or services, to another, and (iii) the other party agrees to pay for
the sum or items transferred at a later date.'') (citing In re Grand
Union Co., 219 F. 353, 356 (2d Cir. 1914)).
    \327\ The final rule adopts provisions from the proposed rule
that, in order to prevent evasion, the statutory exclusion does not
apply where the IDI originates a ``sham'' loan; or the purported
``loan'' is actually a synthetic loan such as a loan credit default
swap or loan total return swap. See CFTC Regulation Sec.
1.3(ggg)(5)(iii).
---------------------------------------------------------------------------

    As stated in the proposed rule, this exclusion is available to all
IDIs that are a source of a transfer of money to a borrower pursuant to
a loan. The final rule adopts provisions from the proposed rule that
the exclusion is available to an IDI that is a source of money by being
part of a loan syndicate, being an assignee of a loan, obtaining a
participation in a loan, or purchasing a loan.\328\ However, the
proposed rule did

not state explicitly how the notional amount of a swap subject to the
exclusion must relate to the amount of money provided by an IDI that is
in a loan syndicate or is an assignee of, participant in or purchaser
of a loan. In this regard, some commenters said that a borrower and the
IDIs in a lending syndicate need flexibility to allocate responsibility
for the swap(s) related to the loan as they may agree.\329\ We believe
that, to allow for this flexibility, the exclusion may apply to a swap
(which is otherwise covered by the exclusion) even if the notional
amount of the swap is different from the amount of the loan tranche
assigned to the IDI. However, we also agree with a commenter that the
IDI should have a substantial participation in the loan.\330\ The
requirement of substantial participation would prevent an IDI from
applying the exclusion where the IDI makes minimal lending commitments
in multiple loan syndicates where it offers swaps, causing its swap
activity to be far out of proportion to its loan activity.\331\
---------------------------------------------------------------------------

    \328\ See CFTC Regulation Sec.  1.3(ggg)(5)(ii). As is also
stated in the Proposing Release, if an IDI were to transfer its
participation in a loan to a non-IDI, then the non-IDI would not be
able to claim this exclusion, regardless of the terms of the loan or
the manner of the transfer. Similarly, a non-IDI that is part of a
loan syndicate with IDIs would not be able to claim the exclusion.
    \329\ See, e.g., letter from Regional Banks.
    \330\ See letter from Better Markets I. This commenter suggested
a minimal threshold of at least 20 percent of the loan. However, we
believe that a 10 percent commitment constitutes a substantial
participation in the loan which supports offering of a swap up to
the loan's full amount.
    \331\ For example, an IDI could act as a 0.1 percent participant
in one hundred different loans in order to serve as the sole swap
counterparty to the borrowers for hedging the borrowers' interest
rate risk on the loans. Thus, by lending or committing to lend $100
million, the IDI could apply the exclusion to swaps with an
aggregate notional amount of $100 billion.
---------------------------------------------------------------------------

    Therefore, the final rule includes a provision that the exclusion
may apply regardless of whether the notional amount of the swap is the
same as the amount of the loan, but only if the IDI is the sole source
of funds under the loan or is committed to be, under the applicable
loan agreements, the source of at least 10 percent of the maximum
principal amount under the loan.\332\ If the IDI does not meet this 10
percent threshold, the final rule provides that the exclusion may apply
only if the aggregate notional amount of all the IDI's swaps with the
customer related to the financial terms of the loan is no more than the
amount lent by the IDI to the customer.\333\ We also note that, in all
cases, application of the exclusion requires that the aggregate
notional amount of all swaps entered into by the borrower with any
person in connection with the financial terms of the loan at any time
is not more than the aggregate principal amount outstanding under the
loan at that time.\334\
---------------------------------------------------------------------------

    \332\ See CFTC Regulation Sec.  1.3(ggg)(5)(i)(D)(1) and (2).
    \333\ See CFTC Regulation Sec.  1.3(ggg)(5)(i)(D)(3).
    \334\ See CFTC Regulation Sec.  1.3(ggg)(5)(i)(E). Paragraphs
(D)(3) and (E) of this regulation refer to all swaps ``in connection
with the financial terms of the loan'' in order to clarify that only
such swaps are relevant in this regard. For example, if the IDI were
to enter into a swap with the customer that is not in connection
with the loan's financial terms, the swap would not be relevant
because the exclusion would not apply to the swap.
---------------------------------------------------------------------------

    We also reiterate the interpretation in the Proposing Release that
the word ``offer'' in this exclusion includes scenarios where the IDI
requires the customer to enter into a swap, or where the customer asks
the IDI to enter into a swap, specifically in connection with a loan
made by that IDI.
    We also continue to emphasize, as stated in the Proposing Release,
that the statutory language of the exclusion limits its availability to
only IDIs as defined in the statute. Regarding some commenters'
statements about the competitive effect of this interpretation of the
term ``insured depository institution,'' we believe that the scope of
application of the swap dealer definition to various entities should be
treated in the de minimis exception, which is available to all persons.
    In order to provide clarification in response to certain technical
questions raised by commenters, we note that whether a swap hedges all
of the risk, or only some of the risk, of a loan is not relevant to
application of the exclusion. Nor is it relevant to the exclusion if
the IDI later transfers or terminates the loan in connection with which
the swap was entered into, so long as the swap otherwise qualifies for
the exclusion and the loan was originated in good faith and was not a
sham.\335\ Further, swaps that are covered by the exclusion should not
be considered in determining if an IDI exceeds the de minimis level of
swap dealing activity, because the statute provides that swaps covered
by the exclusion should not be considered in determining if an IDI is a
swap dealer, and the de minimis exception provides that it considers
the ``quantity of [a person's] swap dealing.'' \336\ The application of
the exclusion to swaps entered into by an IDI in connection with the
origination of loans, however, does not mean that the IDI could not be
a swap dealer because of other of the IDI's activities that constitute
swap dealing. Regarding swaps used by an IDI to hedge or lay off its
risks arising from a loan, we do not believe it is appropriate to treat
such swaps as covered by the exclusion, because the statute explicitly
limits the exclusion to swaps ``with a customer,'' which such hedging
swaps are not. However, a swap that an IDI enters into for the purpose
of hedging or laying off the risk of a swap that is covered by the IDI
exclusion will not be considered in the de minimis determination, or
otherwise in evaluating whether the IDI is covered by the swap dealer
definition.\337\
---------------------------------------------------------------------------

    \335\ On the other hand, if the IDI were to transfer the swap
(but not the loan) to another IDI, and the IDI that is the
transferee of the swap is not a source of money to the borrower
under the loan, then the transferee IDI would not be able to apply
the exclusion to the swap.
    \336\ See CEA sections 1a(49)(A) and 1a(49)(D), 7 U.S.C.
1a(49)(A) and 1a(49)(D).
    \337\ An IDI that is seeking out swap counterparties to enter
into swaps in order to hedge or lay off the risk of a swap that is
subject to the IDI exclusion would generally not be accommodating
demand for swaps or facilitating interest in swaps.
---------------------------------------------------------------------------

    Last, we believe it is appropriate to require that an IDI claiming
the exclusion report its swaps that are covered by the exclusion to a
swap data repository (``SDR''). This requirement is consistent with the
prevailing practice that IDIs handle the documentation of loans made to
borrowers, and will provide for consistent reporting of swaps that are
covered by the exclusion, thereby allowing the CFTC and other
regulators to monitor the use of the exclusion.
    In sum, the final rule balances the need for flexibility in
response to existing lending practices, consistent with the constraints
imposed by the statutory text as enacted, against the risk of
establishing a gap in the regulatory framework enacted in Title
VII.\338\ It provides that the exclusion may be claimed by a person
that meets the following conditions: (i) The person is an IDI; (ii) the
IDI enters into a swap with the borrower that does not extend beyond
the termination of the loan; (iii) the swap is connected to the
financial terms of the loan or is required by the IDI's loan
underwriting criteria to to be in place as a condition of the loan in
order to hedge commodity price risks incidental to the borrower's
business; (iv) the loan is within the common law meaning of ``loan''
and it is not a sham or a synthetic loan; (v) the IDI is the source of
money to the borrower in connection with the loan either directly, or
(so long as the IDI is the source of at least 10 percent of the entire
amount of the loan) through syndication, participation, assignment,
purchase, refinancing or otherwise; (vi) the IDI

enters into the swap with the borrower within 90 days before or 180
days after the date the execution of the loan agreement, or within 90
days before or 180 days after any transfer of principal to the borrower
from the IDI pursuant to the loan; (vii) the aggregate notional amount
of all swaps entered into by the borrower with all persons in
connection with the financial terms of the loan at any time is not more
than the aggregate amount of the borrowings under the loan at that
time; and (viii) the IDI agrees to report the swap to an SDR.
---------------------------------------------------------------------------

    \338\ The final rule text in CFTC Regulation Sec.
1.3(ggg)(5)(i) has been revised to conform the text of the rule to
the statutory provision which refers to ``an insured depository
institution [that] * * * enter[s] into a swap with a customer in
connection with originating a loan with that customer.'' See CEA
Sec.  1a(49)(A), 7 U.S.C. 1a(49)(A)
---------------------------------------------------------------------------

    An IDI that enters into swaps that do not meet these conditions,
and thus do not qualify for the statutory exclusion, is not necessarily
required to register as a swap dealer. Rather, the IDI would apply the
statutory definition and the provisions of the rule (taking into
account the applicable interpretive guidance set forth in this Adopting
Release), solely with respect to its swaps that are not subject to the
IDI exclusion, in order to determine whether it is engaged in swap
dealing activity that exceeds the de minimis threshold.

C. Application of Dealer Definitions to Legal Persons and to Inter-
Affiliate Swaps and Security-Based Swaps

1. Proposed Approach and Commenters' Views
    In the Proposing Release, the Commissions preliminarily concluded
that designation as a dealer would apply on an entity-level basis
(rather than to a trading desk or other business unit that is not
organized as a separate legal person), and that an affiliated group of
legal persons could include more than one dealer.\339\ The Proposing
Release also stated that the dealer analysis should consider the
economic reality of swaps and security-based swaps between affiliates,
and preliminarily noted that swaps or security-based swaps ``between
persons under common control may not involve the interaction with
unaffiliated persons that we believe is a hallmark of the elements of
the definitions that refer to holding oneself out as a dealer or being
commonly known as a dealer.'' \340\
---------------------------------------------------------------------------

    \339\ See Proposing Release, 75 FR at 80183.
    \340\ Id. The Proposing Release further noted that sections
721(c) and 761(b)(3) give the Commissions anti-evasion authority, to
the extent that an entity were to seek to use transactions between
persons under common control to avoid one of the dealer definitions.
See id. (erroneously referring to section 721(c) as section
721(b)(3).
---------------------------------------------------------------------------

    Commenters supported the view that swaps and security-based swaps
among affiliates should be excluded from the dealer analysis.\341\ A
number of commenters took the view that the dealer definitions should
not apply when there is common control between counterparties, or when
common control is combined with the consolidation of financial
statements.\342\ Some commenters suggested that this interpretation
regarding the scope of the dealer definitions should incorporate
concepts of affiliation that are found in other statutory and
regulatory provisions.\343\ Several commenters also opposed the
suggestion (raised as part of the Proposing Release's request for
comments) that this interpretation be limited to transactions among
wholly owned subsidiaries.\344\
---------------------------------------------------------------------------

