[Federal Register Volume 77, Number 100 (Wednesday, May 23, 2012)]
[Rules and Regulations]
[Pages 30596-30764]
[FR Doc No: 2012-10562]

Vol. 77

Wednesday,

No. 100

May 23, 2012

Part II

Commodity Futures Trading Commission

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17 CFR Part 1

Securities and Exchange Commission

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17 CFR Part 240

Further Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,''
``Major Swap Participant,'' ``Major Security-Based Swap Participant''
and ``Eligible Contract Participant;'' Final Rules

Federal Register / Vol. 77, No. 100 / Wednesday, May 23, 2012 / Rules
and Regulations

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AD06

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-66868; File No. S7-39-10]
RIN 3235-AK65

Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant''

AGENCY: Commodity Futures Trading Commission; Securities and Exchange
Commission.

ACTION: Joint final rule; joint interim final rule; interpretations.

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SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (``Dodd-Frank Act''), the Commodity
Futures Trading Commission (``CFTC'') and the Securities and Exchange
Commission (``SEC'') (collectively, the ``Commissions''), in
consultation with the Board of Governors of the Federal Reserve System
(``Board''), are adopting new rules and interpretive guidance under the
Commodity Exchange Act (``CEA''), and the Securities Exchange Act of
1934 (``Exchange Act''), to further define the terms ``swap dealer,''
``security-based swap dealer,'' ``major swap participant,'' ``major
security-based swap participant,'' and ``eligible contract
participant.''

DATES: Effective date. The effective date for this joint final rule and
joint interim final rule: July 23, 2012, except for CFTC regulations at
17 CFR 1.3(m)(5) and (6), which are effective December 31, 2012.
    Comment date. The comment period for the interim final rule (CFTC
regulation at 17 CFR 1.3(ggg)(6)(iii)) will close July 23, 2012.
    Compliance date. Compliance with the element of the CFTC regulation
at 17 CFR 1.3(m)(8)(iii) requiring that a commodity pool be formed by a
registered CPO shall be required with respect to a commodity pool
formed on or after December 31, 2012 for any person seeking to rely on
such regulation; compliance with such element shall not be required
with respect to a commodity pool formed prior to December 31, 2012.

FOR FURTHER INFORMATION CONTACT:
    CFTC: Jeffrey P. Burns, Assistant General Counsel, at 202- 418-
5101<EMAIL_ADDRESS>Mark Fajfar, Assistant General Counsel, at 202-
418-6636<EMAIL_ADDRESS>Julian E. Hammar, Assistant General
Counsel, at<PHONE_NUMBER><EMAIL_ADDRESS>or David E. Aron, Counsel,
at<PHONE_NUMBER><EMAIL_ADDRESS>Office of General Counsel; Gary
Barnett, Director, at<PHONE_NUMBER><EMAIL_ADDRESS>or Frank
Fisanich, Deputy Director, at<PHONE_NUMBER><EMAIL_ADDRESS>
Division of Swap Dealer and Intermediary Oversight,Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,
Washington, DC 20581;
    SEC: Joshua Kans, Senior Special Counsel, Richard Grant, Special
Counsel, or Richard Gabbert, Attorney Advisor, at<PHONE_NUMBER>,
Division of Trading and Markets, Securities and Exchange Commission,
100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act into
law.\1\ Title VII of the Dodd-Frank Act established a statutory
framework to reduce risk, increase transparency, and promote market
integrity within the financial system by, among other things: (i)
providing for the registration and regulation of swap dealers and major
swap participants; (ii) imposing clearing and trade execution
requirements on standardized derivative products; (iii) creating
recordkeeping and real-time reporting regimes; and (iv) enhancing the
Commissions' rulemaking and enforcement authorities with respect to all
registered entities and intermediaries subject to the Commissions'
oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
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    The Dodd-Frank Act particularly provides that the CFTC will
regulate ``swaps,'' and that the SEC will regulate ``security-based
swaps.'' The Dodd-Frank Act also adds definitions of the terms ``swap
dealer,'' ``security-based swap dealer,'' ``major swap participant,''
``major security-based swap participant'' and ``eligible contract
participant'' to the CEA and Exchange Act.\2\ Section 712(d)(1) of the
Dodd-Frank Act further directs the CFTC and the SEC, in consultation
with the Board, jointly to further define those terms, among others.\3\
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    \2\ See Dodd-Frank Act sections 721 and 761. Sections 721(b)(2)
and 761(b)(2) also provide that the CFTC and SEC may by rule further
define any other term included in an amendment made by Title VII to
the CEA or the Exchange Act, respectively.
    \3\ In addition, section 712(d)(1) directs the CFTC and SEC, in
consultation with the Board, jointly to further define the terms
``swap,'' ``security-based swap,'' and ``security-based swap
agreement.'' These further definitions are the subject of a separate
rulemaking by the Commissions. See CFTC and SEC, Notice of Proposed
Joint Rulemaking, Further Definition of ``Swap,'' ``Security-Based
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 76 FR 29818 (May 23,
2011) (``Product Definitions Proposal''). Section 712(d)(2)(A), in
turn, provides that the Commissions shall jointly adopt such other
rules regarding the definitions set forth in section 712(d)(1) as
they ``determine are necessary and appropriate, in the public
interest, and for the protection of investors.''
    In addition, section 721(c) of the Dodd-Frank Act requires the
CFTC to adopt a rule to further define the terms ``swap dealer,''
``major swap participant,'' and ``eligible contract participant''
for the purpose of including transactions and entities that have
been structured to evade Title VII. Also, section 761(b) of the
Dodd-Frank Act permits the SEC to adopt a rule to further define the
terms ``security-based swap dealer,'' ``major security-based swap
participant,'' and ``eligible contract participant,'' with regard to
security-based swaps, for the purpose of including transactions and
entities that have been structured to evade Title VII.
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    In December 2010, the Commissions proposed rules and
interpretations to further define the meaning of the terms ``swap
dealer,'' ``security-based swap dealer,'' ``major swap participant,''
``major security-based swap participant,'' and ``eligible contract
participant.'' \4\ The Commissions received approximately 968 written
comments in response to the Proposing Release.\5\ In addition, the
Staffs of the Commissions participated in approximately 114 meetings
with market participants and other members of the public about the
Proposing Release,\6\ and the Commissions held a

