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Volume XI, Number 172

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CFTC Re-Proposes Minimum Capital Requirements for Swap Dealers and Major Swap Participants

On December 2, the Commodity Futures Trading Commission re-proposed minimum capital requirements for swap dealers (SDs) and major swap participants (MSPs) that are not subject to prudential regulation (Covered Entities). The CFTC had initially proposed capital rules for Covered Entities in 2011 but deferred further action pending finalization and implementation of uncleared swaps margin requirements. The CFTC finalized margin requirements in December 2015 that began being implemented in September 2016.

Under the CFTC’s proposal, there would be three alternative capital approaches: a bank-based capital approach, a net liquid assets capital approach and a tangible net worth capital approach for SDs. The bank-based capital approach would permit SDs to comply with capital requirements adopted by the Board of Governors of the Federal Reserve System for bank holding companies.

The net liquid assets capital approach would be consistent with the CFTC’s current capital requirements for future commission merchants, the Securities and Exchange Commission’s current capital approach for broker-dealers and over-the-counter derivatives dealers, and the SEC’s proposed requirements for security-based swaps dealers. Under this approach, an SD would be required to maintain a minimum level of adjusted net capital (i.e., relatively liquid capital) of at least the greater of US $20 million; 8 percent of margin required on the SD’s cleared and uncleared swaps, security-based swaps and futures and foreign futures positions; or the amount of capital required by the National Futures Association. A joint FCM and SD that is also a BD would have to meet the higher of these three tests or the requirements of the SEC for a BD.

Finally, an SD principally engaged in non-financial activities could maintain tangible net worth adjusted to exclude certain intangible assets (e.g., goodwill) of at least the greater of US $20 million adjusted by market and credit risk charges on certain of its proprietary swaps positions; 8 percent of margin required on the SD’s cleared and uncleared swaps, security-based swaps and futures and foreign futures positions; or the amount of capital required by NFA.

Non-US-based SDs could potentially comply with local capital requirements as an additional alternative if approved by the CFTC pursuant to a comparability determination.

As part of its proposed capital rules, the CFTC would also require Covered Entities to provide it and NFA with monthly financial statements and an annual certified financial statement and to keep current books and records. Covered entities would also be subject to special early warning notification requirements related to material adverse changes in their financial condition, as well as an obligation to report weekly their uncleared swaps position and margin information “for the purposes of conducting risk surveillance.” These reports appear to be in addition to the current requirements for SDs to file daily large trader reports with the CFTC for reportable positions in physical commodity swaps and transaction information for all over-the-counter swaps data repositories.

SDs that choose to rely on the bank-based or net liquid assets capital approaches would additionally be subject to certain liquidity requirements, including performing monthly stress tests if relying on the liquid assets capital option.

The CFTC re-proposed capital rules are available here.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VI, Number 344
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About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...

212-940-6558
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