    \341\ See, e.g., letters from API I, COPE I, ISDA I, Midsize
Banks, ONEOK, Inc. (``ONEOK'') and Peabody.
     Several commenters explained the widespread use of central
hedging desks to allocate risk within affiliate groups or to gather
risk from within a group and lay that risk off on the market. See,
e.g., letters from EEI/EPSA, Kraft Foods Inc. (``Kraft''), MetLife
and Prudential Financial, Inc. (``Prudential'') dated February 17,
2011 (``Prudential I'').
     Some commenters particularly stated that the use of a single
entity to face the market on behalf of an affiliate group had
several risk-reducing and efficiency-enhancing benefits, and that
those benefits would be lost if the dealer definitions were to lead
corporate groups to avoid using central trading desks and instead
require each affiliate to face the market as an independent end-
user. See letters from FSR I, Philip Morris International Inc.
(``Philip Morris''), Shell Trading dated June 3, 2011 (``Shell
Trading II'') and Utility Group, and joint letter from ABA
Securities Association, American Council of Life Insurers
(``ACLI''), FSR, Futures Industry Association (``FIA''), Institute
of International Bankers, ISDA and SIFMA (``Financial
Associations'').
     Some commenters also stated that legislative history suggested
that Congress did not intend that the dealer definition capture
transactions involving the use of an affiliate to hedge commercial
risk. See letters from CDEU and Prudential I.
    \342\ See letters from CDEU (common control), Financial
Associations (common control and consolidation), MetLife
(consolidation), ONEOK (common control, evaluated based on whether
the trading interests of the entities are aligned) and Prudential I
(citing CFTC letter interpretation regarding common control).
    \343\ See, e.g., letters from EDF Trading (proposing definition
from regulations promulgated by the Federal Energy Regulatory
Commission) and Peabody (proposing definition of ``affiliate'' used
in federal securities laws) and joint letter from the Bank of Tokyo-
Mitsubishi UFJ, Ltd., Mizuho Corporate Bank, Ltd. and Sumitomo
Mitsui Banking Corp. (suggesting use of control definition in Bank
Holding Company Act).
    \344\ See, e.g., letters from Kraft and ONEOK.
---------------------------------------------------------------------------

2. Final Interpretation and Rule
a. Application to Legal Persons
    Consistent with the Proposing Release, the Commissions interpret
``person'' as used in the swap dealer and security-based swap dealer
definitions to refer to a particular legal person. Accordingly, the
dealer definitions will apply to the particular legal person performing
the dealing activity, even if that person's dealing activity is limited
to a trading desk or discrete business unit,\345\ unless the person is
able to take advantage of a limited designation as a dealer.\346\
---------------------------------------------------------------------------

    \345\ Within an affiliated group of companies, however, only
those legal persons that engage in dealing activities will be
designated as dealers; that designation will not be imputed to other
non-dealer affiliates or to the group as a whole. A single affiliate
group may, however, have multiple swap or security-based swap
dealers.
    \346\ Limited designation as a dealer is addressed in more
detail below in part II.E.
---------------------------------------------------------------------------

b. Application to Inter-Affiliate Swaps and Security-Based Swaps
    The final rules codify exclusions from the dealer definitions for a
person's swap or security-based swap activities with certain
affiliates.\347\ These rules are consistent with the Proposing
Release's recognition of the need to consider the economic reality of
any swaps or security-based swaps that a person enters into with
affiliates. Market participants may enter into such inter-affiliate
swaps or security-based swaps for a variety of purposes, such as to
allocate risk within a corporate group or to transfer risks within a
corporate group to a central hedging or treasury entity.
---------------------------------------------------------------------------

    \347\ See CFTC Regulation Sec.  1.3(ggg)(6)(i); Exchange Act
rule 3a71-1(d). A person's market-facing swap or security-based swap
activity may still cause that person to be a dealer, even if that
market-facing activity is linked to the inter-affiliate activity, to
the extent that the market-facing activity satisfies the dealer
definition. However, a person's market-facing swap activity for
hedging purposes as defined in CFTC Regulation Sec.
1.3(ggg)(6)(iii) would not cause that person to be a dealer.
---------------------------------------------------------------------------

    Under the final rules, the dealer analysis will not apply to swaps
and security-based swaps between majority-owned affiliates.\348\ When
the economic interests of those affiliates are aligned adequately--as
would be found in the case of majority-ownership--such swaps and
security-based swaps serve to allocate or transfer risks within an
affiliated group, rather than to move those risks out of the group to
an unaffiliated third party. For this reason, and as contemplated by
the Proposing Release,\349\ we do not believe that such

swaps and security-based swaps involve the interaction with
unaffiliated persons to which dealer regulation is intended to apply.
---------------------------------------------------------------------------

    \348\ See CFTC Regulation Sec.  1.3(ggg)(6)(i); Exchange Act
rule 3a71-1(d)(1). For the purposes of these rules, the
counterparties are majority-owned affiliates if one party directly
or indirectly holds a majority ownership interest in the other, or
if a third party directly or indirectly holds a majority interest in
both, based on holding a majority of the equity securities of an
entity, or the right to receive upon dissolution or the contribution
of a majority of the capital of a partnership. See CFTC Regulation
Sec.  1.3(ggg)(6)(i); Exchange Act rule 3a71-1(d)(2).
    \349\ See Proposing Release, 75 FR at 80183 (noting that swaps
or security-based swaps between affiliates ``may not involve the
interaction with unaffiliated persons that we believe is a hallmark
of the elements of the definitions that refer to holding oneself out
as a dealer or being commonly known as a dealer'').
---------------------------------------------------------------------------

    The standard in the final rules differs from the standard suggested
by the Proposing Release, which alluded to affiliates as legal persons
under ``common control.'' This change is based on our further
consideration of the issue, including consideration of comments that an
inter-affiliate exclusion should be available when common control is
combined with the consolidation of financial statements. Although we
are not including a requirement that financial statements be
consolidated--as we do not believe that the scope of this exclusion
should be exposed to the risk of future changes in accounting
standards--in our view a majority ownership standard is generally
consistent with consolidation under GAAP.\350\ Absent majority
ownership, we cannot be confident that there would be an alignment of
economic interests that is sufficient to eliminate the concerns that
underpin dealer regulation.
---------------------------------------------------------------------------

    \350\ See FASB ASC Section 810-10-25, Consolidation--Overall--
Recognition (stating that consolidation is appropriate if a
reporting entity has a controlling financial interest in another
entity and a specific scope exception does not apply).
---------------------------------------------------------------------------

    In taking this approach, we have also considered alternatives
suggested by commenters. For example, while one commenter suggested
that we adopt a definition of ``affiliate'' as used in the securities
laws,\351\ we believe that such an approach would be too broad for the
purpose of this exclusion from dealing activity, given that common
control by itself does not ensure that two entities' economic interests
are sufficiently aligned.\352\
---------------------------------------------------------------------------

    \351\ See letter from Peabody. The commenter did not specify
which definition of ``affiliate'' in the securities laws it was
proposing. For example, Rule 405 of the Securities Act of 1933
defines affiliate in terms of common control, see 17 CFR 230.405,
and Section 20(a) of the Exchange Act takes a similar approach. The
Investment Company Act of 1940 (``ICA'') defines affiliate to
include entities with a common ownership interest as low as 5
percent, ICA section 2(a)(3). Two other commenters proposed using a
common control standard, perhaps also in reference to the Rule 405
definition of ``affiliate.''
    \352\ The definitions of ``affiliate'' and ``control'' found in
Rule 405 and other securities law provisions are appropriate in the
context of the prophylactic and remedial provisions in which they
are found. Rule 405, for example, uses the terms ``affiliate'' and
``control'' to identify those persons that have the power to effect
registration of an issuer's securities, and the broad definitions
ensure that the persons with that power actually fulfill their
obligation to do so. By comparison, the exclusion of inter-affiliate
swaps and security-based swaps from the dealer analysis should be
more tightly focused to address situations in which counterparties
have similar economic interests.
     Another commenter noted the definition of ``affiliate'' found
in certain Federal Energy Regulation Commission regulations--which
define ``affiliate'' in terms of a ten percent or five percent
common ownership interest. See letter from EDF Trading. Those
relatively low ownership thresholds, however, are intended to
address different concerns regarding collusion and cross-
subsidization, and do not appear appropriate for an interpretation
that has the potential to reduce the counterparty and market
protections provided by Title VII. See 18 CFR sections 35.36(a)(9),
35.39, 366.2(b), 366.3.
---------------------------------------------------------------------------

c. Application to Cooperatives
    Similar considerations apply, in certain situations, to cooperative
entities that enter into swaps with their members in order to allocate
risk between the members and the cooperative. Commenters identified two
general types of such cooperatives--``cooperative associations of
producers'' as defined in section 1a(14) of the CEA \353\ and
cooperative financial entities such as Farm Credit System institutions
and Federal Home Loan Banks.\354\ As is the case for affiliated groups
of corporate entities, we believe that when one of these cooperatives
enters into a swap with one of its members,\355\ the swap serves to
allocate or transfer risks within an affiliated group, rather than to
move those risks from the group to an unaffiliated third party, so long
as the cooperative adheres to certain risk management practices.
---------------------------------------------------------------------------

    \353\ 7 U.S.C. 1a(14). A cooperative association of producers is
at least 75 percent owned or controlled, directly or indirectly, by
producers of agricultural products and must comply with the Capper-
Volstead Act (referred to in the CEA as the Act of February 18,
1922, 7 U.S.C. 291 and 292). See letters from Land O'Lakes II, NCFC
I and NMPF.
    \354\ See letters from Farm Credit Council I and FHLB I. The NRU
CFC qualifies as a cooperative financial entity, but we understand
that it does not enter into a significant amount of swaps with its
members; rather, it enters into swaps with unaffiliated third
parties. See letter from NRU CFC I and meeting with NRU CFC on
January 13, 2011.
    \355\ The term ``cooperative association of producers'' also
includes any organization acting for a group of such associations
and owned or controlled by such associations. See CEA section
1a(14), 7 U.S.C. 1a(14). For a cooperative association of producers
that is acting for and owned or controlled by such associations, we
believe that this conclusion applies to any swap between such
cooperative association of producers and any cooperative association
of producers that is a member of it, and any producer that is a
member of any such cooperative association of producers that is
itself a member of the first cooperative association of producers.
See CFTC Regulation Sec.  1.3(ggg)(6)(ii)(C).
     However, we do not believe that this conclusion applies to any
security-based swap that a cooperative association of producers may
enter into, nor does it apply to any swap related to a non-physical
commodity (such as a rate swap). For this reason, the exclusion for
cooperative associations of producers is limited to swaps that are
primarily based on a commodity that is not an excluded commodity.
See CFTC Regulation Sec.  1.3(ggg)(6)(ii)(A)(3). The term ``excluded
commodity'' is defined in CEA section 1a(19), 7 U.S.C. 1a(19).
---------------------------------------------------------------------------

    Accordingly, the final rules specifically provide that the dealer
analysis excludes swaps between a cooperative and its members, so long
as the swaps in question are reported to the relevant SDR by the
cooperative and are subject to policies and procedures of the
cooperative which ensure that it monitors and manages the risk of such
swaps.\356\ The final rules define the term ``cooperative'' to include
cooperative associations of producers and any entity chartered under
Federal law as a cooperative and predominantly engaged in activities
that are financial in nature.\357\ The cooperatives covered by this
relief are subject to provisions of Federal law providing for their
cooperative purpose. Cooperative associations of producers have been
recognized since the passage of the Capper-Volstead Act as being
permitted to engage in certain cooperative activities without violating
antitrust laws.\358\ Cooperative financial institutions such as the
Farm Credit System institutions and Federal Home Loan Banks are
chartered under Federal laws that limit their membership and require
that they serve certain public purposes.\359\
---------------------------------------------------------------------------

    \356\ See CFTC Regulation Sec.  1.3(ggg)(6)(ii). To be clear,
these cooperatives are not excluded from the dealer definitions. See
part II.A.6, supra. Rather, swaps between a cooperative and its
members (and swaps that a cooperative enters into to hedge or lay
off the risk of such swaps) are excluded from the dealer analysis.
If a cooperative were to engage in other swap activities that are
covered by, and not otherwise excluded from, the statutory
definition of the term ``swap dealer,'' then it would be required to
register as a swap dealer.
    \357\ See CFTC Regulation Sec.  1.3(ggg)(6)(ii)(B).
    \358\ See Capper-Volstead Act section 1, 7 U.S.C. 291.
    \359\ See Farm Credit Act of 1971, 12 U.S.C. 2001 et seq. and
Federal Home Loan Bank Act, 12 U.S.C. 1421 et seq.
---------------------------------------------------------------------------

    We are aware that other persons commented that their swap
activities should be excluded from the dealer analysis because they use
swaps in connection with a cooperative or non-profit purpose, or
because they aggregate demand for swaps arising from numerous small
entities.\360\ However, the key distinction drawn in granting this
relief is that cooperatives covered by the exclusion enter into swaps
with their members in order to allocate risk between the members and

the cooperative. By contrast, the other entities noted above enter into
swaps with unaffiliated parties in order to transfer risks between
unaffiliated parties.\361\ As noted above, the Commissions believe that
the contemplated scope of the statutory definitions does not include
instances where a person's swap activities transfer risk within an
affiliated group, but does extend to activities that create legal
relationships that transfer risk between unaffiliated parties. Thus, it
is appropriate that the dealer analysis exclude swaps between a
cooperative and its members, but such analysis should include swaps
between a cooperative or other aggregator and unaffiliated persons.
---------------------------------------------------------------------------