Joint Public Roundtable on the proposed dealer and major participant
definitions.\7\ After considering the comments received, the
Commissions are adopting final rules and interpretations to further
define these terms.
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    \4\ See CFTC and SEC, Notice of Proposed Joint Rulemaking:
Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' Securities
Exchange Act Release No. 63452, 75 FR 80174 (Dec. 21, 2010)
(``Proposing Release'').
    Prior to issuing the Proposing Release, the Commissions issued a
joint Advance Notice of Proposed Rulemaking (``ANPRM'') requesting
public comment regarding the definitions of the terms ``swap,''
``security-based swap,'' ``security-based swap agreement,'' ``swap
dealer,'' ``security-based swap dealer,'' ``major swap
participant,'' ``major security-based swap participant,'' and
``eligible contract participant.'' See CFTC and SEC, Advance Notice
of Proposed Joint Rulemaking: Definitions Contained in Title VII of
Dodd-Frank Wall Street Reform and Consumer Protection Act,
Securities Exchange Act Release No. 62717, 75 FR 51429 (Aug. 20,
2010). The Proposing Release and these final rules both reflect
comments received in response to the ANPRM.
    \5\ Comment letters received in response to the Proposing
Release may be found on the Commissions' Web sites at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=933 and at
http://www.sec.gov/comments/s7-39-10/s73910.shtml.
    \6\ Summaries of these staff meetings may be found on the
Commissions' Web sites at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_2_Definitions/index.htm and http://www.sec.gov/comments/s7-39-10/s73910.shtml#meetings.
    \7\ A transcript of the roundtable discussion and public
comments received with respect to the roundtable may be found on the
CFTC's Web site at http://www.cftc.gov/PressRoom/Events/opaevent_cftcsecstaff061611.
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II. Definitions of ``Swap Dealer'' and ``Security-Based Swap Dealer''

    The Dodd-Frank Act definitions of the terms ``swap dealer'' and
``security-based swap dealer'' focus on whether a person engages in
particular types of activities involving swaps or security-based
swaps.\8\ Persons that meet either of those definitions are subject to
statutory requirements related to, among other things, registration,
margin, capital and business conduct.\9\
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    \8\ See section 721 of the Dodd-Frank Act (adding Section 1a(49)
of the CEA, 7 U.S.C. 1a(49), to define ``swap dealer'') and section
761 of the Dodd-Frank Act (adding Section 3(a)(71) of the Exchange
Act, 15 U.S.C. 78c(a)(71), to define ``security-based swap
dealer'').
    \9\ The Dodd-Frank Act excludes from the Exchange Act definition
of ``dealer'' persons who engage in security-based swaps with
eligible contract participants. See section 3(a)(5) of the Exchange
Act, 15 U.S.C. 78c(a)(5), as amended by section 761(a)(1) of the
Dodd-Frank Act.
     The Dodd-Frank Act does not include comparable amendments for
persons who act as brokers in swaps and security-based swaps.
Because security-based swaps, as defined in section 3(a)(68) of the
Exchange Act, are included in the Exchange Act section 3(a)(10)
definition of ``security,'' persons who act as brokers in connection
with security-based swaps must, absent an exception or exemption,
register with the SEC as a broker pursuant to Exchange Act section
15(a), and comply with the Exchange Act's requirements applicable to
brokers.
     In mid-2011, the SEC issued temporary exemptions under the
Exchange Act in connection with the revision of the ``security''
definition to encompass security-based swaps. Among other aspects,
these temporary exemptions extended to certain broker activities
involving security-based swaps. See ``Order Granting Temporary
Exemptions under the Securities Exchange Act of 1934 in Connection
with the Pending Revision of the Definition of ``Security'' to
Encompass Security-Based Swaps, and Request for Comment,''
Securities Exchange Act Release No. 64795 (Jul. 1, 2011), 76 FR
39927, 39939 (Jul. 7, 2011) (addressing availability of exemption to
registration requirement for securities brokers).
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    The CEA and Exchange Act definitions in general encompass persons
that engage in any of the following types of activity:
    (i) Holding oneself out as a dealer in swaps or security-based
swaps,
    (ii) making a market in swaps or security-based swaps,
    (iii) regularly entering into swaps or security-based swaps with
counterparties as an ordinary course of business for one's own account,
or
    (iv) engaging in any activity causing oneself to be commonly known
in the trade as a dealer or market maker in swaps or security-based
swaps.\10\

    \10\ See CEA section 1a(49)(A), 7 U.S.C. 1a(49)(A); Exchange Act
section 3(a)(71)(A), 15 U.S.C. 78c(a)(71)(A).
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These dealer activities are enumerated in the CEA and Exchange Act in
the disjunctive, in that a person that engages in any one of these
activities is a swap dealer under the CEA or security-based swap dealer
under the Exchange Act, even if such person does not engage in one or
more of the other identified activities.

