Cost-Benefit Analysis of the CFTC’s Swap Dealer De Minimis Exception Definition

In a new report, NERA determines the incremental costs and benefits associated with the upcoming changes to the de minimis exception to the Commodity Futures Trading Commission’s (CFTC) swap dealer registration requirements under the Dodd-Frank Act. The American Bankers Association commissioned the report, which was authored by former Managing Director Dr. Sharon Brown-Hruska and her team, Consultant Trevor Wagener, former Senior Consultant Georgi Tsvetkov, and former Analyst Ryan Cummings.

The authors used six data sources—including FR Y-9C filings, a proprietary questionnaire of banking swaps participants, and CFTC Weekly Swaps Reports—to measure the aggregate benefits of four different de minimis threshhold scenarios: 1) the current system with a single gross activity-based threshold, 2) a hybrid risk-based and activity-based metric, 3) a gross activity-based threshold with qualifying exclusions (namely, a modified IDI Exclusion), and 4) a hybrid metric with qualifying exclusions.

The paper’s findings include:

  • Banking swaps participants under the current de minimis threshold of $8 billion hold less than 0.04% of the total gross negative fair value of swaps.
  • The present value of incremental costs for a typical banking swaps participant is $8.1 million, $6.7 million of which is incurred in business conduct, record keeping, and reporting; $0.7 million of which is from recurring swap dealer determination costs; and $0.7 million of which goes toward recurring margin costs.
  • A reduction of the de minimis threshold to $3 billion would cost firms approximately $129.6 million in recurring costs with little increase in regulatory benefits.
  • Raising the de minimis threshold to $15 billion would reduce costs to firms by $81 million with little appreciable loss of regulatory coverage.
  • By combining a hybrid risk-based and activity-based threshold, modifying the IDI Exclusion to eliminate date restrictions, and maintaining a safe-harbor de minimis threshold of $8 billion, the CFTC could save firms approximately $47 million with a less than 0.1% reduction in coverage.

Read the full report for a thorough explanation of the authors’ methods and conclusions, as well as background on the de minimis threshold, IDI Exclusions, and other important components of the swap dealing and Dodd-Frank regulation.

In June 2018, the CFTC voted 2-1 to approve a proposed rule to keep the de minimis threshold at $8 billion, rather than allowing the threshold to fall to $3 billion as it had originally planned. CFTC Commissioner Brian Quintenz cited the results of NERA’s study when explaining his tie-breaking vote, noting that NERA’s results suggested that a lower de minimis threshold would be very costly for financial institutions. In the 13 November 2018 Final Rule keeping the de minimis threshold at $8 billion, CFTC staff likewise cited NERA’s study 33 times.