    \360\ See letter from NFPEEU (not-for-profit power utilities,
electric cooperatives and related persons); letters from Farmers'
Associations, NGFA I and NMPF (referring to private companies that
serve as aggregators for swaps in agricultural commodities or
otherwise offer swaps for agricultural risk management); and letter
from Northland Energy (small energy firm that aggregates demand for
swaps from small energy retailers and consumers).
    \361\ See, e.g., letter from NFPEEU (not-for-profit power
utilities and electric cooperatives generally enter into swaps
between themselves, with large industrial consumers, and a wide
range of other counterparties). Indeed, the Dodd-Frank Act permits
the CFTC to exempt agreements, contracts or transactions between
entities described in section 201(f) of the Federal Power Act, such
as certain not-for-profit power utilities and electric cooperatives.
See section 722(f) of the Dodd-Frank Act. As noted above, a
coalition of not-for-profit power utilities and electric
cooperatives has advised that it plans to submit a request for the
exemption contemplated by section 722(f) of the Dodd-Frank Act. See
note 295 supra.
---------------------------------------------------------------------------

D. De Minimis Exception

1. Proposed Approach
    The Dodd-Frank Act's definitions of ``swap dealer'' and ``security-
based swap dealer'' require that the Commissions exempt from dealer
designation any entity ``that engages in a de minimis quantity'' of
dealing ``in connection with transactions with or on behalf of
customers.'' The statutory definitions further require the Commissions
to ``promulgate regulations to establish factors with respect to the
making of any determination to exempt.'' \362\
---------------------------------------------------------------------------

    \362\ CEA section 1a(49)(D), 7 U.S.C. 1a(49)(D); Exchange Act
section 3(a)(71)(D), 15 U.S.C. 78c(a)(71)(D).
---------------------------------------------------------------------------

    In the Proposing Release, we preliminarily concluded that the de
minimis exception ``should be interpreted to address amounts of dealing
activity that are sufficiently small that they do not warrant
registration to address concerns implicated by the regulations
governing swap dealers and security-based swap dealers. In other words,
the exception should apply only when an entity's dealing activity is so
minimal that applying dealer regulations to the entity would not be
warranted.'' \363\ In taking this view, we rejected the suggestion that
the de minimis exception should compare a person's swap or security-
based swap dealing activities to the person's non-dealing
activities.\364\
---------------------------------------------------------------------------

    \363\ Proposing Release, 75 FR at 80179 (footnote omitted).
    \364\ See id. at 80179-80.
---------------------------------------------------------------------------

    At the same time, we recognized that this proposed approach did not
appear to ``readily translate into objective criteria.'' We further
recognized that a range of alternative approaches may be reasonable,
and we solicited comment as to what factors should be used to implement
the exception.\365\
---------------------------------------------------------------------------

    \365\ See id. at 80180.
---------------------------------------------------------------------------

    The proposed de minimis exception was comprised of three factors,
all of which a person would have had to satisfy to avail itself of the
exception.\366\ The first proposed factor would have limited the
aggregate effective amount, measured on a gross basis, of the swaps or
security-based swaps that a person entered into over the prior 12
months in connection with its dealing activities to $100 million \367\
(or $25 million with regard to counterparties that are ``special
entities'').\368\
---------------------------------------------------------------------------

    \366\ Under the proposal, the factors would consider a person's
swap or security-based swap dealing activity as a whole, rather than
separately considering different types of swaps or security-based
swaps. See Proposing Release, 75 FR at 80181.
    \367\ See proposed Exchange Act rule 3a71-2(a). The proposed
standard reflected our understanding that in general the notional
size of a small swap or security-based swap is $5 million or less,
and that the proposed threshold would reflect 20 instruments of that
size. The standard also sought to reflect the customer protection
issues implicated by swaps and security-based swaps. See Proposing
Release, 75 FR at 80180.
    The proposed notional threshold would not consider the market
risk offsets associated with combining long and short positions. In
addition, the proposed notional threshold would not account for the
amount of collateral held or posted by the entity, or other risk
mitigating factors. See id.
    \368\ See proposed Exchange Act rule 3a71-2(a). As set forth by
the statutory business conduct rules applicable to security-based
swap dealers (as set forth in Exchange Act section 15F(h)(2)(C)),
``special entity'' refers to: Federal agencies; States, State
agencies and political subdivisions (including cities, counties and
municipalities); ``employee benefit plans'' as defined under the
Employee Retirement Income Security Act of 1974 (``ERISA'');
``governmental plans'' as defined under ERISA; and endowments. Title
VII imposes additional business conduct requirements on security-
based swap dealers in connection with special entities. See CEA
sections 4s(h)(2), 4s(h)(4), 4s(h)(5); Exchange Act section
15F(h)(2), (4), (5).
---------------------------------------------------------------------------

    The second proposed factor would have limited a person's swap or
security-based swap dealing activity to no more than 15 counterparties
over the prior 12 months (while counting counterparties that are
members of an affiliated group as one counterparty for these purposes).
The final proposed factor would have limited a person's dealing
activity to no more than 20 swaps or security-based swaps over the
prior 12 months (without counting certain amendments as new swaps or
security-based swaps).
2. Commenters' Views
a. Basis for the Exception
    Some commenters sought to link the de minimis exception to systemic
risk criteria by taking the position that a person should have to
register as a dealer only if its dealing activities pose systemic
significance.\369\ One commenter specifically objected to the position
in the Proposing Release that the de minimis exception should take into
account customer protection principles.\370\ On the other hand, one
commenter supported the rejection of a risk-based de minimis test.\371\
---------------------------------------------------------------------------

    \369\ See, e.g., letters from CDEU, MFX II, NCGA/NGSA II and
SIFMA--Regional Dealers Derivatives Committee (``SIFMA--Regional
Dealers'').
    \370\ See letter from WGCEF I (arguing that basing the exception
on customer protection principles would be contrary to the statutory
framework, given that only ECPs are eligible to participate in off-
exchange swap transactions).
    \371\ See letter from Better Markets I.
---------------------------------------------------------------------------

    Some commenters argued that the de minimis test should account for
proportionality criteria that would excuse entities whose dealing
activity is relatively minor compared to their other activities.\372\
---------------------------------------------------------------------------

    \372\ See, e.g., letters from FHLB I, IECA-Credit I, NCGA/NGSA
I, NRG Energy, Peabody and WGCEF I. One commenter said the
proportionality criteria should also consider an entity's activities
with respect to the physical commodity underlying its swaps. See
letter from NCGA/NGSA I. But see letter from Better Markets I
(supporting rejection of a proportionality test). Some commenters
suggested more than one alternative approach.
---------------------------------------------------------------------------

b. Significance of ``Customer'' Language
    One commenter took the position that the language within the de
minimis exception that specifically referred to ``transactions with or
on behalf of customers'' meant that the exception should be available
only for persons who limit their swaps or security-based swaps to those
that are entered into with or on behalf of customers.\373\ Other
commenters posited the opposite view that the ``customer'' language
should be read to mean that a person's dealing activities with
counterparties other than customers may be disregarded for purposes of
the exception (i.e., non-customer transactions would not count against
the de minimis thresholds).\374\ Some commenters argued that

transactions entered into in a fiduciary capacity should be disregarded
for purposes of the exception.\375\ One commenter questioned the
proposal's use of the term ``counterparty'' in lieu of the statutory
term ``customer.'' \376\
---------------------------------------------------------------------------

    \373\ See letter from Better Markets I. Another commenter said
that the ``customer'' language serves to emphasize that the de
minimis exception is available to entities that provide swaps to
customers. See letter from NGFA I.
    \374\ See letters from ISDA I, Vitol and WGCEF I. Another
commenter said that the use of the term ``customer'' indicates that
all transactions with physical commodity customers should be
disregarded in determining if a person is a dealer. See letter from
EDF Trading.
    \375\ See, e.g., letter from FSR I.
    \376\ See letter from Vitol (suggesting that the proposed
language meant that dealing activity involved ``customers'' but not
``counterparties'').
---------------------------------------------------------------------------

c. Proposed Tests and Thresholds
    Commenters criticized the proposed de minimis thresholds in a
variety of ways. These included arguments that the proposed thresholds
were inappropriately low,\377\ would harm end-users by reducing the
number of entities willing to enter into low-value swaps and security-
based swaps,\378\ would be unjustified on a cost-benefit basis,\379\
and were disproportionately low compared to the activities of
recognized dealers.\380\ Other commenters said the de minimis
thresholds should be set at a level to allow entities to engage in a
meaningful amount of customer-facing swaps or security-based swaps
without being required to register as dealers.\381\
---------------------------------------------------------------------------

    \377\ See, e.g., letters from API I, CDEU, DFA, EDF Trading,
Farm Credit Council I, Growmark, Land O'Lakes dated January 13, 2011
(``Land O'Lakes I''), Midsize Banks, NCFC I, NCGA/NGSA II, New York
City Bar Association--Committee on Futures and Derivatives
Regulation (``NYCBA Committee''), Northland Energy, NRG Energy,
Regional Banks and SIFMA--Regional Dealers. Some commenters also
said that the thresholds, particularly those for swaps, should vary
according to the riskiness of the swap or type of commodity
underlying the swap. See letters from BG LNG I, Farm Credit Council
I, Gavilon II, ISDA I, NFPEEU, Vitol and WGCEF I.
    \378\ See, e.g., letters from API I, BG LNG IFarm Credit Council
I, Midsize Banks, NCFC I, NGFA I, Regional Banks and SIFMA--Regional
Dealers and meetings with Electric Companies on April 13, 2011, the
Asset Management Group of SIFMA (``SIFMA--AMG'') on February 4, 2011
and WGCEF on April 28, 2011.
    \379\ See, e.g., letters from CDEU and Vitol. Another commenter
noted that application of a cost-benefit analysis of the de minimis
threshold could be challenging. See Roundtable Transcript at 193-94
(remarks of Camille Rudge, The PrivateBank and Trust Company).
    \380\ See letter from CDEU (citing statistics indicating that
the average respondent to an ISDA survey had an annual ``event
volume'' of over 297,000 OTC derivatives trade processing actions);
see also letter from Regional Banks.
    \381\ See meetings with Electric Companies on April 13, 2011,
Gavilon on May 11, 2011 and WGCEF on April 28, 2011.
---------------------------------------------------------------------------

    A number of commenters particularly criticized the proposed
notional threshold, with some commenters suggesting that the threshold
should be based on a percentage of the total swap market \382\ or some
other fixed value,\383\ or arguing in favor of an exposure-based
threshold in lieu of a notional threshold.\384\ Other commenters said
that the aggregate notional amount of swaps is not a meaningful measure
of an entity's dealing activity.\385\ A few commenters supported the
proposed notional threshold.\386\
---------------------------------------------------------------------------

    \382\ See letter from COPE I (suggesting 0.001% of the total
U.S. swap market, amounting to approximately $3 billion); see also
letters from API dated June 3, 2011 (``API II''), EDF Trading,
Edison Int'l, EEI/EPSA, IECA-Credit I, NCGA/NGSA II, NextEra,
NFPEEU, Utility Group and WGCEF I (suggesting 0.001% of the total
U.S. swap market).
    \383\ See, e.g., meeting with Land O'Lakes on January 6, 2011
(suggesting the threshold be increased by 2 to 5 times--i.e., to
$200 million to $500 million); letters from Growmark, FHLB I and MFX
II (each supporting $1 billion notional standard); Regional Banks
(supporting $2 billion notional standard); letter from NCFC dated
October 31, 2011 (``NCFC III'') (supporting alternative notional
standards of $1 billion or $3 billion depending on certain
assumptions); letter from FSR VI and joint letter from Capital One,
Fifth Third Bancorp and Regions Financial Corporation (suggesting
notional standard of at least $2 billion); letter from WGCEF dated
June 3, 2011 regarding the swap dealer definition (``WGCEF V'')
(suggesting notional standard of $3.5 billion); and letter from IPR-
GDF Suez Energy North America (suggesting notional standard of $10
billion). Some commenters suggested more than one possible
threshold.
    \384\ See, e.g., letters from Farm Credit Council I, FSR VI and
Midsize Banks. Other commenters said the threshold should account
for the effect of netting. See letters from API II, Chesapeake
Energy, Land O'Lakes I and MFX II. On the other hand, one commenter
specifically supported the use of the gross notional amount. See
letter from Greenberger.
    \385\ See letters from Farm Credit Council I, ISDA I, Land
O'Lakes I, Midsize Banks, NCFC I, SIFMA--Regional Dealers and Vitol.
    \386\ See letters from AFR, Better Markets I, Greenberger and
NMPF. One of these commenters said that data on credit default swaps
analyzed by the SEC's Division of Risk, Strategy, and Financial
Innovation indicates that the $100 million proposed notional
thresholds are too high. See letters from Better Markets to CFTC and
SEC dated April 6, 2012 (``Better Markets III'').
---------------------------------------------------------------------------