    At the same time, the statutory dealer definitions provide
exceptions for a person that enters into swaps or security-based swaps
for the person's own account, either individually or in a fiduciary
capacity, but not as a part of a ``regular business.'' \11\ The Dodd-
Frank Act also instructs the Commissions to exempt from designation as
a dealer a person that ``engages in a de minimis quantity of [swap or
security-based swap] dealing in connection with transactions with or on
behalf of its customers.'' \12\ Moreover, the definition of ``swap
dealer'' (but not the definition of ``security-based swap dealer'')
provides that an insured depository institution is not to be considered
a swap dealer ``to the extent it offers to enter into a swap with a
customer in connection with originating a loan with that customer.''
\13\ The statutory definitions further provide that a person may be
designated as a dealer for one or more types, classes or categories of
swaps or security-based swaps, or activities without being designated a
dealer for other types, classes or categories or activities.\14\
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    \11\ See CEA section 1a(49)(C), 7 U.S.C. 1a(49)(C); Exchange Act
section 3(a)(71)(C), 15 U.S.C. 78c(a)(71)(C).
    \12\ See 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).
    \13\ See CEA section 1a(49)(A), 7 U.S.C. 1a(49)(A).
    \14\ See CEA section 1a(49)(B), 7 U.S.C. 1a(49)(B); Exchange Act
section 3(a)(71)(B), 15 U.S.C. 78c(a)(71)(B).
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    In the Proposing Release, the Commissions proposed rules to
identify the activity that would cause a person to be a dealer,\15\ to
implement the exception for de minimis dealing activity,\16\ to
implement the exception from the swap dealer definition in connection
with the origination of loans by insured depository institutions,\17\
and to provide for the limited purpose designation of dealers.\18\ The
release also set forth proposed interpretive guidance related to the
definitions.
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    \15\ See proposed CFTC Regulation Sec.  1.3(ggg)(1); proposed
Exchange Act rule 3a71-1(a), (b).
    \16\ See proposed CFTC Regulation Sec.  1.3(ggg)(4); proposed
Exchange Act rule 3a71-2.
    \17\ See proposed CFTC Regulation Sec.  1.3(ggg)(5).
    \18\ See proposed CFTC Regulation Sec.  1.3(ggg)(3); proposed
Exchange Act rule 3a71-1(c).
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    After considering the comments received, the Commissions are
adopting final rules and interpretations to further define the terms
``swap dealer'' and ``security-based swap dealer.'' In this Adopting
Release, we particularly address: (i) The general analysis for
identifying dealing activity involving swaps and security-based swaps;
(ii) the exclusion from the ``swap dealer'' definition in connection
with the origination of loans by insured depository institutions; (iii)
the application of the dealer analysis to inter-affiliate swaps and
security-based swaps; (iv) the application of the de minimis exception
from the dealer definitions; and (v) the limited designation of swap
dealers and security-based swap dealers.

A. General Considerations for the Dealer Analysis

1. Proposed Approach
    The proposed rules to define the activities that would lead a
person to be a ``swap dealer'' and ``security-based swap dealer'' were
based closely on the corresponding language of the statutory
definitions.\19\ The Proposing Release further noted that the Dodd-
Frank Act defined the terms ``swap dealer'' and ``security-based swap
dealer'' in a functional manner, and stated that those statutory
definitions should not be interpreted in a constrained, overly
technical or rigid manner, particularly given the diversity of the swap
and security-based swap markets. The Proposing Release also identified
potential distinguishing characteristics of swap dealers and security-
based swap dealers based on the functional role that dealers fulfill in
the swap and security-based swap markets, such as: dealers tend to
accommodate demand from other parties; dealers generally are available
to enter into swaps or security-based swaps to facilitate other
parties' interest; dealers tend not to request that other parties
propose the terms of swaps or security-based swaps, but instead tend to
enter into those instruments on their own standard terms or on terms
they arrange in response to other parties' interest; and dealers tend
to be able to arrange customized terms for

