure that existing commercial borrowing practices and customary features of commercial contracts, and the development of new features, will not be disrupted as a result of new regulation."

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Farm Credit Council - July 22, 2011

Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping
July 22, 2011

Summary of key points from the comment letter:

  • We support the general considerations for determining that loans will not be treated as swaps. We respectfully request, however, that the Commissions clarify further that commercial loans and financing facilities with embedded options will not be considered swaps.
  • We believe that consumer and commercial loans should not be considered swaps regardless of their treatment under the Legal Certainty for Bank Products Act of 2000.4 To the extent the CFTC relies on that Act to provide legal certainty for identified banking products, it should interpret Farm Credit System institutions as “banks” and loans made by Farm Credit System institutions as “identified banking products.”
  • We support the Commissions’ determination that “true” loan participations, in which the participant acquires a beneficial ownership interest in the underlying loans, will not be considered swaps.
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Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant" ("Entity Definitions")

Consortium of Major Financial Institutions- February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

This comment letter was written on behalf of Bank of America, Citigroup Inc., and JPMorgan Chase & Co.

From the comment letter:

"We believe the final regulations implementing the definitions of swaps entities and the associated registration requirements should not cover the Non-U.S. Operations of U.S. banking organizations to the extent the Non-U.S. Operations engage in swaps activities outside the United States. "Specifically, we submit that final regulations that reflect the following approach would be consistent with the language and the purposes of the statute:

  • Non-U.S. Operations should not be considered swaps entities, or be required to register as such, solely on the basis that they are affiliated with, or, in the case of Non-U.S. branches of U.S. banks, a part of, a U.S. bank.
  • Non-U.S. Operations that engage in swaps activities should fall within the definition of swaps entity only if they engage in swap activities with U.S. persons, other than in any de minimis amount authorized by the final rules and in transactions with their U.S. affiliates for purposed of risk management
  • Engaging in transactions with non-U.S. counterparties whether or not the Non-U.S. counterparties have a U.S. affiliate should not cause the Non-U.S. Operations to be swaps entities
  • The presence of a guarantee by one of the Companies or its U.S. subsidiaries of a swap transaction engaged in by a Non-U.S. Operation with a non-U.S. counterparty should not cause the Non-U.S. Operation to be considered a swaps entity."
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Capital One Financial Corporation - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

From the comment letter:

Capital One offers several suggestions regarding the Swaps Definitions Regulation. Specifically they comment on the following areas:

  • Eligible Contract Participant (ECP) Definition: they propose a new category to the ECP definition that allows commercial end users to continue to effectively and economically hedge their loans and other extensions of credit with lender banks;
  • Lending Exclusion from the Swap Dealer Definition: they propose that the lending exclusion explicitly include swaps entered into in connection with a loan for partial hedging, anticipatory hedging or subsequent hedging purposes
  • Limited Swap Dealer Designation: they support a registration process that provides all market participants an opportunity to request a limited swap dealer designation that would become immediately effective, on a provisional basis, at the time of registration
  • Phased-In Compliance Period: they support a flexible compliance period of at least 18 months so that small dealers are not severely disadvantaged relative to the largest and most active dealers, and commercial end users are not adversely impacted by the liquidity drain that would result if regional and local dealers halt their activities.
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BlackRock - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

From the comment letter:

BlackRock urges the Commission "to refine their proposals to provide safe harbors so that market participants will know they can rely on certain methodologies to value their swap or SBS exposure. In addition, the Commissions should speak directly to the employee benefit plan exclusion in the Major Participant definitions so that these important market participants will know the parameters of the exemption provided to them by Congress. Similarly, the Commissions should provide additional guidance on the applicability of the third prong of the Dealer definitions. Regulatory certainty will promote the development of liquid, deep and efficient swap markets. The Commissions should do all they can to encourage this result."

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Newedge USA - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

From the comment letter:

Newedge provides the Commission with the beliefs that "(a) US-registered FCMs, BDs and foreign firms subject to comparable swaps regulation that effect swaps primarily on a customer facilitation back-to-back basis should be exempt from the definitions of swaps dealer and major swaps participant, and (b) Foreign Firms should not be required to register as swaps dealers or major swaps participants under Dodd-Frank, even to the extent they deal with US investors, but rather, such activities be dealt with via the existing regulatory framework of Part 30 and Rule 15a-6."

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MetLife - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

MetLife comments that they generally agree with the Commission's definition of swap dealer in the Proposed Rule but request that the Commission make clear that "any swap trade between a Group Risk Aggregator and an affliated company within the consolidated group should not be viewed as a "swap" for purposed of the Dodd-Frank rule framework." In addition, MetLife "strongly advocate increasing the limits for the Rate Swap Category to avoid penalizing U.S. firms with large international businesses that want to diversify credit and portfolio risk and prudently risk manage their currency exposures." Metlife further argues that "it is not appropriate to require aggregation of subsidiaries' swaps at the parent level unless the parent is providing a guarantee or credit support for the subsidiaries' obligations."

