Factbox: CFTC unveils swap dealer definitions

WASHINGTON (BestGrowthStock) – The U.S. Commodity Futures Trading Commission on Wednesday unveiled details about its new proposal outlining the definitions of swap dealers and major swap participants.

Here are the details of what was proposed.

DISTINGUISHING CHARACTERISTICS OF SWAP DEALERS:

* Tend to accommodate demand for swaps from other parties.

* Generally available to enter into swaps to facilitate other parties’ interest in entering into swaps.

* Tend not to request that other parties propose the terms of swaps.

* Tend to enter into swaps on their own standard terms or on terms they arrange in response to other parties’ interest.

* Tend to be able to arrange customized terms for swaps upon request, or to create new types of swaps at their own initiative.

DE MINIMIS EXEMPTION FROM DEALER DEFINITION:

* A PERSON must meet all of the following criteria to receive this exemption.

* The aggregate effective notional amount, measured on a gross basis, of the swaps that the person enters into over the prior 12 months in connection with dealing activities must not exceed $100 million.

* The aggregate effective notional amount of such swaps with “special entities” over the prior 12 months must not exceed $25 million.

* The person must not enter into swaps as a dealer with more than 15 counterparties, other than security-based swap dealers, over the prior 12 months.

* The person must not enter into more than 20 swaps as a dealer over the prior 12 months.

EXCLUSION OF SWAPS IN CONNECTION WITH BANK LOANS

* Applies only to swaps that are connected to the financial terms of the loan itself.

DEFINITION OF MAJOR SWAP PARTICIPANT

* Meets any one of the following criteria:

– A person that maintains a “substantial position” in any of the major swap categories, excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan.

– A person whose outstanding swaps create “substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.”

– Any “financial entity” that is “highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking agency” and that maintains a “substantial position” in any of the major swap categories.

DEFINITION OF “SUBSTANTIAL POSITION”

* Uses two tests to account for current uncollateralized exposure and potential future exposure.

* A position that satisfies either test would be a “substantial position.”

* Excludes positions hedging commercial risk and employee benefit plan positions.

* Tests apply to positions in each of four categories: rate swaps, credit swaps, equity swaps, commodity swaps.

* Current exposure measured by marking the swap positions to market using industry standard practices, allowing the deduction of the value of collateral that is posted with respect to the swap positions, and calculating exposure on a net basis

* Thresholds for the first test would be a daily average current uncollateralized exposure of $1 billion in the applicable major category of swaps, except that the threshold for the rate swap category would be $3 billion.

* Thresholds for the second test would be $2 billion in daily average current uncollateralized exposure plus potential future exposure in the applicable major swap category, except that the threshold for the rate swap category would be $6 billion.

* Potential future exposure calculated by:

– Multiplying the total notional principal amount of the person’s swap positions by specified risk factor percentages (ranging from 0.5 percent to 15 percent) based on the type of swap and the duration of the position.

– Discounting the amount of positions subject to master netting agreements by a factor ranging between zero and 60 percent, depending on the effects of the agreement.

– If the swaps are cleared or subject to daily mark-to-market margining, further discounting the amount of the positions by 80 percent.

DEFINITION OF HEDGING COMMERCIAL RISK

* “Substantial position” will exclude hedges.

* Hedges include swaps that qualify as “bona fide hedges” under Commodity Exchange Act rules, or qualifies under Financial Accounting Standards Board Statement No. 133

* Also include swaps that are “economically appropriate” to reducing risks for a potential change in the value of assets that a person owns, produces, manufactures, processes, or merchandises, liabilities that a person incurs, or services that a person provides or purchases.

* Also includes swaps used to hedge foreign exchange rate risks, interest rate risks.

DEFINITION OF SUBSTANTIAL COUNTERPARTY EXPOSURE

* MSPs can be players whose swaps create “substantial counterparty exposure” that could threaten stability of financial system.

* Uses same calculation as “substantial position” above

* Is not limited to major categories of swaps.

* Does not exclude hedging or employee benefit plan positions.

* Encompasses all of a person’s swap positions.

* Thresholds are a current uncollateralized exposure of $5 billion, or a sum of current uncollateralized exposure and potential future exposure of $8 billion, across the entirety of a person’s swap positions.

(Reporting by Ayesha Rascoe, Roberta Rampton and Christopher Doering; Editing by Alden Bentley)

Factbox: CFTC unveils swap dealer definitions