swaps or security-based swaps upon request, or to create new types of
swaps or security-based swaps at the dealer's own initiative.\20\
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    \19\ See CFTC Regulation Sec.  1.3(ggg); Exchange Act rule 3a71-
1(a), (b).
    \20\ Proposing Release, 75 FR at 80176.
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    The proposal recognized that the principles for identifying dealing
activity involving swaps can differ from principles for identifying
dealing activity involving security-based swaps, in part due to
differences in how those instruments are used.\21\
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    \21\ Id.
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a. ``Swap Dealer'' Activity
    Consistent with the statutory definition, the proposed rule stated
that the term ``swap dealer'' includes a person that ``regularly enters
into swaps with counterparties as an ordinary course of business for
its own account,'' but also that ``the term swap dealer does not
include a person that enters into swaps for such person's own account,
either individually or in a fiduciary capacity, but not as a part of a
regular business.'' The Proposing Release stated that these two
provisions should be read in combination with each other, and explained
that the difference between the two provisions is whether or not the
person enters into swaps as a part of, or as an ordinary course of, a
``regular business.'' Thus, the Proposing Release equated the phrases
``ordinary course of business'' and ``regular business.'' The Proposing
Release also stated that persons who enter into swaps as a part of a
``regular business'' are those persons whose function is to accommodate
demand for swaps from other parties and enter into swaps in response to
interest expressed by other parties. Such persons would be swap
dealers.\22\ Conversely, the Proposing Release said that persons who do
not fulfill this function in connection with swaps should not be deemed
to enter into swaps as part of a ``regular business,'' and thus would
not likely be swap dealers.\23\
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    \22\ In addition, the Proposing Release explained that (in
general, and not specifically limited to the provisions relating to
entering into swaps as part of a ``regular business'') the proposed
swap dealer definition does not depend on whether a person's
activity as a swap dealer is the person's sole or predominant
business (other than through the de minimis exception discussed
below).
    \23\ See Proposing Release, 75 FR at 80177.
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    In addition, the Proposing Release noted that the nature of swaps
precludes importing concepts used to identify dealers in other areas.
The Proposing Release explained that because swaps are typically not
bought and sold, concepts such as whether a person buys and sells
swaps, makes a two-sided market in swaps, or trades within a bid/offer
spread cannot necessarily be used to determine if the person is a swap
dealer, even if such concepts are useful in determining whether a
person is a dealer in other financial instruments.\24\
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    \24\ See id. at 80176-77.
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    The Proposing Release further stated that swap dealers can be
identified through their relationships with counterparties, explaining
that swap dealers tend to enter into swaps with more counterparties
than do non-dealers, and in some markets, non-dealers tend to
constitute a large portion of swap dealers' counterparties. In
contrast, the Proposing Release said, non-dealers tend to enter into
swaps with swap dealers more often than with other non-dealers. The
Proposing Release noted that it is likely that swap dealers are
involved in most or all significant parts of the swap markets.\25\
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    \25\ See id. at 80177.
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    The Proposing Release concluded that this functional approach would
identify as swap dealers those persons whose function is to serve as
the points of connection in the swap markets. Thus, requiring
registration and compliance with the requirements of the Dodd-Frank Act
by such persons would thereby reduce risk and enhance operational
standards and fair dealing in those markets.\26\
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    \26\ See id.
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    The Proposing Release also noted that the swap markets are diverse
and encompass a wide variety of situations in which parties enter into
swaps with each other, and invited comment as to what aspects of the
parties' activities in particular situations should, or should not, be
considered swap dealing activities. Specifically, the Proposing Release
invited comment regarding persons who enter into swaps: (i) As
aggregators; (ii) as part of their participation in physical markets;
or (iii) in connection with the generation and transmission of
electricity.\27\
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    \27\ See id. at 80183-84.
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    First, regarding aggregators, the Proposing Release noted that some
persons, including certain cooperatives, enter into swaps with other
parties in order to aggregate the swap positions of the other parties
into a size that would be more amenable to entering into swaps in the
larger swap market. The Proposing Release explained that, for example,
certain cooperatives enter into swaps with smaller businesses because
the smaller business cannot establish a commodity position large enough
to be traded on a swap or futures market, or large enough to be of
interest to larger financial institutions. The Proposing Release said
that while such persons engage in activities that are similar in many
respects to those of a swap dealer, it may be that the swap dealing
activities of these aggregators would not exceed the de minimis
threshold, and therefore they would not be swap dealers. The CFTC
requested comment as to how the de minimis threshold would apply to
such persons, and in general on the application of the swap dealer
definition to this activity. The Proposing Release also noted that the
CFTC was engaged in a separate rulemaking pursuant to section
723(c)(3)(B) of the Dodd-Frank Act regarding swaps in agricultural
commodities, and requested comment on the application of the swap
dealer definition to dealers, including potentially agricultural
cooperatives, that limit their dealing activity primarily to swaps in
agricultural commodities.\28\
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    \28\ After publication of the Proposing Release, the CFTC
adopted a final rule on agricultural swaps under which swaps in
agricultural commodities will be permitted to transact subject to
the same rules as all other swaps. See Agricultural Swaps; Final
Rule, 76 FR 49291 (Aug. 10, 2011).
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    Second, the Proposing Release noted that the markets in physical
commodities such as oil, natural gas, chemicals and metals have
developed highly customized transactions, some of which would be
encompassed by the statutory definition of the term ``swap,'' and that
some participants in these markets engage in swap dealing activities
that are above the proposed de minimis threshold. The CFTC invited
comment as to any different or additional factors that should be
considered in applying the swap dealer definition to participants in
these markets.
    Third, the Proposing Release noted a number of complexities that
arise when applying the swap dealer definition in connection with the
generation and transmission of electricity. In particular, the
Proposing Release noted that additional complexity results because
electricity is generated, transmitted and used on a continuous, real-
time basis, and because the number and variety of participants in the
electricity market is very large, and some electricity services are
provided as a public good rather than for profit. The CFTC invited
comment as to any different or additional factors that should be
considered in applying the swap dealer definition to participants in
the generation and transmission of electricity. Specifically, the CFTC
invited comment on whether there are special considerations, including
without limitation special considerations arising from section

201(f) of the Federal Power Act,\29\ related to not-for-profit power
systems such as rural electric cooperatives and entities operating as
political subdivisions of a state and on the applicability of the
exemptive authority in section 722(f) of the Dodd-Frank Act to address
those considerations.
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    \29\ 16 U.S.C. 824(f).
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b. ``Security-Based Swap Dealer'' Activity
    The Proposing Release noted the parallels between the definition of
``security-based swap dealer'' and the definition of ``dealer'' under
the Exchange Act,\30\ as well as the fact that security-based swaps may
be used to hedge risks associated with owning certain types of
securities or to gain economic exposure akin to ownership of certain
types of securities. As a result, the Proposing Release took the view
that the same factors that are relevant to determining whether a person
is a ``dealer'' under the Exchange Act also are generally relevant to
the analysis of whether a person is a security-based swap dealer. The
Proposing Release also addressed the relevance of the ``dealer-trader''
distinction for identifying dealing activity involving security-based
swaps,\31\ while recognizing that certain concepts associated with the
dealer-trader distinction--particularly concepts involving ``turnover
of inventory'' and ``regular place of business''--appeared potentially
less applicable to the security-based swap dealer definition. In
addition, the Proposing Release noted that under the dealer-trader
distinction, we would expect that entities that use security-based
swaps to hedge business risks, absent other activities, likely would
not be dealers.\32\
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    \30\ See Exchange Act sections 3(a)(5)(A), (B), 15 U.S.C.
78c(a)(5)(A), (B), as amended by Section 761(a)(1) of the Dodd-Frank
Act.
    \31\ The Proposing Release referred to the fact that the SEC
previously has noted that the dealer-trader distinction:
``recognizes that dealers normally have a regular clientele, hold
themselves out as buying or selling securities at a regular place of
business, have a regular turnover of inventory (or participate in
the sale or distribution of new issues, such as by acting as an
underwriter), and generally provide liquidity services in
transactions with investors (or, in the case of dealers who are
market makers, for other professionals).'' Proposing Release, 75 FR
at 80177 (citing Securities Exchange Act Release No. 47364 (Feb. 13,
2003) (footnotes omitted)). The Proposing Release further noted that
other non-exclusive factors that are relevant for distinguishing
between dealers and non-dealers can include receipt of customer
property and the furnishing of incidental advice in connection with
transactions. See id.
    \32\ See Proposing Release, 75 FR at 80177-78.
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c. Additional Principles Common to Both Definitions
i. ``Hold Themselves Out'' and ``Commonly Known in the Trade'' Tests
    The Proposing Release identified the following non-exclusive list
of factors as potentially indicating that a person meets the ``hold
themselves out'' and ``commonly known in the trade'' tests of the
statutory dealer definitions:
     Contacting potential counterparties to solicit interest in
swaps or security-based swaps;
     Developing new types of swaps or security-based swaps
(which may include financial products that contain swaps or security-
based swaps) and informing potential counterparties of the availability
of such swaps or security-based swaps and a willingness to enter into
such swaps or security-based swaps with the potential counterparties;
     Membership in a swap association in a category reserved
for dealers;
     Providing marketing materials (such as a Web site) that
describe the types of swaps or security-based swaps that one is willing
to enter into with other parties; or
     Generally expressing a willingness to offer or provide a
range of financial products that would include swaps or security-based
swaps.\33\
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    \33\ See id. at 80178.
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    The Proposing Release further stated that the test for being
``commonly known in the trade'' as a swap dealer or security-based swap
dealer may appropriately reflect, among other factors, the perspective
of persons with substantial experience with and knowledge of the swap
and security-based swap markets (regardless of whether a particular
entity is known as a dealer by persons without that experience or
knowledge). The Proposing Release also stated that holding oneself out
as a security-based swap dealer likely would encompass a person who is
a dealer in another type of security entering into a security-based
swap with a customer, as well as a person expressing its availability
to enter into security-based swaps, regardless of the direction of the
transaction or across a broad spectrum of risks.\34\
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    \34\ See id.
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ii. Market Making
    In addressing the statutory definitions' ``making a market'' test,
the Proposing Release noted that while continuous two-sided quotations
and a willingness to buy and sell a security are important indicators
of market making in the equities market, these indicia may not be
appropriate in the swap and security-based swap markets. The proposal
also noted that nothing in the statutory text or legislative history
suggested the intent to impute a ``continuous'' activity requirement to
the dealer definitions.\35\
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    \35\ See id.
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iii. No Predominance Test
    The Proposing Release further addressed whether a person should be
a dealer only if that activity is the person's sole or predominant
business, and took the view that such an approach was not consistent
with the statutory definition. The Proposing Release rejected this as
an unworkable test of dealer status because many parties that commonly
are acknowledged as dealers also engage in other businesses that
outweigh their swap or security-based swap dealing business in terms of
transaction volume or other measures.\36\
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    \36\ See id. at 80178-79.
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iv. Application to New Types of Wwaps and New Activities
    The Proposing Release noted that the Commissions intended to apply
the dealer definitions flexibly when the development of innovative
business models is accompanied by new types of dealer activity,
following a facts-and-circumstances approach.\37\
---------------------------------------------------------------------------