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Freddie Mac - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

From the comment letter:

"Without further rulemaking, and in particular without refinement of the concept that swaps are contracts dependent on contingencies with an economic consequence, [the given definition of swap and 'security-based swap'] are of uncertain scope. Read broadly, the definitions could be read to provide that virtually any contract is a swap, security-based swap, or mixed swap, since it is a fairly unusual financial contract, the completion of which is not subject to at least the non-occurrence of certain contingencies..." Additionally, Freddie Mac argues that "greater clarity as to what is a swap is also critical to an assessment of the method of allocating swaps to the 'major categories' and the risk factors proposed by the Commissions for purposed of determining whether an institution is a major swap participant."

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EDF Trading - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

From the comment letter:

"The Commission’s proposed definition of swap dealer may not be sufficiently narrow to protect end users, and could negatively impact end users if not modified or clarified as recommended in this letter. Specifically, EDF Trading requests that the Commission:

  • provide end users in the energy markets with practical and predictable exceptions from the definition of swap dealer that do not restrict the use of swaps that are incidental to energy management services;
  • not regulate inter-affiliate risk transfers or hedging transactions entered into through centralized hedging affiliates as swap dealing;
  • not classify swaps traded for one’s own account for profit as swap dealing; and
  • adopt a de minimis exception that excepts from the definition of swap dealer entities that engage only in immaterial amounts of swap dealing.

The Commission should also adopt a flexible and practical definition of “hedging or mitigating commercial risk” that encompasses the many ways market participants manage risk."

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Morgan Stanley - September 20, 2010

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
September 20, 2010

Morgan Stanley believes the best approach would be to treat all swaps with securities based features as solely security-based swaps. In other words, the Commissions should prescribe rules that leave mixed swaps under the SEC’s jurisdiction. This would be supported by the Dodd-Frank act, which defines mixed swaps under both the CEA and the Exchange Act as security-based swaps. In an indirect and less explicit manner, mixed swaps also fall under the swap definition (the provision excluding a security-based swap from the definition of swap expressly carves out from the exclusion those swaps falling under the provision defining mixed swaps as security-based swaps). Morgan Stanley also states, however, that some weight should be given to the fact that Congress took a far more straightforward path in expressly including mixed swaps in the security-based swap definition.

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Consortium of Foreign Banks - January 11, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
January 11, 2011

The letter is addressed to the CFTC, SEC and U.S. Federal Reserve Bank on behalf of seven foreign banking institutions (Barclays Bank PLC, BNP Paribas S.A., Deutche Bank AG, Royal Bank of Canada, Royal Bank of Scotland PLC, Societe Generale and UBS AG).

From the comment letter:

"We respectfully urge the Commodity Futures Trading Commission (the 'CFTC'), the Securities and Exchange Commission (the 'SEC' and, together with the CFTC, the 'Commissions') and the Board of Governors of the Federal Reserve System (the 'Federal Reserve') to adopt implementing regulations under the Dodd-Frank Act that enable and encourage foreign banks engaged in swap dealing activities to book their swaps businesses in a single well-capitalized, highly rated foreign-based banking institution. Absent such a regulatory model, foreign bank swap dealer registration may be incompatible with home country requirements, objectionable to home country supervisors, prohibitively expensive, impossible to achieve in the necessary timeframe and impractical from an operational perspective. These considerations will be equally relevant to U.S. financial institutions operating globally as the EU implements the European Market Infrastructure Regulation ('EMIR'). Accordingly, it is critical to develop a framework that can support global business models.

"To conduct global swaps businesses raises considerations of conflicting U.S. and foreign rules, the potential for clashing regulatory jurisdictions, questions of legal certainty and the need to develop systems compatible with the requirements in each jurisdiction. We believe there are several potential operating models that could effectively address these issues and that should be available to international banks in organizing their swaps businesses. Regardless of the operating model selected, we believe that the Commissions and the Federal Reserve can, and should, adopt common principles and craft rules that implement Title VII in a way that relies on home country supervision where the regulations operate at the entity level and applies Title VII to U.S. swap transactions, but not to foreign swap transactions, in the case of regulations that operate at the transaction level. The framework discussed herein is consistent with the letter and spirit of Title VII, promotes stability, legal certainty, prudent management and effective regulatory oversight, and facilitates international comity and mutual cooperation among international financial regulators."

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Deutsche Bank - September 20, 2010

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
September 20, 2010

From the comment letter:

"Because of a distinction in Title VII between swaps and security-based swaps based on whether a transaction is linked to a broad-based index of securities, on the one hand, or a narrow-based index of securities or a single security or loan, on the other hand, certain credit default swap ("CDS") transactions that are economically identical will be subject to different regulators and potentially differing regulations."

