CFTC Approves Final Swap Dealer Capital Rule

July 23rd | 2020

The CFTC recently approved new capital rules for swap dealers and major swap participants. The rule allows swap dealers, depending on their characteristics, to select one of three different approaches to calculate their minimum capital requirements. The approaches are:

  1. “Net Liquid Assets Capital Approach,” which requires swap dealers to maintain 2% of the margin amount associated with uncleared swaps as a “cushion” to protect customers in the event of a liquidation;

  2. “Bank-Based Capital Approach,” which is tailored to the unique status and characteristics of banks in our financial system, relies on a combination of percentages of risk weighted assets, tier 1 common equity, and uncleared swap margin; and

  3. “Tangible Net Worth Capital Approach”, which is designed for non-financial commercial businesses (usually in the agriculture or energy sectors) whose capital is predominantly in the form of physical assets.

The new rule also adopts financial reporting, recordkeeping, and notification requirements for swap dealers and major swap participants. These requirements include the obligation to provide financial statements and reports to the CFTC and the National Futures Association. Like the SEC’s net capital rule, covered entities must alert the CFTC when there is undercapitalization, a books and records problem, and/or a specified triggering event, such as the failure to post required margin. The rule also includes public reporting requirements for those swap dealers not subject to the jurisdiction of a banking regulator.

In response to the credit crisis of 2008, in 2010, the Dodd-Frank Act amended the Commodity Exchange Act providing that the CFTC “shall adopt” capital and financial reporting requirements. Even though the Commissioners were split 3-2 on the particulars – some, including the Chairman, felt the rule struck the appropriate balance, while other Commissioners felt it could have been better – all appear to agree these rules have been a long time coming.

The new rule will be effective 60 days after publication in the Federal Register. Market participants must be compliant by October 6, 2021.

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