    \37\ See id. at 80179.
---------------------------------------------------------------------------

2. Commenters' Views
    Numerous commenters addressed the proposed rules and
interpretations in connection with the ``swap dealer'' and ``security-
based swap dealer'' definitions. Several commenters addressed
principles that are common to the two dealer definitions, while a
number of commenters also addressed interpretations in the Proposing
Release that were specific to the ``swap dealer'' definition.
a. ``Hold Themselves Out'' and ``Commonly Known in the Trade'' Tests
    Some commenters expressed the view that the persons that hold
themselves out as or are commonly known as dealers are easy to
identify.\38\ In addressing the ``hold themselves out'' and ``commonly
known'' criteria of the dealer definitions, commenters placed
particular focus on whether only dealers engage in the activities cited
by the

Proposing Release, or whether those activities are common both to
dealers and to other users of swaps and security-based swaps.
Commenters particularly stated that end users contact potential
counterparties,\39\ develop new types of swaps or security-based
swaps,\40\ and propose terms or language for swap or security-based
swap agreements.\41\ One commenter further stated that identifying
dealing activity based on whether a person develops new types of swaps
or proposes swap terms would discourage innovation and the free
negotiation of swaps.\42\ Some commenters stated that merely responding
to a request for proposals or quotations should not, in itself,
constitute dealing.\43\ Commenters also criticized the Proposing
Release's suggestion that criteria for identifying dealing activity
include membership in a dealer category of a trade association,\44\ as
well as providing marketing materials and offering a range of financial
products.\45\ Commenters also argued for more objective criteria for
identifying persons ``commonly known'' as dealers.\46\
---------------------------------------------------------------------------

    \38\ See transcript of Joint CFTC-SEC Staff Roundtable
Discussion on Proposed Dealer and Major Participant Definitions
Under Dodd-Frank Act, June 16, 2011 (``Roundtable Transcript'') at
22-23 (remarks of Ron Filler, New York Law School), 50-51 (remarks
of Ron Oppenheimer, Working Group of Commercial Energy Firms), 215
(remarks of Bella Sanevich, NISA Investment Advisors LLC).
    \39\ See letters from the Financial Services Roundtable
(``FSR'') dated February 22, 2011 (``FSR I''), the International
Swap Dealers Association (``ISDA'') dated February 22, 2011 (``ISDA
I'') and the Midsize Bank Coalition of America (``Midsize Banks'').
    \40\ See letters from the Committee on Capital Markets
Regulation (``CCMR'') dated February 22, 2011 (``CCMR I''), FSR I,
ISDA I and Midsize Banks.
    \41\ See letters from the BG Americas & Global LNG (``BG LNG'')
dated February 22, 2011 (``BG LNG I''), CCMR I, EDF Trading North
America, LLC (``EDF Trading'') and The Gavilon Group, LLC
(``Gavilon'') dated February 21, 2011 (``Gavilon II'').
    \42\ See letter from EDF Trading.
    \43\ See meeting with American Electric Power, Calpine
Corporation (``Calpine''), Constellation, DC Energy LLC (``DC
Energy''), Edison International (``Edison Int'l''), Exelon Corp.,
GenOn, Southern Company, Edison Electric Institute (``EEI'') and
Electric Power Supply Association (``ESPA'') (collectively
``Electric Companies'') on April 13, 2011.
    \44\ See letter from ISDA I and joint letter from National Corn
Growers Association (``NCGA'') and Natural Gas Supply Association
(``NGSA'') (``NCGA/NGSA'') dated February 22, 2011 (``NCGA/NGSA
I'').
    \45\ See letter from ISDA I.
    \46\ See letters from ISDA I and Peabody Energy Corporation
(``Peabody'').
---------------------------------------------------------------------------