    Some commenters argued against basing the de minimis exception on
the number of a person's swaps or security-based swaps or the number of
a person's counterparties,\387\ or supported increasing those
thresholds above the proposed standard.\388\ Commenters also suggested
a variety of other alternatives to the proposed tests.\389\
---------------------------------------------------------------------------

    \387\ See, e.g., letters from API II, Atmos Energy, Chesapeake
Energy, COPE I, EEI/EPSA, Gavilon II, IECA-Credit I, Land O'Lakes I,
NCGA/NGSA II, NEM, NextEra I, NMPF, NRG Energy, Peabody and Utility
Group.
    \388\ See, e.g., letters from ISDA I (suggesting 25 transactions
over 12 months); FHLB I (suggesting 25 counterparties and 50
transactions over 12 months) FSR I and Midsize Banks (each
suggesting 75 counterparties and 200 transactions over 12 months);
Regional Banks (suggesting 100 counterparties and 300 transactions
over 12 months); Growmark and MFX II (suggesting thresholds should
be increased by a factor of 10) and meeting with Land O'Lakes on
January 6, 2011 (suggesting thresholds should be increased by a
factor of between 2 and 5).
    One commenter said the number of transaction and number of
counterparty standards should be disjunctive--i.e., a dealer's
activity would be de minimis if it were below either standard. See
letter from Northland Energy. Other commenters raised questions
about how counterparties or transactions should be counted for
purposes of the standard. See letters from CDEU (novations should
not be counted as new transactions) and J.P. Morgan (members of an
affiliated group should be counted as one counterparty), joint
letter from BB&T, East West Bank, Fifth Third Bank, The PrivateBank
and Trust Company, Regions Bank, Sun Trust Bank, U.S. Bank National
Association and Wells Fargo Bank, N.A. (``Midmarket Banks'')
(questioning how to count multiple borrower counterparties to a loan
and swap) and meeting with Land O'Lakes on January 6, 2011 (members
of a cooperative should be counted as one counterparty).
    Last, some commenters said that the number of transaction or
number of counterparty standards should be deleted because they are
not useful as tests of de minimis status. See letters from Gavilon
II (eliminate both standards) and SIFMA--Regional Dealers (eliminate
number of counterparties standard).
    \389\ See letters from IECA-Credit I (suggesting that exception
exclude persons whose positions either are below a notional
threshold or are below a combined proportionality and revenue
threshold), SIFMA--Regional Dealers (supporting annual threshold of
500 customer-facing or riskless principal swaps, consistent with the
de minimis exception from the Exchange Act ``broker'' definition in
connection with bank brokerage activity, as well as SEC rules in
connection with the Exchange Act definition of ``dealer''), FHLB I
(supporting non-quantitative test accounting for relatively small
swap-related exposure compared to primary customer activity,
collateral that also provides credit support for other business done
with the customer, an existing relationship with customer and
inability of customer to obtain swaps from entities that primarily
are dealers), Gavilon II (alluding to use of non-quantitative
tests), MFX II (suggesting establishment of a separate qualitative
process by which a dealer may establish why registration is not
warranted) and DC Energy (thresholds should be set at a level
appropriate to support the capital levels to be required for swap
dealers).
---------------------------------------------------------------------------

d. Additional Issues
    Some commenters emphasized the need to provide protections in
connection with ``special entities.'' \390\ Certain commenters sought
to identify problems related to the application of the proposed
thresholds in connection with particular types of businesses or
markets,\391\ or to aggregators or

cooperatives.\392\ Other commenters suggested that the exception should
focus dealer regulation toward ``financial'' entities.\393\ One
commenter emphasized the need for the exception to be available when
the end-user is a credit union, bank or thrift.\394\
---------------------------------------------------------------------------

    \390\ See letters from Better Markets I (arguing that the de
minimis exception should not be available in connection with
transactions with special entities), AFR (similar), Greenberger
(supporting reduction of the notional threshold for transactions
with special entities to $5 million) and AFSCME. Some commenters
said the standard for swaps and security-based swaps with special
entities should be a notional value equal to 0.0001% of the total
U.S. swap market. See letters from COPE I, EDF Trading, EEI/EPSA,
IECA-Credit I, NFPEEU and Utility Group. One commenter said the
threshold for special entities should be eliminated because it is
not useful in determining de minimis status. See letter from Gavilon
II.
    \391\ See letters from BG LNG I (small energy companies), COPE I
and Northland Energy (each discussing commodity markets, suggesting
that notional thresholds be based on the unit of a commodity), NCFC
I (commodity prices), NGFA I (grain elevators) and WGCEF I (energy
prices).
    \392\ See, e.g., letters from Growmark and Land O'Lakes I.
    \393\ See letters from NEM, NextEra I, and NGFA I.
    \394\ See letter from CUNA.
---------------------------------------------------------------------------

    Commenters sought clarification that the de minimis criteria would
not apply to transactions for hedging or proprietary trading
purposes,\395\ or to inter-affiliate transactions.\396\
---------------------------------------------------------------------------

    \395\ See, e.g., letters from API I, EDF Trading, Gavilon II and
SIFMA--Regional Dealers.
    \396\ See, e.g., letter from Atmos Energy Holdings, Inc (``Atmos
Holdings'').
---------------------------------------------------------------------------

    Commenters also raised issues related to the exception's treatment
of the proposed use of a rolling annual period for calculations,\397\
the proposed use of ``effective notional amounts,'' \398\ the
possibility of adjusting the thresholds over time,\399\ how the de
minimis tests would apply in the context of affiliated positions,\400\
and how the exception would account for swaps or security-based swaps
entered into before the definition's effective date.\401\
---------------------------------------------------------------------------

    \397\ See letters from NCGA/NGSA I (supporting measurement of
rolling period average over 12 months), NextEra I (supporting
evaluation as of the last day of each calendar quarter rather than
over the immediate preceding 12 months) and Northland Energy
(requesting clarification that if a monetary notional amount is
used, the evaluation periods should be fixed rather than rolling).
    \398\ See letters from ISDA I (stating that the use of
``effective notional amount'' in the test introduces ambiguity and
uncertainty) and WGCEF I (notional amounts should be measured on a
``delta-equivalent'' basis).
    \399\ See letters from Farm Credit Council I (supporting
automatic periodic increases to reflect changes in market size, the
size of typical contracts and inflation), Greenberger (supporting
reevaluation of the de minimis criteria on an ongoing basis), and BG
LNG I, EEI/EPSA, NCFC I and WGCEF I (each supporting inflation or
market size adjustments).
    \400\ See meeting with Edison Int'l (requesting clarification
that an entity that is prohibited from coordinating its financial
derivatives activities should determine whether it qualifies for the
de minimis exception without considering financial derivatives
entered into by its affiliated entities).
    \401\ See letter from Covington & Burling (urging clarification
that lookback period will not commence until all the relevant
regulations become effective).
---------------------------------------------------------------------------

    Some commenters suggested that the de minimis thresholds be set
higher initially to provide for efficient use of regulatory
resources.\402\ One commenter requested clarification that the
exception would apply prospectively without regard to dealing
activities taken prior to the effectiveness of Title VII.\403\ One
commenter requested that a person that falls above the de minimis tests
be able to take advantage of application and re-evaluation periods akin
to those associated with the major participant definitions.\404\
---------------------------------------------------------------------------

    \402\ See letters from BGLNG I and WGCEF V. See also Roundtable
Transcript at 50-51 (remarks of Ron Oppenheimer, WGCEF), 57 (remarks
of Richard Ostrander, Morgan Stanley) and 208-09 (remarks of Bella
Sanevich, NISA Investment Advisors).
    \403\ See letter from FSR I.
    \404\ See letter from WGCEF I; see also Northland Energy
(supporting grace period for registration if the de minimis
threshold is exceeded).
---------------------------------------------------------------------------

    Two commenters expressed support for the proposed self-executing
approach of the exception.\405\ Some commenters requested clarification
that the de minimis exception is independent of the loan origination
exclusion in the CEA ``swap dealer'' definition.\406\
---------------------------------------------------------------------------

    \405\ See letters from ISDA I and Northland Energy.
    \406\ See letters from FSR VI and Midsize Banks.
---------------------------------------------------------------------------

    A number of commenters also addressed the application of dealer
regulation to non-U.S. entities. While those comments did not
specifically address the de minimis exception, the exception may be
relevant to addressing these cross-border issues.\407\
---------------------------------------------------------------------------

    \407\ Some commenters particularly took the view that the
application of the dealer definitions to non-U.S. persons should
solely address those persons' U.S. dealing activities. See letters
from FSR I, ISDA I and Soci[eacute]t[eacute] G[eacute]n[eacute]rale.
Some commenters also specifically identified concerns of
international comity in this context. See letters cited in note 148,
supra.
     The Commissions intend to address the application of dealer
regulation to non-U.S. persons as part of separate releases that
generally will address the application of Title VII to non-U.S.
persons.
---------------------------------------------------------------------------

    One commenter separately addressed the credit default swap data
analysis made available by CFTC and SEC staffs.\408\ The commenter
expressed the view that this data supported the adoption of a de
minimis threshold of $100 million or less, particularly focusing on the
number of entities that may be excluded under particular
thresholds.\409\
---------------------------------------------------------------------------

    \408\ See letter from Better Markets III.
    \409\ See id.
---------------------------------------------------------------------------

3. Final Rules--General Principles for Implementing the De Minimis
Exception
a. Balancing Regulatory Goals and Burdens
    The Commissions recognize that implementing the de minimis
exception requires a careful balancing that considers the regulatory
interests that could be undermined by an unduly broad exception as well
as those regulatory interests that may be promoted by an appropriately
limited exception.
    On the one hand, a de minimis exception, by its nature, will
eliminate key counterparty protections provided by Title VII for
particular users of swaps and security-based swaps.\410\ The broader
the exception, the greater the loss of protection.\411\ Moreover, in
determining the scope of the exception, it is important to consider not
only the current state of the swap and security-based swap markets, but
also to account for how those markets may evolve in the future. This is
particularly important because the full implementation of Title VII--
including enhancements to pricing transparency and the increased access
to central clearing--reasonably may be expected to facilitate new
entrants into the swap and security-based swap markets. To the extent
that such entrants engage in dealing activity below the de minimis
threshold--either for the long term or until their activity surpasses
the threshold--the relative amount of unregistered activity within the
market may be expected to increase. Accordingly, a higher de minimis
threshold may not only result in a certain percentage of unregistered
activity being transacted initially, consistent with the current
market, but also may result in an even greater proportion of
unregistered activity being transacted in the future.
---------------------------------------------------------------------------

    \410\ A number of commenters expressed particular concerns as to
the threats that an overbroad exception would pose to special
entities. See letters from AFR (noting that Congress incorporated
special protections for special entities in reaction to news reports
about special entities losing millions of dollars ``after signing up
for derivatives deals they did not understand,'' and urging the
elimination of any de minimis exception for transactions with
special entities); Better Markets I (stating that history has shown
that special entities are vulnerable to abuse, and that they need
capital, collateral and business conduct protections as much as or
more than any other category of market participants); and AFSCME
(expressing skepticism as to the view that dealer status would
preclude firms from entering into transactions with special
entities). Some of those commenters also generally supported the
proposed $100 million de minimis threshold. See letters from AFR and
Better Markets I; see also letter from Greenberger (stating that the
dynamic nature of the derivatives sector of the financial markets
should counsel caution, and that the de minimis threshold should be
reevaluated on an ongoing basis).
    \411\ Notwithstanding the reduction in protection, however, in
the case of swaps and security-based swaps the general antifraud
provisions of the CEA and the securities laws, respectively,
including rules to be adopted by the SEC pertaining specifically to
security-based swaps, will continue to apply to all transactions in
security-based swaps. See, e.g., CEA section 4b(2), 7 U.S.C. 6b(2).
---------------------------------------------------------------------------

