In a swap trade, Party A exchanges the cash flows of its financial instrument for that of Party B. According to the Financial Regulatory Reform Center, a “swap dealer” is any person that:
· Holds itself out as a dealer in swaps
· Makes a market in swaps
· Regularly enters into swaps with counterparties in the ordinary course of business for its own account
· Engages in any activity causing the person to be commonly known as a dealer or market maker in swaps in connection with the CFTC-regulated swaps
In Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options, author Andrew M. Chisholm enables readers to gain a solid working knowledge of these concepts.
The SEC/CFTC “swap dealer” tag is expected to come with more oversight and increase the cost of such trades. The designation also will give firms latitude to exempt swaps for hedging.
Reuters notes that the Dodd-Frank financial oversight law, which was first proposed in December 2010 in reaction to the financial crisis, has changed dramatically. While it originally allowed firms to be designated swap dealers if they traded more than $100 million in swaps over a 12-month period. As Reuters reports, energy companies and commodity traders lobbied to alter the provision to bump the threshold to $8 billion for most asset classes as an initial phase-in. In time, the threshold could drop to $3 billion.
Both regulatory agencies face legal challenges over the rules. There also are concerns that the SEC and CFTC have not fully analyzed the economic impact and rule formulation processes.
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