June 28, 2018Client Alert

Federal Regulators Turn Their Attention Back to the Dodd-Frank Act

In recent weeks, federal regulators reopened two critical reforms under the Dodd-Frank Act, both with a potential for significant impact on small and mid-sized banks:  the de minimis exception to swap dealer registration, and the Volcker Rule. A brief discussion of each of the newly proposed rules follows.

CFTC Proposes to Make the $8 Billion Swap Dealer Threshold Permanent

On June 4th, the Commodity Futures Trading Commission (CFTC) proposed to amend the definition of “swap dealer,” such that the de minimis threshold for registering would be permanently set at $8 billion of gross notional swap dealing activity in the prior 12 months. In the absence of this rule, the de minimis threshold is to decrease to $3 billion on December 31, 2019.

In addition, the CFTC’s proposed rule would exclude certain swap activity from the de minimis calculation, including a broader category of swaps (i) entered into by insured depository institutions and their customers in connection with originating a loan, (ii) entered into for hedging purposes, and (iii) resulting from multilateral portfolio compression exercises.

The regulator is seeking comments on three specific proposals to the de minimis threshold calculation: whether there should be minimum counterparty and transaction counts, whether exchange-traded or cleared swaps should be excluded, and whether non-deliverable FX forwards should be excluded. The CFTC will be accepting public comments on the proposed rule until August 13, 2018.

Five Financial Regulators Propose to Make Volcker Rule Compliance Easier

On May 30, 2018, five regulators – the Federal Reserve, Office of the Comptroller of the Currency, CFTC, Federal Deposit Insurance Corporation and Securities and Exchange Commission (collectively, the “Federal Regulators”) proposed parallel rules intended to simplify compliance with the Volcker Rule.

The Volcker Rule was promulgated under the Dodd-Frank Act, and prohibits lenders that accept U.S. taxpayer-insured deposits from engaging in proprietary trading or investing in certain investment vehicles such as hedge funds. Under this proposed rule, compliance with the Volcker prohibitions would be tailored to each firm based on its size. This is to say that:

  • Banks with more than $10 billion in trading assets would be subject to the most rigorous compliance standards
  • Banks with $1 billion to $10 billion in trading assets would be subject to a simplified set of compliance standards
  • Banks with less than $1 billion in trading assets will be exempt from compliance

In addition, the proposed rule would simplify the criteria for relying on the hedging exemption from the prohibition on proprietary trading. The definition of “trading account” would be revised to eliminate the presumption that short-term trading is profit-seeking unless other evidence is provided, and replaced with an objective, accounting-based test. The trade data reporting requirements would be streamlined. The proposed rule clarifies that banks with certain internal risk policies in place would be permitted to engage in certain market-making or underwriting activities.

The Federal Regulators will be accepting public comments on the proposed rule for 60 days after it is published in the Federal Register.

Please reach out to Cheryl Aaron or Alec Fraser with any questions on the above regulatory proposals, or if you would like assistance in drafting comments.

back to top