    On the other hand, the Commissions also recognize that Congress
included a statutorily mandated de minimis exception for certain swap
and security-based swap dealing activity, and that an appropriately
calibrated de minimis exception has the potential to advance other
interests. For example, the de minimis exception may further the
interest of regulatory efficiency when

the amount of a person's dealing activity is, in the context of the
relevant market, limited to an amount that does not warrant
registration to address the concerns implicated by government
regulation of swap dealers and security-based swap dealers. To advance
this interest, it is necessary to consider the benefits to the
marketplace associated with the regulation of dealers against the total
burdens and potential impacts on competition, capital formation and
efficiency associated with that regulation.\412\
---------------------------------------------------------------------------

    \412\ While we are mindful that the Commissions have yet to
adopt all the final substantive rules applicable to swap dealers and
security-based swap dealers, we nonetheless believe that we have
sufficient understanding of those potential requirements to
reasonably balance the relevant factors to identify the initial
level of dealing activity that should be considered to be de
minimis. Moreover, finalizing the dealer definitions will help
provide for the orderly and informed finalization of those other
substantive rules governing swap dealers and security-based swap
dealers.
---------------------------------------------------------------------------

    In addition, the exception can provide an objective test for
persons who engage in some swap or security-based swap activities that,
in their view, potentially raise the risk that they would be deemed to
be dealers.\413\ The exception also may permit persons that are not
registered as dealers to accommodate existing clients that have a need
for swaps or security-based swaps in conjunction with other financial
services or commercial activities, thus avoiding the need for such
clients to establish separate relationships with registered dealers,
which may have attendant costs. The exception further may promote
competition in dealing activity within the swap or security-based swap
markets, by helping to allow non-registered persons to commence
providing dealing services while avoiding the costs associated with
full-fledged dealers. More competition within the market for swaps and
security-based swaps may not only decrease the costs for participants
in the market, but also may help to decrease systemic risk by lessening
the current apparent concentration of dealing activity among a few
major market participants.\414\
---------------------------------------------------------------------------

    \413\ ``Congress incorporated a de minimis exception to the Swap
Dealer definition to ensure that smaller institutions that are
responsibly managing their commercial risk are not inadvertently
pulled into additional regulation.'' See 156 Cong. Rec. S6192 (daily
ed. July 22, 2010) (letter from Senators Dodd and Lincoln to
Representatives Frank and Peterson).
    \414\ See 478 through 487 and accompanying text, infra.
---------------------------------------------------------------------------

    The statutory requirements that apply to swap dealers and security-
based swap dealers include requirements aimed at the protection of
customers and counterparties,\415\ as discussed above, as well as
requirements aimed at helping to promote effective operation and
transparency of the swap and security-based swap markets.\416\ The
overall economic benefits provided by these requirements in large part
will depend on the proportion of swaps and security-based swaps that
are transacted subject to these requirements. In other words, the
greater the dealing activity of a registered dealer, the more
significant the resulting increase in market efficiency,\417\ and the
greater the reduction in risks faced by the entity's customers and
counterparties.\418\ These benefits can be expected to accrue over the
long term and be distributed over the market and its participants as a
whole. This is not to say, however, that it would be insignificant for
any particular counterparty if its swaps or security-based swaps were
to fall outside of the ambit of dealer regulation. For example, a
customer or counterparty that is not protected by the business conduct
rules applicable to dealers might be more likely to suffer losses
associated with entering into an inappropriate or misunderstood swap or
security-based swap than if the instrument was transacted pursuant to
the business conduct rules applicable to registered dealers.
---------------------------------------------------------------------------

    \415\ As discussed above, in part, these customer and
counterparty protections derive from the financial responsibility
requirements applicable to dealers, particularly: capital and margin
requirements (CEA section 4s(e); Exchange Act section 15F(e)), and
requirements for segregation of collateral (CEA sections 4d(f),
4s(l); Exchange Act section 3E).
    These customer and counterparty protections also derive from
certain other requirements applicable to dealers, particularly:
requirements with respect to business conduct when transacting with
special entities (CEA sections 4s(h)(2), 4s(h)(4), 4s(h)(5);
Exchange Act sections 15F(h)(2), (h)(4), (h)(5)); disclosure
requirements (CEA section 4s(h)(3)(B); Exchange Act section
15F(h)(3)(B)); requirements for fair and balanced communications
(CEA section 4s(h)(3)(D); Exchange Act section 15F(h)(3)(C)); other
requirements related to the public interest and investor protection
(CEA section 4s(h)(3)(D); Exchange Act section 15F(h)(3)(D)); and
conflict of interest provisions (CEA section 4s(j)(5); Exchange Act
section 15F(j)(5)).
    \416\ Relevant provisions are: reporting and recordkeeping
requirements (CEA section 4s(f); Exchange Act section 15F(f)); daily
trading records requirements (CEA section 4s(g); Exchange Act
section 15F(g)); regulatory standards related to the confirmation,
processing, netting, documentation and valuation of security-based
swaps (CEA section 4s(i); Exchange Act section 15F(i)); position
limit monitoring requirements (CEA section 4s(j)(1); Exchange Act
section 15F(j)(1)); risk management procedure requirements (CEA
section 4s(j)(2); Exchange Act section 15F(j)(2)); and requirements
related to the disclosure of information to regulators (CEA section
4s(j)(3); Exchange Act section 15F(j)(3)).
    \417\ For example, the more swaps or security-based swaps a
dealer enters into, the more significant will be the efficiency
benefits associated with confirmation, processing, netting
documentation and valuation requirements applicable to dealers.
    \418\ For example, the more swaps or security-based swaps a
dealer enters into, the more significant the number of
counterparties that will be protected by the disclosure and other
business conduct obligations imposed on dealers.
---------------------------------------------------------------------------

    In contrast to the benefits associated with dealer regulation, many
of the burdens of dealer regulation will accrue in the short term and
will fall directly on registered dealers.\419\ Some of those burdens
may be expected to be independent of the amount of an entity's dealing
activity (i.e., entities that engage in minimal dealing activity would
still be expected to face certain burdens associated with the
registration process and the development of compliance and other
systems if they are required to register as dealers), while other
burdens (e.g., the impact of margin and capital rules applicable to
dealers) may be more directly linked to the amount of that entity's
dealing activity.
---------------------------------------------------------------------------

    \419\ Certain commenters also have expressed concerns that the
prospect of regulation may deter certain entities from engaging in
limited swap or security-based swap dealing activities, see, e.g.,
letters from SIFMA--Regional Dealers and Midsize Banks, which could
reduce the availability of those instruments.
---------------------------------------------------------------------------

    As discussed below, the Commissions have sought to balance the
various interests associated with a de minimis exception, as well as
the benefits and burdens associated with such an exception, in
developing the factors to implement the de minimis exceptions to the
``swap dealer'' and ``security-based swap dealer'' definitions.
    However, in moving forward with implementing this balancing
approach, we recognize that the information that currently is available
regarding certain portions of the swap market is limited. Following the
full implementation of Title VII, more information will be available to
permit us to assess the effectiveness of this balancing for particular
markets and to revise the exception as appropriate.
    In that context--and in light of the tools currently available to
us--we have been influenced, in particular, by comments taking the view
that the de minimis factors should take into account the size and
unique attributes of the market for swaps and security-based
swaps.\420\ We believe that factors that exclude entities whose dealing
activity is sufficiently modest in light of the total size,
concentration and other attributes of the applicable markets can be
useful in avoiding the imposition of

regulatory burdens on those entities for which dealer regulation would
not be expected to contribute significantly to advancing the customer
protection, market efficiency and transparency objectives of dealer
regulation. The Commissions note, however, that they are not of the
general view that the costs of extending regulation to any particular
entity must be outweighed by the quantifiable or other benefits to be
achieved with respect to that particular entity. The Commissions,
rather, analyze the overall benefits and costs of regulation, keeping
in mind, as noted above, that the benefits may be distributed, accrue
over the long-term, and be difficult to quantify or to measure as
easily as certain costs.\421\
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    \420\ See, e.g., letters from CDEU (comparing proposed
thresholds with statistics regarding the activities of recognized
dealers) and EEI/EPSA (recommending that thresholds be set at an
amount equal to 0.001 percent of the aggregate size of the U.S.
swaps market, and 0.0001 percent for swaps in which the counterparty
is a special entity).
    \421\ For example, it does not appear possible to demonstrate
empirically--let alone quantify--the increase or decrease in the
possibility that a financial crisis would occur at a particular
future time and with a particular intensity in the absence of
financial regulation or as a result of varying levels or types of
financial regulation. It also is difficult to demonstrate
empirically that the customer protections associated with dealer
regulation would increase or decrease the likelihood that any
particular market participant would suffer injury (or the degree to
which the participant would suffer injury) associated with entering
into an inappropriate swap or security-based swap. At the same time,
certain costs may also not be readily susceptible to quantification
or measurement, for example, the costs that might be associated with
diminished presence, if any, of new entrants. The inability to
quantify these benefits and costs does not mean that the benefits
and costs of dealer regulation are any less substantial.
---------------------------------------------------------------------------

b. Specific Factors Implementing the De Minimis Exception
i. Notional Test
    Consistent with the proposal, the final rules implementing the de
minimis exception take into account the notional amount of an entity's
swap or security-based swap positions over the prior 12 months arising
from its dealing activity.\422\ While the Commissions recognize that
notional amounts do not directly measure the exposure or risk
associated with a swap or security-based swap position, such measures
do reflect the relative amount of an entity's dealing activity.\423\
Moreover, although some commenters have posited measures of risk or
exposure as alternatives to notional measures, such risk or exposure
measures could, to the extent they allow for netting or collateral
offsets, potentially allow an unregistered entity to engage in large
amounts of swap or security-based swap dealing activity while remaining
within the de minimis exception so long as that entity nets or
collateralizes its swap or security-based swap positions. Such an
outcome could undermine the customer protection and market operation
benefits associated with dealer regulation. As with the proposed rules,
the notional factor in the final rules is based on the notional
positions of an entity over a 12 month period, rather than capping the
current notional amount of a position at any time, to better reflect
the amount of an entity's current activity.
---------------------------------------------------------------------------

    \422\ See CFTC Regulation Sec.  1.3(ggg)(4); Exchange Act rule
3a71-2(a)(1). Over the first year following the effective date of
the final rules implementing the statutory definition of ``swap''
and ``security-based swap'' as set forth in CEA section 1a(47) and
Exchange Act section 3(a)(68), respectively, this notional test will
be based on the person's dealing activity following that effective
date. See id. Accordingly, the analysis of whether a person may take
advantage of the de minimis exception will not encompass the
person's dealing activity prior to that effective date, given the
need for the person to know whether an instrument is a swap or
security-based swap for purposes of the analysis.
    \423\ ``Changes in notional volumes are generally reasonable
reflections of business activity, and therefore can provide insight
into potential revenue and operational issues. However, the notional
amount of derivatives contracts does not provide a useful measure of
either market or credit risks.'' OCC Quarterly Report at 8.
---------------------------------------------------------------------------

    The final rules, like the proposed rules, include lower notional
thresholds for dealing activities in which the counterparty is a
``special entity.'' \424\ This is consistent with the fact that Title
VII's requirements applicable to swap dealers and security-based swap
dealers provide heightened protection to those types of entities.\425\
It is important that the de minimis exception not undermine those
statutory protections.\426\ Also, consistent with the Proposing
Release, these notional standards will be based on ``effective
notional'' amounts when the stated notional amount is leveraged or
enhanced by the structure of the swap or security-based swap.\427\
---------------------------------------------------------------------------

