At its December 2, 2016 meeting, the Commodity Futures Trading Commission (CFTC) unanimously approved key proposals implementing the Dodd-Frank Act’s rules regarding capital requirements for certain swap dealers and major swap participants. The proposal would apply different requirements of an SD/MSP that is registered as a CFTC’s futures commission merchant (FCM) or SEC’s broker-dealer.
The proposed capital requirements, which are intended to protect parties against market risks and counterparty credit risks, would vary depending on a variety of dynamic factors, while also being administrable by the watchdog.
In particular, the legislation provides that the relevant regulator will review all the activities of the swap dealers and MSPs when setting capital requirements. This could result in capital requirements being imposed on a given swap dealer or MSP, in part, due to the activities of its affiliates or subsidiaries. And depending on the regulators’ interpretation, the amount of minimum capital required for a covered swap entity that predominantly engaged in non-financial activities will depend on the tangible net worth of the entities.
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Under the proposal, a covered swap entity will be also allowed to use internal risk-based formulas for computing their required capital, subject to prior approval by either the CFTC or the National Futures Association (NFA).
In addition to capital regulation, swap dealers and MSPs will be also subject to reporting requirements such as maintaining certain records, including daily trading records of swaps and other related records, as well as communications relative to their respective capital requirements.
Given the role some believe swaps played in the financial crisis, CFTC had determined to regulate SD and MSP capital requirements in 2011, although no further action was taken. But since swap dealers and MSPs are now subject to final capital and margin requirements imposed by the CFTC, the commission is re-proposing capital standards and conduct regulation.
The capital requirements and related recordkeeping obligations are found under sections 4s(e) and (f) of the Commodity Exchange Act, as added by Section 731 of the Dodd-Frank Act.
Comments on the CFTC’s rule will be due within 90 days of the rule’s publication in the Federal Register.