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Institute of International Bankers - January 10, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
January 10, 2011

From the comment letter:

"In light of these considerations, the Institute respectfully proposes to the Commissions below a framework for global supervision of cross-border swap activity by foreign banks. The proposed framework is designed to (i) allocate to the Commissions the regulation of swap activity conducted with U.S. counterparties, (ii) allocate to home (or non-U.S. host) country authorities the regulation of swap activity conducted with counterparties located outside the U.S., and (iii) establish an appropriate allocation of regulatory responsibilities for registration, transaction-specific and non-transaction-specific supervision. In recognition of the structural diversity of the swap markets, this letter provides an overview of how this framework would be applied to a variety of common transaction paradigms.

"The Institute believes that this proposed framework is best-suited to accomplishing Dodd-Frank’s objectives while minimizing the potential for overlapping and inconsistent requirements. As a result, this framework would reinforce continued cross-border regulatory cooperation, promote efficient use of supervisory resources, prevent fragmentation of the derivatives markets along regional lines, and avoid the concomitant adverse consequences for systemic risk, transparency and economic efficiency. We believe that the proposed framework is consistent with the purposes of Dodd-Frank and within the scope of the Commissions’ interpretive and definitional authority thereunder."

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Chicago Board Options Exchange - September 20, 2010

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
September 20, 2010

In this comment letter, the Chicago Board Options Exchange (CBOE) argues that the definitions in the Dodd-Frank act should be refined and interpreted in a way that maximizes the benefits of central clearing and exchange trading. In particular, the definitions of "swap" and "security-based swap" should be construed broadly so that derivatives transactions in the US subject only to the exclusions expressly specified in the Act, are brought under regulatory oversight by the CFTC and SEC in accordance with the regulatory framework established by the Act. CBOE states that the customization of derivatives should not be allowed to become a "loophole" to escape regulatory oversight.

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International Swaps and Derivatives Association - September 20, 2010

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
September 20, 2010

From the comment letter:

"Elements of the definitions of 'swap' and 'security-based swap' fail to capture the existing commercial realities of relevant markets.

...

"Paragraph (C) of the definition of 'swap,' the rule of construction regarding master agreements, needs to be clarified to be certain that master agreements (as opposed to transactions under master agreements) do not need to be cleared, traded, or otherwise be subject to the requirements of the Dodd-Frank Act."

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International Swaps and Derivatives Association - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

From the comment letter:

"We are substantially concerned (a) by acute problems of vagueness and overbreadth in the definition of Dealer; (b) that the Major Participants tests may be overly static, with the unintended consequence that the status of individual entities may fluctuate frequently, unnecessarily increasing uncertainty and cost and (c) that should non-U.S. entities (including non-U.S. affiliates or branches of a U.S. bank) become subject to the Dodd-Frank Act in relation to transactions with non-U.S. counterparties:

  • they will be at a competitive disadvantage as compared to local competitors;
  • there will be an issue of conflict of entity level regulation where they are already subject to regulation in their home jurisdiction; and
  • there is the danger of conflicts between local and Dodd-Frank Act regulation in relation to specific transactions. Examples include circumstances where a swap is required to be cleared in two different places at once and also the requirement under the Dodd-Frank Act that counterparties face a futures commission merchant (“FCM”)."
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Securities Industry and Financial Markets Association - September 20, 2010

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
September 20, 2010

From the comment letter:

"The AMG* believes that the statutory definitions of (1) the terms 'swap dealer' and 'security-based swap dealer' (collectively, 'Swap Dealers') should be further defined by regulation to exclude market participants that do not perform the traditional functions of dealers and (2) the terms 'major swap participant' and 'major security-based swap participant' (collectively, 'Major Participants') should be further defined by regulation to exclude persons who neither have, nor present, a level of exposure to their Swap counterparties that reasonably could be considered to be systemically important or capable of significantly impacting the financial system of the United States."

*Asset Management Group of SIFMA

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Securities Industry and Financial Markets Association - February 3, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 3, 2011

From the comment letter:

SIFMA suggests several proposed approaches "for how the U.S. regulators should exercise their jurisdiction over swap dealers and cross-border swaps activities. Specifically:

  • A non-U.S. entity, including a non-U.S. affiliate or branch of a U.S. entity, should not be required to register as a swap dealer and comply with Title VII’s swap dealer regulations if it conducts swaps transactions solely outside of the United States with non-U.S. persons.
  • U.S. regulators should examine the entity-level regulations applicable to a swap dealer and consider where it would be appropriate to rely on a non-U.S. swap dealer’s home country entity-level regulation, for example when such regulation yields comparable results to U.S. regulation.
  • U.S. regulators should examine the transaction-based regulations applicable to a swap dealer and consider whether such regulations should apply to swap dealers when a non-U.S. person is involved. The U.S. regulators should be sensitive to situations in which their transaction-based rules may conflict with non-U.S. transaction-based rules applicable to non-U.S. persons.
  • The Commissions should permit multiple operating and risk-management models, including intermediary models, in which a non-U.S. swap dealer and its U.S. affiliate are responsible for fulfilling different responsibilities under Title VII, and inter-affiliate structures, in which Title VII’s transaction-based"
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National Futures Association - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