    \424\ For these purposes, ``special entity'' means: (i) A
Federal agency; (ii) a state, state agency, city, county,
municipality, or other political subdivision of a state; (iii) any
employee benefit plan, as defined in section 3 of the Employee
Retirement Income Security Act of 1974 (``ERISA''); (iv) any
governmental plan, as defined in section 3 of ERISA; or (v) any
endowment, including an endowment that is an organization described
in section 501(c)(3) of the Internal Revenue Code of 1986. See CEA
section 4s(h)(2)(C) and CFTC Regulation Sec.  23.401(c); Exchange
Act section 15F(h)(2)(C).
    \425\ See CEA sections 4s(h)(2), (4), (5); see also CFTC,
Business Conduct Standards for Swap Dealers and Major Swap
Participants with Counterparties; Final Rule, 77 FR 9733 (Feb. 17,
2012); Exchange Act sections 15F(h)(2), (4), (5) (providing
additional requirements for dealers that advise special entities or
that enter into swaps or security-based swaps with special
entities).
    \426\ The importance of the statutory protections for special
entities has been highlighted by the SEC's recent action in
connection with the inappropriate sale of notes linked to the
performance of synthetic collateralized debt obligations to a number
of school districts. According to a complaint filed in federal
district court, these securities were unsuitable for the investment
needs of the school districts, were sold to school districts that
lacked the requisite sophistication and experience to independently
evaluate the risks of the investment, and exposed the school
districts to a heightened risk of catastrophic loss ultimately led
to a complete loss of their investments. ``SEC Charges Stifel,
Nicolaus and Former Executive with Fraud in Sale of Investments to
Wisconsin School Districts,'' SEC Litigation Release No. 22064 (Aug.
10, 2011) (http://www.sec.gov/litigation/litreleases/2011/lr22064.htm).
    \427\ For example, if an exchange of payments associated with a
$1 million notional equity swap was based on three times the return
associated with the underlying equity, the effective notional amount
of the equity swap would be $3 million.
---------------------------------------------------------------------------

ii. Other Tests From the Proposing Release
    The proposed rules limited the number of swaps or security-based
swaps that an entity could enter into in a dealing capacity, and the
number of an entity's counterparties in a dealing capacity. The final
rules do not include those measures. In part, this reflects commenter
concerns that a standard based on the number of swaps or security-based
swaps or counterparties can produce arbitrary results by giving
disproportionate weight to a series of smaller transactions or
counterparties.\428\
---------------------------------------------------------------------------

    \428\ See, e.g., letter from COPE I.
---------------------------------------------------------------------------

c. Significance of Statutory ``Customer'' Language
    Consistent with the Proposing Release, the final rules implementing
the de minimis exception do not require the presence of any type of
defined ``customer'' relationship.
    In adopting these rules the Commissions have considered alternative
approaches suggested by commenters, including one commenter's
suggestion that the de minimis exception should be available only in
connection with swaps or security-based swaps entered into as part of a
``customer'' relationship.\429\ In considering that alternative view,
however, we believe that it is significant that the statutory exception
lacks terminology such as ``existing'' or ``preexisting'' that limits
the availability of the exception or otherwise to distinguishes a
``customer'' relationship from other types of counterparty
relationship. Also, while that alternative view could still permit an
unregistered person to provide limited dealer services as an
accommodation to an existing customer or counterparty, an
interpretation that predicates the exception on the presence of a
particular type of ``customer'' relationship would not advance other
potential benefits associated with a de minimis exception, including
the

benefit of providing certainty in connection with the swap or security-
based swap activities of end-users.\430\ Accordingly, we do not believe
that the ``customer'' reference standing alone provides a sufficient
basis to conclude that the exception should only be available if there
is an existing relationship of some type, and the final rules neither
require that a dealer accommodate the demand of an existing customer
nor require the presence of a preexisting relationship for the
exception to apply.
---------------------------------------------------------------------------

    \429\ See letter from Better Markets I.
    \430\ As discussed above, see note 413, supra, there is
legislative history that suggests that an intended purpose of the
exception would be to ensure that the dealer definition does not
encompass ``smaller institutions that are responsibly managing their
commercial risk.''
---------------------------------------------------------------------------

    We also are not persuaded by the different commenter suggestion
that the statutory de minimis exception's ``customer'' language means
that an unregistered dealer should be permitted to engage in unlimited
dealing activity so long as its counterparties are not customers.\431\
Such an unlimited exception would appear to be contrary to the express
language of the statutory exception. In addition, such an approach
would lead to the perverse result of discouraging entities from
entering into swaps or security-based swaps to facilitate risk
management activities of customers (while encouraging other dealing
activities), which appears contrary to Title VII's general approach of
seeking to limit undue impacts on the swap and security-based swap
activities of commercial end-users.
---------------------------------------------------------------------------

    \431\ See, e.g., letter from ISDA I.
---------------------------------------------------------------------------

d. Focus on ``Dealing'' Activity
    Some commenters suggested that we clarify that the limitations
associated with the de minimis exception apply only in connection with
a person's dealing activities, and not to the person's hedging or
proprietary trading activities.\432\ The Commissions agree that the de
minimis exception is intended to permit an unregistered person to
engage in a limited amount of dealing activity without regard to the
person's non-dealing activity. Thus, to the extent that a particular
swap or security-based swap position is not connected to dealing
activity under the applicable interpretation of the statutory dealer
definition, it will not count against the de minimis thresholds.
Conversely, if a swap or security-based swap position is connected to
the person's dealing activity, the position will count against those
thresholds.\433\
---------------------------------------------------------------------------

    \432\ See, e.g., letters from SIFMA--Regional Dealers and EDF
Trading.
    \433\ For purposes of the de minimis exception to the security-
based swap dealer definition, we note that one indicator of dealing
activity under the dealer-trader distinction is that a person profit
by providing liquidity in connection with security-based swaps.
Accordingly, for purposes of the de minimis exception to the
security-based swap dealer definition, a security-based swap
position that hedges or otherwise offsets a position that was
entered into as part of dealing activity would itself comprise part
of the person's dealing activity, and hence count against the de
minimis thresholds.
     For purposes of the de minimis exception to the swap dealer
definition, we take the view that the relevant question in
determining whether swaps count as dealing activity against the de
minimis thresholds is whether the swaps fall within the swap dealer
definition under the statute and the final rules, as further
interpreted by this Adopting Release. If hedging or proprietary
trading activities did not fall within the definition, including
because of the application of CFTC Regulation Sec.  1.3(ggg)(6),
they would not count against the de minimis thresholds.
---------------------------------------------------------------------------

    Commenters also requested clarification that the de minimis
thresholds do not apply to a person's inter-affiliate swaps and
security-based swaps, nor apply to swaps covered by the exclusion for
swaps entered into by insured depository institutions in connection
with the origination of loans to customers.\434\ Consistent with the
discussion above,\435\ such swaps or security-based swaps do not
constitute dealing activity and should not be counted against the de
minimis thresholds. Similarly, swaps between a cooperative and its
members, as provided in CFTC Regulation Sec.  1.3(ggg)(6)(ii), and
swaps entered into for the hedging purpose defined in CFTC Regulation
Sec.  1.3(ggg)(6)(iii) should not be counted against the de minimis
threshold.\436\
---------------------------------------------------------------------------

    \434\ See, e.g., letters from Atmos Holdings and FSR I.
    \435\ See parts II.B and II.C, supra.
    \436\ Swaps and security-based swaps that hedge, mitigate, or
offset the types of swaps and security-based swaps discussed in the
foregoing paragraph, which do not constitute dealing activity,
similarly should not be counted against the de minimis thresholds.
---------------------------------------------------------------------------

    In light of the increased notional thresholds of the final rules,
and the resulting opportunity for a person to evasively engage in large
amounts of dealing activity if it can multiply those thresholds, the
final rules provide that the notional thresholds to the de minimis
exception encompass swap and security-based swap dealing positions
entered into by an affiliate controlling, controlled by or under common
control with the person at issue.\437\ This is necessary to prevent
persons from avoiding dealer regulation by dividing up dealing activity
in excess of the notional thresholds among multiple affiliates.\438\
---------------------------------------------------------------------------

    \437\ See CFTC Regulation Sec.  1.3(ggg)(4)(i); Exchange Act
rule 3a71-2(a)(1). For these purposes, we interpret control to mean
the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract or
otherwise. This is consistent with the definition of ``control'' and
``affiliate'' in connection with Exchange Act rules regarding
registration statements. See Exchange Act rule 12b-2.
     The final rules use a control standard in connection with the
de minimis notional thresholds as a means reasonably designed to
prevent evasion of the limitations of that exception. This contrasts
with the majority-ownership standard used by the inter-affiliate
exclusions from the dealer and major participant definitions. See
parts II.C.2 and IV.G.2, infra. That majority-ownership standard,
which in application will not be expected to be satisfied in all
circumstances in which a control standard is satisfied, is
reasonably designed to reflect the economic alignment that
appropriately underpins those exclusions.
    \438\ In other words, for example, if a parent entity controls
two subsidiaries which both engage in activities that would cause
the subsidiaries to be covered by the dealer definitions, then each
subsidiary must aggregate the swaps or security-based swaps that
result from both subsidiaries' dealing activities in determining if
either subsidiary qualifies for the de minimis exception.
    The SEC expects to address the application of this principle to
the security-based swap activities of non-U.S. persons in a separate
release.
---------------------------------------------------------------------------

e. Alternative Approaches We Are Not Following
    Certain commenters have suggested alternative approaches to
implementing the de minimis exception. While the Commissions have
considered those suggested alternatives, we do not believe that they
provide the optimal framework for implementing the exception.
    For example, some commenters took the position that the de minimis
exception should focus dealer regulation on those entities whose
dealing activities pose systemic risk, and excuse other dealers from
having to register.\439\ Such an approach, however, would fail to
account for regulatory interests apart from the control of systemic
risk that are addressed by dealer regulation, including statutory
provisions that protect customers and counterparties in other ways, and
that promote effective market operations and transparency.\440\
---------------------------------------------------------------------------

    \439\ See, e.g., letters from CDEU and SIFMA--Regional Dealers.
    \440\ We also disagree with the suggestion that it would be
inconsistent with the Title VII framework to consider customer
protection issues in setting the de minimis factors. See letter from
WGCEF I. While the restrictions on the availability of swaps and
security-based swaps to non-ECPs help to mitigate certain customer
protection concerns, Title VII includes specific safeguards designed
to protect dealers' customers and counterparties regardless of
whether those are ECPs. It would not be consistent with Title VII to
ignore those interests.
---------------------------------------------------------------------------

    Some commenters also have suggested that the de minimis exception
should subsume a proportionality

standard, whereby an entity may be excluded from dealer regulation if
its dealing activity comprises only a relatively small portion of its
overall activities (or its overall swap or security-based swap
activities), or if its dealing activity is ``tangential'' to its
principal business.\441\ We are not incorporating that type of approach
into the de minimis factors, however, because that approach would not
appear to provide a logical way to balance the benefits and burdens of
dealer regulation. A proportionality approach could permit a large
entity to engage in a significant amount of dealing activity without
being subject to dealer regulation, thus undermining the benefits of
dealer regulation. Moreover, a proportionality approach could lead to
arbitrary results by excusing a large entity from dealer regulation
while requiring the registration of a smaller entity that engages in
less total dealing activity (if that smaller amount of dealing activity
comprises a greater portion of the smaller entity's total
activity).\442\
---------------------------------------------------------------------------

    \441\ See letter from FHLB I.
    \442\ As discussed below, if an entity is a dealer, the
regulations applicable to dealers in general will govern all of the
entity's swap or security-based swap activities and positions.
Depending on the applicable facts and circumstances, however, the
entity may be able to avail itself of a limited purpose designation
as a dealer. See part II.E, infra.
---------------------------------------------------------------------------

    Some commenters also supported the use of non-quantitative
standards in connection with the de minimis exception.\443\ Although we
recognize that such an approach may help us weigh the facts and
circumstances associated with a particular person's dealing activity,
we believe that it is more appropriate to base the exception on an
objective quantitative standard, to allow the exception to be self-
executing, and to promote predictability among market participants and
the efficient use of regulatory resources. Unlike the overall
definitions of ``swap dealer'' and ``security-based swap dealers,''
which consider the entirety of a person's activities with respect to
swaps, the de minimis exception is only relevant to persons who have
determined that they are engaged in swap or security-based swap
dealing, and are looking to determine whether the quantity of their
dealing activity is de minimis. For this more particular and focused
determination, an objective quantitative standard is more appropriate.
---------------------------------------------------------------------------

    \443\ See letters from FHLB I, Gavilon II, and MFX II.
---------------------------------------------------------------------------

    Commenters also made various suggestions as to the types of factors
and accompanying thresholds that should be used in connection with the
de minimis exception. Those suggestions are addressed more specifically
below in the specific context of the swap dealer and security-based
swap dealer de minimis exceptions.
4. Final Rules--De Minimis Exception to Swap Dealer Definition
a. Overview of the Final Rule
    After considering commenters' views, the final rule implementing
the de minimis exception caps an entity's dealing activity involving
swaps at $3 billion over the prior 12 months.\444\ This amount is based
on input from commenters and is supported by several rationales,
including the estimated size of the domestic swap market, among others.
---------------------------------------------------------------------------