    Conversely, one commenter said that three particular activities
cited in the Proposing Release--membership in a swap association
category reserved for dealers, providing marketing materials and
expressing a willingness to offer a range of financial products--are
indicative of holding oneself out as a dealer or being commonly known
in the trade as a dealer, and should be codified in the final rule.\47\
Another commenter suggested other factors, such as having a derivatives
sales team, that should be treated as indicators of dealer
activity.\48\ Commenters also expressed the view that this aspect of
the dealer definition should focus on whether a person solicits
expressions of interest in swaps from a range of market
participants,\49\ and that end users of swaps can actively seek out and
negotiate swaps without necessarily being swap dealers.\50\
---------------------------------------------------------------------------

    \47\ See letter from FSR I.
    \48\ See meeting with Vitol, Inc. (``Vitol'') on February 16,
2011.
    \49\ See letter from Midsize Banks.
    \50\ See letter from EDF Trading.
---------------------------------------------------------------------------

b. Market Making
    Several commenters generally requested that the Commissions provide
more guidance as to which activities constitute making a market in
swaps or security-based swaps.\51\ Commenters also described various
activities as indicating, or not indicating, market making activity.
For example, two commenters expressed the view that market making is
characterized by entering into swaps on one side of the market and then
establishing offsetting positions on the other side of the market.\52\
Other commenters equated market making to providing liquidity by
regularly quoting bid and offer prices for swaps, and standing ready to
enter into swaps.\53\ One commenter stated that market making activity
is indicated by a person consistently presenting itself as willing to
take either side of a trade.\54\ Two commenters said that market makers
receive tangible benefits (such as reduced trading fees) in return for
the obligation to transact when liquidity is required.\55\
---------------------------------------------------------------------------

    \51\ See joint letter from American Benefits Council and the
Committee on Investment of Employee Benefits Assets (``ABC/CIEBA'')
and letters from FSR I.
    \52\ See letters from DC Energy and FSR I.
    \53\ See letters from Edison Int'l, NextEra Energy Resources,
LLC (``NextEra'') dated February 22, 2011 (``NextEra I'') and Vitol,
and joint letter from American Electric Power, Edison Int'l, Exelon
Corp., and Southern Company (``Utility Group'').
    \54\ See letter from ISDA I.
    \55\ See joint letter from EEI and EPSA (``EEI/EPSA'') and
letter from Vitol.
---------------------------------------------------------------------------

    In contrast, one commenter said the proposal correctly did not
limit market making to consistently quoting a two-sided market, because
to do so would insert a loophole into the definition.\56\ Some
commenters expressed the view that mere active participation in a
market or entering into swaps on both sides of a market does not
necessarily constitute market making.\57\ Others said that occasionally
quoting prices on both sides of the market is not market making when
done to obtain information about the market or to mask one's view of
the market.\58\ One commenter stated that futures commission merchants
(``FCMs'') and broker-dealers that facilitate customers' entering into
swaps are not necessarily market makers.\59\ Other commenters urged the
Commissions to reject the view that market making requires continuous
activity.\60\
---------------------------------------------------------------------------

    \56\ See letter from Americans for Financial Reform (``AFR'').
    \57\ See letters from ABC/CIEBA, Managed Funds Association
(``MFA'') dated February 22, 2011 (``MFA I''), and Vitol.
    \58\ See letters from NextEra Iand Vitol.
    \59\ See letter from Newedge USA LLC (``Newedge''); see also
Roundtable Transcript at 39 (remarks of Eric Chern, Chicago Trading
Company).
    \60\ See letters from American Federation of State, County and
Municipal Employees (``AFSCME''), and FSR I.
---------------------------------------------------------------------------

    A number of commenters addressed the issue of how the dealer
definitions should treat swaps or security-based swaps entered into on
a trading platform such as a designated contract market (``DCM''),
national securities exchange, swap execution facility (``SEF''), or
security-based SEF (collectively referred to herein as
``exchanges'').\61\ Several stated that entering into swaps or
security-based swaps on exchanges should not be considered in
determining if a person is a dealer.\62\ Some of these commenters
emphasized the fact that parties would not know the identity of the
counterparty to the swap executed on an exchange (i.e., such swaps are
``anonymous''),\63\ while other commenters said that such swaps do not
constitute ``accommodating demand'' for swaps or ``facilitating
interest'' in swaps.\64\ Another commenter said that future means of
executing swaps on exchanges are likely to be diverse, and it is
premature to draw conclusions

about how they should be treated in the dealer definitions.\65\
---------------------------------------------------------------------------

    \61\ While some of these commenters specially addressed this
issue in the context of whether a person is a market maker in swaps,
others more generally addressed the issue in terms of whether a
person is a dealer. For clarity, all of those comments are being
addressed in the market maker context.
    \62\ See letters from EEI/EPSA, International Energy Credit
Association (``IECA-Credit'') dated February 22, 2011 (``IECA-Credit
I''), and NextEra I, joint letter from Shell Trading (US) Company
and Shell Energy North America (US), L.P. (``Shell Trading'') dated
February 22, 2011 (``Shell Trading I''), and joint letter from
Allston Trading, LLC, Atlantic Trading USA LLC, Bluefin Trading LLC,
Chopper Trading LLC, DRW Holdings, LLC, Eagle Seven, LLC, Endeavor
Trading, LLC, Geneva Trading USA, LLC, GETCO, Hard Eight Futures,
LLC, HTG Capital Partners, IMC Financial Markets, Infinium Capital
Management LLC, Kottke Associates, LLC, Liger Investments Limited,
Marquette Partners, LP, Nico Holdings LLC, Optiver US, Quantlab
Financial, LLC, RGM Advisors, LLC, Tibra Trading America LLC,
Traditum Group LLC, WH Trading and XR Trading LLC (``Traders
Coalition'').
    \63\ See letters from Shell Trading I and Traders Coalition.
    \64\ See letters from EEI/EPSA, IECA-Credit I, and NextEra I.
For further discussion of this issue, see parts II.A.4 and II.A.5
below.
    \65\ See letter from Metropolitan Life Insurance Company
(``MetLife'').
---------------------------------------------------------------------------

