Thank you, Chairman Schapiro.
In accordance with the Dodd-Frank Act, the Commission is proposing rules that further define certain terms, including “security-based swap dealer” and “major security-based swap participant.” These definitions determine which entities will be subject to additional registration, capital, margin, and business conduct mandates as a result of Dodd-Frank.
I support the recommendation before us, although I do so with reservations. My primary concern is that the proposal may be unduly precautionary, subjecting some firms to heightened regulatory requirements when it may not be warranted given the extent and nature of their participation in the security-based swap market. Specifically, I have concern that the de minimis exemption thresholds for the “security-based swap dealer” definition may be too low. Likewise, I have concern that the thresholds that determine whether an entity is a “major security-based swap participant” may be too low.
Under the proposed thresholds, more firms are captured as security-based swap dealers and major security-based swap participants than would be the case if the thresholds were higher or perhaps conceived of differently. Do the proposed thresholds appropriately delineate the point at which a firm poses such a risk that subjecting the firm to more costly regulation is justified? Whatever the benefits of such regulation may be, there are corresponding costs that must be accounted for in defining “security-based swap dealer” and “major security-based swap participant” — definitions that determine how far the substantive regulatory regime will reach.
The proposing release solicits comment on a range of topics and asks a number of specific questions. As always, I look forward to considering the comments we will receive. Given my reservations with the proposal, I am particularly interested in comments that address the following:
(1) How might broader or narrower definitions of “security-based swap dealer” and “major security-based swap participant” impact the security-based swap market? What could be the consequences for liquidity, risk management, and capital formation of subjecting more firms (as a result of broader definitions) or fewer firms (as a result of narrower definitions) to the registration, capital, margin, and business conduct requirements that attend being a security-based swap dealer or major security-based swap participant?
(2) What are the appropriate factors to consider in determining the de minimis exemption to the definition of “security-based swap dealer”?
Under the proposed de minimis exemption, a dealer’s notional amount of dealing activity in security-based swaps could not exceed $100 million over the prior 12 months. This threshold is lowered to $25 million insofar as the dealer’s counterparties are “special entities.” Should the de minimis test be different when a dealer transacts with special entities as compared to non-special entities? Dodd-Frank provides special protections to special entities. But does it follow that these special protections for special entities should be triggered sooner — that is to say, at a lower level of dealing activity than the level of dealing activity that triggers the protections afforded non-special entities?
(3) What are the appropriate factors to consider in determining the definition of “major security-based swap participant?” Under what circumstances does a market participant pose a sufficient threat to the financial system so as to justify additional regulation? How can we more precisely fashion the thresholds for “substantial position,” “substantial counterparty exposure,” and “highly leveraged” to capture firms that can jeopardize the financial system but without also capturing as major security-based swap participants firms that do not pose such a risk?
(4) Is the meaning the proposing release ascribes to “hedging or mitigating commercial risk” — including the release’s distinction between “speculation” and “trading,” on the one hand,” and “hedging,” on the other — sufficiently clear? How narrowly or expansively should we conceive of “hedging or mitigating commercial risk” in defining what constitutes a “substantial position”?
In addressing these and other questions, I encourage commenters to provide any relevant data that are available.
In concluding, I’d like to join my colleagues in thanking the staff — especially those from the Division of Trading and Markets — for your hard work and dedication on this rulemaking.