    \444\ CFTC Regulation Sec.  1.3(ggg)(4). As noted above, for the
first year following the effective date of the rules implementing
the definition of ``swap'' the analysis would only address activity
following that effective date. For clarity, the final rule also has
been revised from the proposal to provide that persons taking
advantage of the exception ``shall be deemed not to be'' swap
dealers (the proposed rule used the phrasing ``shall not be deemed
to be'' swap dealers) The final rule also reflects certain
structural changes consistent with the substantive changes from the
proposed rule. In addition, as discussed above, see part II.D.3.d,
supra, the final rule has been revised to provide that the notional
thresholds to the de minimis exception encompass swap dealing
positions entered into by an affiliate controlling, controlled by or
under common control with the person at issue.
---------------------------------------------------------------------------

    As noted above, commenters who suggested a fixed notional standard
proposed that the standard be set at a level between $200 million and
$3.5 billion in notional amount of swaps entered into over a period of
twelve months.\445\ In considering these comments, we are mindful of
the variety of uses of swaps in various markets and therefore it is
understandable that various commenters would reach different
conclusions regarding the appropriate standard. At the same time, we
see value in setting a single standard for all swaps so that there is a
``level playing field'' for all market participants and so that the
standard can be implemented easily without the need to categorize
swaps. Considering the written input of the commenters as well as the
discussions of the de minimis standard at the Commissions' joint
roundtable and numerous meetings with market participants, and the
benefits of the regulation of swap dealers (i.e., protection of
customers and counterparties, and promotion of the effective operation
and transparency of the swap markets), we believe a notional standard
at a level of $3 billion appropriately balances the relevant regulatory
goals.
---------------------------------------------------------------------------

    \445\ One commenter suggested a threshold of $3 billion. See
letter from COPE I (suggesting 0.001% of the total U.S. swap market,
amounting to approximately $3 billion). Other commenters also
supported a threshold of 0.001% of the total U.S. swap market. See
letters cited in note 382, supra.
---------------------------------------------------------------------------

    As noted above, several commenters suggested that the standard be
set at an amount equal to 0.001 percent of the overall domestic market
for swaps. The Commissions note, however, that comprehensive
information regarding the total size of the domestic swap market is
incomplete, with more information available with respect to certain
asset classes than others. The CFTC evaluated data regarding one
particular type of swap--credit default swaps (``CDS'') based on
indices of debt securities known as ``index CDS''--that was provided by
the SEC.\446\ As noted in the CFTC analysis of this data, however, the
information is not filtered to reflect activity that would constitute
swap dealing under the Dodd-Frank Act, so it is not possible to use the
data to draw conclusions regarding any specific entity's status as a
swap dealer.\447\ The data reflects only activity relating to index
CDS, which constitute a very narrow part of the overall swap market,
and, as noted in the CFTC analysis, similar data regarding other types
of swaps is not available.\448\ Subject to these limitations, the data
may help evaluate the impact of alternative approaches to implementing
the de minimis exception.
---------------------------------------------------------------------------

    \446\ The CFTC analysis was made available to the public. See
memorandum to the public comment file from the CFTC Office of the
Chief Economist.
    \447\ See id.
    \448\ See id.
---------------------------------------------------------------------------

    One often-cited measure of the market, the Quarterly Report on Bank
Trading and Derivatives Activities issued by the OCC (``OCC Quarterly
Report'') is both limited, in that it includes only data related to the
activities of U.S. bank holding companies, commercial banks and trust
companies, and over-inclusive, in that it includes activities related
to instruments that are not or may not be included in the final
definition of ``swap'' (including futures, forwards, certain foreign
exchange instruments, and certain options) and it includes both swaps
and security-based swaps. Nonetheless, the Commissions believe that the
available (imperfect) data suggests that a $3 billion notional standard
is generally consistent with the commenters' suggestion of basing the
standard on a percentage of the overall domestic market for swaps.
    The total notional value of $333.1 trillion in ``derivatives''
stated in the most recent OCC Quarterly Report includes approximately
$221.1 trillion

in ``swaps'' and ``credit derivatives.'' \449\ Since some instruments
that are security-based swaps are included in this total,\450\ the
total notional value of swap positions at U.S. bank holding companies,
commercial banks and trust companies at the end of the second quarter
of 2011 of may be estimated to be somewhat less than $221.1 trillion.
---------------------------------------------------------------------------

    \449\ See Office of the Comptroller of the Currency, ``Quarterly
Report on Bank Trading and Derivatives Activities, Second Quarter
2011'' at tables 1 and 2 (http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq211.pdf). These totals
reflect the sum of the amounts reported for the top 25 bank holding
companies reported in table 1 and for all but the top 25 commercial
banks and trust companies reported in table 2.
    However, this adjustment is only approximate, because the
definitions of ``swap'' and ``credit derivative'' used in the OCC
Quarterly Report are likely to be significantly different from the
final definition of ``swap'' and ``security-based swap'' for
purposes of the Dodd-Frank Act. For the same reason, it is uncertain
how many of the notional value of $54.5 trillion in options reported
in the OCC Quarterly Report are swaps or security-based swaps.
    Also, data from the CDS trade information warehouse maintained
by the Depository Trust & Clearing Corporation (``DTCC'') indicates
that total global notional CDS positions on indices amount to
approximately $10.47 trillion. See http://dtcc.com/products/derivserv/data_table_i.php?tbid=3 (data for the week ending
October 7, 2011, obtained on October 17, 2011).
    \450\ See part II.D.5, infra, for a discussion of the size of
the security-based swap market.
---------------------------------------------------------------------------

    This total notional value is by nature under-inclusive, because it
reflects only swap positions at U.S. bank holding companies, commercial
banks and trust companies and not the swap positions of other market
participants. However, there are also reasons that the information from
the OCC Quarterly Report may overstate the notional value of swaps that
would be relevant to estimating the size of the domestic swap market
for purposes of the de minimis standard. While we believe the data is
not sufficiently precise at this time to serve as the sole basis for
the notional standard, a standard of $3 billion seems that it is likely
generally consistent with 0.001 percent of the domestic swap market
that would be relevant to a potential dealer's de minimis swap activity
figure. First, the large majority of derivatives in the OCC Quarterly
Report (approximately $229 trillion in notional value for commercial
banks and trust companies) are derivatives between ``dealers'' (as
defined for the purposes of the report.) \451\ Thus, it is likely that
a large part of the derivatives in the OCC Quarterly Report reflect
transactions between financial institutions that will be swap dealers.
It is also notable that approximately $204.6 trillion in notional value
of the derivatives (i.e., not only swaps) reported by U.S. commercial
banks were interest rate contracts, many of which are swaps entered
into by IDIs with customers in connection with the origination of loans
which will be excluded from the determination of whether the IDIs are
swap dealers.\452\ Finally, the OCC Quarterly Report measures swap
positions held at a certain point in time, rather than the level of
swap activity over a certain time period, again indicating that the
figures are broader than those that would be subject to the de minimis
figure. Accordingly, it appears that notional amount of the overall
domestic market for swaps that actually would be relevant to
determining the notional standard, and thus the appropriate basis for
the 0.001 percent calculation, may be significantly lower than $331
trillion.
---------------------------------------------------------------------------

    \451\ See OCC Quarterly Report at Graph 1.
    \452\ See OCC Quarterly Report at Graph 3.
---------------------------------------------------------------------------

    Because there is merit in the 0.001 percent ratio suggested by
several commenters, we believe an appropriate balance of the goal of
promoting the benefits of regulation (while recognizing the
unquantifiable nature of those benefits) against the competing goal of
avoiding the imposition of burdens on those entities for which
regulation as a dealer would not be associated with achieving those
benefits in a significant way, would be reached by setting the notional
standard for swaps at a level that is near (taking into account the
uncertainties noted above) 0.001 percent of a reasonable estimate of
the overall domestic market for all swaps between all counterparties.
We believe a $3 billion notional value standard is appropriate taking
all these considerations into account.
b. Dealing Activity Involving Special Entities
    For swaps in which the counterparty is a special entity, the final
rules set a notional standard consistent with the proposal of $25
million over the prior 12 months.\453\ The Commissions believe that
this notional standard is appropriate in light of the special
protections that Title VII affords to special entities. In adopting
this threshold, we recognize the serious concerns raised by commenters
stating that the de minimis exception should not permit any dealing
activities (by persons who are not registered as swap dealers)
involving special entities, in light of losses that special entities
have incurred in the financial markets.\454\ However, the final rule
does not fully exclude such dealing activity from the exception, in
light of the potential benefits that may arise from a de minimis
exception. In this way, the threshold would not completely foreclose
the availability of swaps to special entities from unregistered
dealers, but the threshold would limit the financial and other risks
associated with those positions for a special entity, which would in
turn limit the possibility of inappropriately undermining the special
protections that Title VII provides to special entities.
---------------------------------------------------------------------------

    \453\ CFTC Regulation Sec.  1.3(ggg)(4)(i).
    \454\ See letters from AFR and Better Markets I.
---------------------------------------------------------------------------

c. Phase-in Procedure
    The Commissions believe that a phase-in period for the de minimis
threshold would facilitate the orderly implementation of Title VII by
permitting market participants and the Commissions to familiarize
themselves with the application of the swap dealer definition and swap
dealer requirements and to consider the information that will be
available about the swap market, including real-time public reporting
of swap data and information reported to swap data repositories. In
addition, a phase-in period would afford the Commissions additional
time to study the swap markets as they evolve in the new regulatory
framework and allow potential swap dealers that engage in smaller
amounts of activity (relative to the current size of the market)
additional time to adjust their business practices, while at the same
time preserving a focus on the regulation of the largest and most
significant swap dealers. The Commissions also recognize that the data
informing their current view of the de minimis threshold is based on
the markets as they exist today, and that the markets will evolve over
the coming years in light of the new regulatory framework and other
developments.
    We have also considered that there may be some uncertainty
regarding the exact level of swap dealing activity, measured in terms
of a gross notional amount of swaps, that should be regarded as de
minimis. While some quantitative data regarding the usage of swaps is
available, there are many aspects of the swap markets for which
definitive data is not available. We have also considered comments
suggesting that the de minimis thresholds should be set higher
initially to provide for efficient use of regulatory resources,\455\ or
that implementation of the dealer requirements should be phased.\456\
For