    Two commenters asserted that firms that provide liquidity in
cleared and exchange-executed swaps by actively participating in the
market provide heterogeneity among liquidity providers and thereby
disperse risk, and further stated that to regulate such persons as swap
dealers subject to increased capital requirements would discourage
their participation in the market and increase risk.\66\
---------------------------------------------------------------------------

    \66\ See letters from Newedge and Traders Coalition; Roundtable
Transcript at 39 (remarks of Eric Chern, Chicago Trading Company).
---------------------------------------------------------------------------

    One commenter expressed the view that the statutory definition uses
dealing and market making interchangeably, and suggested that the
analysis of whether a person acts as a dealer should be subsumed within
the analysis of whether it acts as a market maker.\67\
---------------------------------------------------------------------------

    \67\ See letter from ISDA I.
---------------------------------------------------------------------------

c. Exception for Activities Not Part of a ``Regular Business''
    Several commenters addressed the exception from the dealer
definitions for swap or security-based swap activities that are not
part of a ``regular business.'' Some commenters supported the
Commissions' proposed interpretation in the context of the ``swap
dealer'' definition and stated that this interpretation should be
codified in the text of the final rule.\68\
---------------------------------------------------------------------------

    \68\ See letters from FSR I, MFA I and Midsize Banks.
---------------------------------------------------------------------------

    Many commenters said that the activity of entering into swaps or
security-based swaps should not be deemed to be a ``regular business,''
and thus not indicative of dealing activity, when the person's use of
swaps or security-based swaps are ancillary to, or in connection with,
a separate non-swap business that is the person's primary business.\69\
Some commenters making this point said that when the person's primary
business relates to physical commodities, the person's use of swaps
relating to those commodities does not constitute a ``regular
business.'' \70\ Other commenters stated that where a person enters
into swaps to serve its own business needs, as opposed to serving the
business needs of the counterparty, the person's use of swaps does not
constitute a ``regular business.'' \71\ Other commenters said that the
use of swaps to hedge the commercial risks of a business does not
constitute a ``regular business'' of entering into swaps.\72\ Some
commenters also suggested that the ``regular business'' exclusion
should be interpreted to mean ``regular swap dealing business'' or
``regular security-based swap dealing business'' to prevent the dealer
definitions from capturing hedgers.\73\
---------------------------------------------------------------------------

    \69\ See Roundtable Transcript at 88 (remarks of Steve Walton,
Bank of Oklahoma).
    \70\ See letters from Atmos Energy Corporation (``Atmos
Energy''), Dominion Resources, Inc. (``Dominion Resources''), EDF
Trading, Edison Int'l, EEI/EPSA, Gavilon II, Hess Corporation and
its affiliates (``Hess''), Mississippi Public Utility Staff, NextEra
I, National Milk Producers Federation (``NMPF''), Shell Trading I,
Utility Group and Working Group of Commercial Energy Firms
(``WGCEF'') on the swap dealer definition dated February 22, 2011
(``WGCEF I''), and meeting with Bunge on February 23, 2011.
    \71\ See letters from BT Pension Scheme Management Limited
(``BTPS''), EDF Trading, EEI/EPSA and Vitol.
    \72\ See letters from American Petroleum Institute (``API'')
dated February 22, 2011 (``API I''), Calpine, Coalition of Physical
Energy Companies (``COPE'') dated February 22, 2011 (``COPE I''),
Dominion Resources, EDF Trading, Edison Int'l and Peabody; see also
Roundtable Transcript at 45 (remarks of Ed Prosser, Gavilon) and
letter from Church Alliance. In addition, three commenters said that
the interpretation of the provisions relating to a ``regular
business'' in the Proposing Release is correct, because it will
exclude from the definition of swap dealer those persons using swaps
to hedge commercial risk. See letters from Air Transport Association
of America, Inc. (``ATAA''), IECA-Credit I and joint letter from
Petroleum Marketers Association of America and New England Fuel
Institute.
    \73\ See letters from Church Alliance and Peabody.
---------------------------------------------------------------------------

    On the other hand, two commenters said that the proposed
interpretation was correct in the view that the test of whether a
person has a ``regular business'' of entering into swaps does not
necessarily depend on whether a person's swap activities are a
predominant activity, because such an approach would allow a person to
engage in a significant level of swap dealing activity without
registering as a swap dealer simply because the person also has
substantial activities in a non-swap business or businesses.\74\
---------------------------------------------------------------------------

    \74\ See letters from AFR and Better Markets, Inc. (``Better
Markets'') dated February 22, 2011 (``Better Markets I'').
---------------------------------------------------------------------------

    Other commenters suggested that the types of swap activities that a
person engages in are relevant to determining whether the person has a
``regular business'' of entering into swaps. One commenter stated that
a person has a ``regular business'' of entering into swaps when the
person has a primary business of accommodating demand or facilitating
interest in swaps,\75\ while others similarly emphasized that a
``regular business'' of entering into swaps is characterized by
financial intermediation activities.\76\ One commenter took the view
that a person that enters into swaps primarily with financial
intermediaries does not have a ``regular business'' of entering into
swaps.\77\
---------------------------------------------------------------------------

    \75\ See letter from IECA-Credit I.
    \76\ See letter from NextEra I and Shell Trading I. Another
commenter disagreed with this approach, however, saying that a
person who enters into swaps as an intermediary between smaller
customers and larger financial institutions is not entering into
swaps for its ``own account'' and therefore is not a swap dealer,
but rather would be an FCM or introducing broker. See letter from
MFX Solutions, Inc. (``MFX'') dated February 22, 2011 (``MFX I'').
    \77\ See letter from Traders Coalition.
---------------------------------------------------------------------------

    Some commenters said that the final rule should clarify the point
at which a person's episodic or occasional swap activities become a
``regular business'' of entering into swaps.\78\ Others stated that the
fact that a person enters into swaps frequently or with a large number
of counterparties does not necessarily mean that the person has a
``regular business'' of entering into swaps.\79\
---------------------------------------------------------------------------