NFA explains that because the Proposed Rule 1.3(qqq) defines MSP as a person that is not an SD, this prohibits a person from becoming registered as both an SD and MSP. They argue that "theoretically one entity could be an SD with respect to one type of swap and an MSP with respect to a different swap category... Therefore, NFA requests that the Commission clarify whether and in what cases a person may be registered as both an SD and MSP."

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Futures Industry Association - September 20, 2010

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
September 20, 2010

From the comment letter:

"FIA strongly believes that FCMs should not be required to register as swap dealers solely by virtue of providing swap clearing services to customers or acting as brokers with respect to swap transactions between customers. Pursuant to Dodd-Frank, a 'swap dealer' is a market participant that 'actively holds itself out as a dealer in swaps', 'makes a market in swaps', 'regularly enters into swaps with counterparties as an ordinary course of business for its own account' or 'engages in any activity causing the person to be commonly known in the trade as a dealer or market maker in swaps.' While FCMs will perform services related to the execution of swaps, they will not, solely by virtue of these activities and acting as clearing brokers, engage in any of the activities enumerated in the swap dealer definition. Specifically, an FCM that acts as a clearing broker but neither holds itself out as a dealer nor makes a market in swaps, and does not enter into swap transactions as principal, should not be considered a dealer. As is the case with respect to futures transactions, an FCM, in its role as a clearing broker, is limited to acting as an agent on behalf of its customers."

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Managed Funds Association - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

From the comment letter:

"Based on the definitions as proposed, many market participants will need to perform the calculations with some regularity to evaluate whether their Swap exposure has exceeded the MSP thresholds, which creates an additional cost and time burden that seems unwarranted for entities that do not pose a systemic risk. Accordingly, we believe that the Commissions should study the scope of the definitions to ensure that these definitions do not encompass such entities."

Additionally, MFA suggests that " although the substantive requirements applicable to an MSP or SD are not the subject of the Proposing Release, we respectfully urge the Commissions not to impose the same obligations on MSPs and SDs under the final rules. The characteristics of, and systemic risk posed by, SDs and MSPs diverge significantly. Generally, SDs are dealers that make markets and have customers, whereas MSPs are, by definition, not dealers but market participants who have substantial positions in Swaps, such that the entity could significantly impact the financial system of the United States."

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Better Markets - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

From the comment letter:

Better Markets comments on several key issues regarding swaps definitions, including:

  • Regarding the de minimis exception to the SD definition,
    • transactions with special entities should be excluded, and
    • an established relationship with customers must be required of those claiming the exception.
  • With respect to the proviso in the definition of SD related to swaps in connection with loans by insured depository institutions, the meaning of the proviso must be stated clearly and the connection between the loan and the swap must be tightened to avoid evasion or misunderstanding.
  • The regulatory approach to the definition of MSP must consider the regulatory purpose of the MSP concept, especially the regulation of business conduct. As a result, the "substantial position' threshold must be measured by both risk exposure and absolute presence in the market
  • Measurement of potential risk exposures must use more accurate and adaptable techniques with key assumptions prescribed by the CFTC,including both mathematical techniques and (a) the disaggregation of swaps with multiple risks and (b) pricing relationships with listed hedge equivalents to value less liquid swaps.
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Working Group of Commercial Energy Firms - February 22, 2011

Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant" and "Eligible Contract Participant"
February 22, 2011

From the comment letter:

The Working Group provides the following comments on the Proposed Rule:

  • The Proposed Rule fails to consider the differences between the energy commodity markets and the financial swap markets.
  • The Proposed Rule incorrectly assumes that swap markets, including energy commodity swap markets, do not operate without the involvement of swap dealers.
  • The definition of Swap Dealer must be construed narrowly, based on commonly understood terms of dealing activity, and must account for the existence of other market participants.
  • The proposed definition of Swap Dealer is overbroad and inconsistent with the statutory terms and Congressional intent.
  • The Commissions’ interpretation of “market making” is broad and inconsistent with the CFTC’s own definition and interpretation of the term... The Proposed Rule should be revised to expressly exclude activity legitimately incidental to the businesses of non-dealer commercial firms.
  • A better interpretation of the General Exception is to exclude swaps entered into by producers, processors, or commercial users of physical energy or agricultural commodities used as prudent price and risk management tools as part of the business of such producers, processors or commercial users of such commodities.
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References

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