all these reasons, the Commissions believe it is appropriate that the
final rules provide for a phase-in period following the effective date
during which higher de minimis thresholds would apply.
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    \455\ See letters cited in footnote 402, supra.
    \456\ See, e.g., Roundtable Transcript at 35 (remarks of Ron
Filler, New York Law School) and letters from FSR dated May 12, 2011
(``FSR III'') and WGCEF V.
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    In particular, during this phase-in period, a person's swap dealing
activity over the prior 12 months is capped at a gross notional value
of $8 billion.\457\ With respect to swaps with special entities, the
Commissions believe it is appropriate that the $25 million gross
notional value threshold apply during the phase-in period.\458\ In
light of the available data--and the limitations of that data in
predicting how the full implementation of Title VII will affect dealing
activity in the swap markets--the Commissions believe that the
appropriate threshold for the phase-in period is an annual gross
notional level of swap dealing activity of $8 billion or less. In
particular, the $8 billion level should still lead to the regulation of
persons responsible for the vast majority of dealing activity within
the swap markets.
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    \457\ See CFTC Regulation Sec.  1.3(ggg)(4)(i).
    \458\ This limitation regarding swaps with special entities
during the phase-in period is consistent with the Dodd-Frank Act's
goal of helping special entities be in a position to benefit from
the counterparty protections associated with the regulation of
registered swap dealers under Title VII.
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    Accordingly, the Commissions believe that while a $3 billion
notional threshold reflects an appropriate long-term standard based on
the available data,\459\ it also is appropriate to allow a degree of
latitude in applying the threshold over time in the event that
subsequent developments in the markets or the evaluation of new data
from swap data reporting facilities suggest that the thresholds should
be adjusted. In particular, the implementation of swap data reporting
under the Dodd-Frank Act may result in new data that would be useful in
confirming the Commissions' determination to establish the $3 billion
threshold which applies after the phase-in period.
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    \459\ See, e.g., part II.D.4.a, supra.
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    For these reasons, review of the de minimis exception will comprise
an important part of the reports that the CFTC is directing its staff
to conduct with regard to the swap dealer definition during the phase-
in period. Among other topics, the report should consider market data
addressing swap dealing activity over a period of approximately two
years, and any resulting changes in swap dealing activity, by dealers
above and below the $8 billion phase-in threshold, and above and below
the $3 billion level applicable after the phase-in period. The report
is required to be completed by the CFTC staff no later than 30 months
following the date that a swap data repository first receives swap data
under the CFTC's regulations, and the report will be published for
public comment.\460\ The CFTC will take this report, in conjunction
with any public comment on it, into account in weighing further action
on the de minimis exception at the end of the phase-in period.
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    \460\ See CFTC Regulation Sec.  1.3(ggg)(4)(ii)(C).
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    The final rules provide that nine months after publication of its
staff report, the CFTC may, in its discretion, either promulgate an
order that the phase-in period will end as of the date set forth by the
CFTC in that order, or issue for public comment a notice of proposed
rulemaking to modify the de minimis threshold, in which case the CFTC
would also issue an order establishing the date that the phase-in
period will end.\461\ The period of nine months provided in the rule is
intended to provide the CFTC an opportunity to consider its staff
report, public comments on the staff report and any other relevant
information.
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    \461\ See CFTC Regulation Sec.  1.3(ggg)(4)(ii)(C).
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    The CFTC recognizes that the determination of the appropriate de
minimis threshold is a significant issue requiring thorough
consideration of a variety of regulatory and market factors. At the
same time, the CFTC recognizes the need for predictability in how the
de minimis exception will apply. Therefore, the final rules include a
finality provision, stating that the phase-in period will end no later
than five years after the date that a swap data repository first
receives swap data under the CFTC's regulations.\462\
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    \462\ See CFTC Regulation Sec.  1.3(ggg)(4)(ii)(D).
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    Persons who are able to avail themselves of the higher de minimis
threshold that applies during the phase-in period will not be required
to do so. In particular, a person that is engaged in dealing activity
involving swaps in excess of the $3 billion threshold may choose to
commence the process for registering as a swap dealer during the phase-
in period.\463\
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    \463\ See CFTC Regulation Sec.  1.3(ggg)(4)(vi).
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d. CFTC Staff Report
    As noted above, the CFTC is directing its staff to report to the
CFTC as to whether changes are warranted to the rules implementing the
swap dealer definition, including the rule implementing the de minimis
exception. We are mindful that following the full implementation of
Title VII--which itself is contingent on the implementation of the
dealer definition--more data will be available to the CFTC via swap
data repositories. We expect that this additional data will assist the
CFTC in testing the assumptions and addressing the effects of the final
rule we are adopting to implement the de minimis exception. For
example, this data should help the CFTC assess, among other things, the
nature and amount of unregulated dealing activity that occurs under the
$3 billion threshold. The CFTC will make this report available for
public comment so that it may benefit from additional input and
analysis regarding the swap dealer definition.
    By making use of post-implementation data, the staff report
(together with public comment on the report) will help the CFTC better
evaluate the exception in light of potential market changes resulting
from the full implementation of Title VII--including market changes
resulting from the de minimis exception itself--as part of determining
whether revised de minimis thresholds would be appropriate. The report
and public comment thereon will also be taken into consideration by the
CFTC in determining what action, if any, to take with respect to the
phase-in period associated with the de minimis exception.
    The final rules provide, moreover, that the CFTC may change the
requirements of the de minimis exception by rule or regulation.\464\
Through this mechanism, the CFTC may revisit the rule implementing the
exception and potentially change that rule, for example, if data
regarding the post-implementation swap market suggests that different
de minimis thresholds would be appropriate.\465\ In determining whether
to revisit the thresholds, the CFTC intends to pay particular attention
to whether the de minimis exception results in a swap dealer definition
that encompasses too many entities whose activities are not

significant enough to warrant full regulation under Title VII, or,
alternatively, whether the de minimis exception leads an undue amount
of dealing activity to fall outside of the ambit of the Title VII
regulatory framework, or leads to inappropriate reductions in
counterparty protections (including protections for special entities).
The CFTC also intends to pay particular attention to whether
alternative approaches would more effectively promote the regulatory
goals that may be associated with a de minimis exception.
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    \464\ CFTC Regulation Sec.  1.3(ggg)(4)(v). CEA section
1a(49)(D) (like Exchange Act section 3(a)(71)(D)) particularly
states that the ``Commission''--meaning the CFTC--may exempt de
minimis dealers and promulgate related regulations. We do not
interpret the joint rulemaking provisions of section 712(d) of the
Dodd-Frank Act to require joint rulemaking here, because such an
interpretation would read the term ``Commission'' out of CEA section
1a(49)(D) (and Exchange Act section 3(a)(71)(D)), which themselves
were added by the Dodd-Frank Act.
    \465\ See letter from Greenberger (stating that the dynamic
nature of the derivatives sector of the financial markets should
counsel caution, and that the de minimis threshold should be
reevaluated on an ongoing basis).
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5. Final Rules--De Minimis Exception to ``Security-Based Swap Dealer''
Definition
a. Overview of the Final Rule
    The final rule implementing the de minimis exception to the
``security-based swap dealer'' definition has been revised from the
proposal in a number of ways. As discussed above, the final rule does
not incorporate proposed limits on the number of security-based swaps
that a person may enter into in a dealing capacity, or on the number of
security-based swap counterparties a person may have when acting in a
dealing capacity.\466\ Moreover, the provisions of the exception that
cap an unregistered person's annual notional dealing activity with
counterparties other than ``special entities'' have been increased from
the proposed $100 million threshold.\467\ Instead, the final rule caps
such dealing activity involving security-based swaps that are credit
default swaps--which largely would consist of single-name credit
default swaps--at $3 billion in notional amount over the prior 12
months.\468\ For other types of security-based swaps (e.g., single-name
or narrow-based equity swaps or total return swaps), the exception caps
an unregistered person's dealing activity at $150 million in notional
amount over the prior 12 months.\469\ Also, as addressed below, the
final rule provides for phase-in levels in excess of those $3 billion
and $150 million thresholds for a certain period of time.
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    \466\ See part II.D.3.b, supra.
    \467\ For clarity, the final rule also has been revised from the
proposal to provide that persons taking advantage of the exception
``shall be deemed not to be'' dealers (the proposed rule used the
phrasing ``shall not be deemed to be'' dealers), and to provide that
such persons ``shall not be subject to Section 15F of the Exchange
Act and the rules, regulations and interpretations issued
thereunder.'' See Exchange Act rule 3a71-2(a). The final rule also
reflects certain structural changes consistent with the substantive
changes from the proposed rule.
     In addition, as discussed above, see part II.D.3.d, supra, the
final rule has been revised to provide that the notional thresholds
to the de minimis exception encompass swap and security-based swap
dealing positions entered into by an affiliate controlling,
controlled by or under common control with the person at issue.
    \468\ Exchange Act rule 3a71-2(a)(1)(i). The final rule, like
the proposal, requires the analysis of de minimis levels to be based
on effective notional amounts to the extent that the stated notional
amount is leveraged or enhanced by the structure of the security-
based swap (such as, for example, if the exchange of payments
associated with an equity swap was based on a multiple of the return
associated with the underlying equity). See Exchange Act rule 3a71-
2(a)(3).
    It is important to recognize that while these types of de
minimis principles are relevant to the ``security-based swap
dealer'' definition, they are not applicable to the general
definitions of ``broker'' and ``dealer'' under the Exchange Act, or
the broker-dealer registration requirements of Exchange Act section
15(a). Unlike the ``security-based swap dealer'' definition, those
other definitions, with the exception of the bank-broker definition
in section 3(a)(4)(B)(xi) of the Exchange Act, lack de minimis
exceptions.
    \469\ Exchange Act rule 3a71-2(a)(1)(ii).
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    In addition, consistent with the proposal, the final rule caps an
unregistered person's security-based swap dealing activity involving
counterparties that are ``special entities'' at $25 million in notional
amount over the prior 12 months.\470\ The final rule further provides
that the SEC may establish alternative methods of determining the scope
of the de minimis exception by rule or regulation.\471\
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    \470\ Exchange Act rule 3a71-2(a)(1)(iii).
    \471\ Exchange Act rule 3a71-2(d); see part II.D.5.f, infra.
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b. Interests Associated With a De Minimis Exception
    In developing this final rule, we have sought to balance the
interests advanced by the de minimis exception against the protections
that would be weakened were the exception applied in an overbroad
manner. In making this evaluation, we have taken into account data
regarding the security-based swap market and especially data regarding
the activity--including activity that may be suggestive of dealing
behavior--of participants in the single-name credit default swap
market.\472\
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    \472\ Certain data has been addressed by an analysis regarding
the market for single-name credit default swaps performed by the
SEC's Division of Risk, Strategy, and Financial Innovation. See
``Information regarding activities and positions of participants in
the single-name credit default swap market'' (Mar. 15, 2012)
(available at http://www.sec.gov/comments/s7-39-10/s73910-154.pdf)
(``CDS Data Analysis''). We believe that the data underlying this
analysis provides reasonably comprehensive information regarding the
credit default swap activities and positions of U.S. market
participants, but note that the data does not encompass those credit
default swaps that both: (i) do not involve U.S. counterparties; and
(ii) are based on non-U.S. reference entities. Our reliance on this
data, which we believe to be the best available, should not be
interpreted to indicate our views as to the nature or extent of the
application of Title VII to non-U.S. persons; instead, the SEC
anticipates that issues regarding the extraterritorial application
of Title VII will be addressed in a separate release.
    As discussed below, see notes 476 and 485, infra, we also have
considered more limited publicly available data regarding equity
swaps.
    The CDS Data Analysis also included an appendix of data
regarding index credit default swaps. We do not consider that data
for purposes of the analysis described in this section because the
statutory definition of ``security-based swap'' in relevant part
encompasses swaps based on single securities or on narrow-based
security indices. See Exchange Act sec. 3(a)(68)(A); see also
Exchange Act Release No. 64372, 76 FR 29818 (May 23, 2011) (proposed
rules further defining ``security-based swap'' and certain other
terms).
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    As discussed above, a de minimis exception eliminates key Title VII
protections for some market participants by regulating less dealer
activity. Conversely, an appropriately applied de minimis exception may
provide an objective test when there is doubt as to whether particular
activities may cause a person to be deemed to be a dealer; \473\ allow
non-dealers to accommodate the incidental security-based swap needs of
existing clients; and help to facilitate competition by allowing the
entry of new dealers into the market. In addition, as discussed above,
a de minimis exception may promote regulatory efficiency by providing a
framework to help focus dealer regulation upon those entities for which
such regulation is warranted, rather than upon entities that engage in
relatively limited amounts of dealing activity.\474\
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    \473\ We believe that the application of the dealer-trader
distinction and the guidance we have provided that distinguishes
hedging activities from dealing activities in the security-based
swap market will also help dealers meet their obligations.
    \474\ See part II.D.3.a, supra.
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i. Providing for Regulatory Coverage of the Vast Majority of Dealing
Activity
    In seeking to develop a de minimis exception that preserves key
counterparty and market protections while promoting regulatory
efficiency, we have considered the comparative amount of security-based
swap dealing activity that could fall outside the ambit of dealer
regulation as a result of the exception. In doing so we have considered
not only the security-based swap market as it currently exists, but
also how the market reasonably may be expected to change after the full
implementation of Title VII.
    In performing this comparative exercise we are, in part, drawing
inferences from the CDS Data Analysis, a dataset released by the SEC
staff that characterizes nearly all transactions in single-name credit
default swaps during the 2011 calendar year.\475\ Though the final
rules apply to all security-based swaps, not just single-name credit

default swaps, the SEC believes that these data are sufficiently
representative of the market to help inform the analysis because an
estimated 95 percent of all security-based swap transactions appear
likely to be single-name credit default swaps.\476\ The SEC also
recognizes that although the de minimis exception is applicable to
persons only with respect to their dealing activity, the CDS Data
Analysis contains transactions reflecting both dealing activity and
non-dealing activity, including transactions by persons who may engage
in no dealing activity whatsoever.\477\
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    \475\ See note 472, supra.
    \476\ While recognizing that the Commissions have yet to adopt
final rules defining a ``security-based swap,'' we believe that
single-name credit default swaps will constitute roughly 95 percent
of the market, as measured on a notional basis, for instruments that
will fall within that definition, with certain equity swaps (in
other words, total return swaps based on single equities or narrow-