    \78\ See letters from BG LNG I and WGCEF I.
    \79\ See letters from NCGA/NGSA I and Vitol. One of these
commenters asked that the final rule clarify that simply because a
person engages in swap activity exceeding the thresholds for the de
minimis exception from the swap dealer definition does not
necessarily mean that the person is engaged in a ``regular
business'' of swap dealing. See letter from Vitol.
---------------------------------------------------------------------------

    Commenters proposed specific tests for determining if a person has
a ``regular business'' of entering into swaps. One commenter said the
determination should look to whether a person enters into swaps to
accommodate demand from other parties and to profit from a bid/ask
spread on swaps (as opposed to swaps that are substitutes for physical
transactions or positions and used by at least one party to hedge
commercial risk), and consider specifically the volume, revenues and
profits of such activities, the person's value at risk (VaR) and
exposure from such activities, and its resources devoted to such
activities.\80\ Another commenter said that the determination should be
based on the nature of the person's business, the person's business
purpose for using swaps, and the person's method of executing swap
transactions (e.g., a person whose business primarily relates to
physical commodities, who uses swaps to hedge commercial risk, and who
executes swaps on an exchange would be less likely to have a ``regular
business'' of entering into swaps).\81\
---------------------------------------------------------------------------

    \80\ See letter from NextEra I; see also letter from Hess
(proposing similar criteria).
    \81\ See letter from Shell Trading I.
---------------------------------------------------------------------------

    One commenter argued that the ``regular business'' exception should
apply to all four of the dealer tests--not only the test for persons
that regularly enters into swaps or security-based swaps as an
``ordinary course of business''--and further argued that the ``regular
business'' exception should be linked to a ``two-way market'' base

requirement to avoid commercial hedgers being encompassed by the dealer
definitions.\82\
---------------------------------------------------------------------------

    \82\ See letter from ISDA dated I.
---------------------------------------------------------------------------

d. Other Dealer Issues
    Commenters also addressed other issues in the Proposing Release,
including: (i) Whether Congress intended that there be implicit
preconditions to dealer status; (ii) whether the concepts of
``accommodating demand'' for swaps or security-based swaps or
``facilitating interest'' in swaps are useful in identifying dealers;
and (iii) whether the interpretation of the dealer definitions should
depend on pre-defined, objective criteria.
i. Preconditions
    Several commenters said that the proposal is overbroad and would
encompass persons that Congress did not intend to regulate as
dealers.\83\ Comments in this vein said that the statutory definition
should be interpreted to require that persons meet certain criteria or
engage in certain activity, not explicitly stated in the statute, to be
covered by the swap dealer definition. For instance, some commenters
said that a dealer is a person who enters into swaps or security-based
swaps on either side of the market and who profits from fees for doing
so, or from the spread between the terms of swaps on either side of the
market.\84\ Other commenters made a similar point, saying that swap
dealers are those persons that intermediate between swap users on
either side of the market.\85\
---------------------------------------------------------------------------

    \83\ See, e.g., letters from BG LNG I, EDF Trading, ISDA I,
NCGA/NGSA dated February 17, 2012 (``NCGA/NGSA II'') and WGCEF I,
and joint letter from American Farm Bureau Federation, American
Soybean Association, National Association of Wheat Growers, National
Cattlemen's Beef Association, National Corn Growers Association,
National Council of Farmer Cooperatives, National Grain and Feed
Association, National Milk Producers Federation and National Pork
Producers Council (``Farmers' Associations'').
    \84\ See letters from COPE I, Edison Int'l, Hess, ISDA I, Shell
Trading I, Utility Group, Vitol and WGCEF I; see also Roundtable
Transcript at 43-45 (remarks of Ed Prosser, Gavilon). However, other
commenters questioned whether profiting from a bid/ask spread is a
relevant test of dealer status, and emphasized that dealers are
those persons who take risk by entering into swaps or security-based
swaps on both sides of the market. See Roundtable Transcript at 21,
56 (remarks of Richard Ostrander, Morgan Stanley) and 43 (remarks of
Russ Wasson, National Rural Electric Cooperative Association
(``NRECA'')). Another commenter pointed out that it could be
difficult to determine how a person is profiting from entering into
swaps. See Roundtable Transcript at 42 (remarks of Michael Masters,
Better Markets).
    \85\ See letters from API I, BG LNG I and NCGA/NGSA II.
---------------------------------------------------------------------------

    The commenters were not all in agreement on this, however. Several
commenters (including some of those that said swap dealers enter into
swaps on both sides of the market) also stated that there are a variety
of situations in which a person's activity of contemporaneously
entering into swaps on both sides of the market is not indicative of
dealing activity.\86\ One commenter said that it would not be
appropriate to require that a person enter into swaps or security-based
swaps on both sides of the market as a litmus test for dealer status,
because to do so would create loopholes in the definition.\87\ Two
commenters also supported rejection of any interpretation that would
limit the dealer definitions to encompass only those entities that
solely or predominately act as dealers.\88\
---------------------------------------------------------------------------

    \86\ The examples cited were: entering into swaps on either side
of a market depending on a firm's commercial purpose for entering
each particular swap (see letters from the Industrial Energy
Consumers of America (``IECA-Consumers'') and WGCEF I, and letter
from the Not-For-Profit Electric End User Coalition (``NFPEEU''),
consisting of NRECA, American Public Power Association (``APPA'')
and Large Public Power Council (``LPPC''); see also Roundtable
Transcript at 44 (remarks of Ed Prosser, Gavilon)); entering into
swaps on both sides of an illiquid market for purposes of price
discovery or to elicit bids and offers from other market
participants (see letters from Hess, Vitol and WGCEF I); and
entering into swaps on both sides of the market as part of an
investment strategy (see letter from ABC/CIEBA).
    \87\ See letter from AFR.
    \88\ See letters from AFR and Better Markets I.
---------------------------------------------------------------------------

    In addition, commenters were particularly divided as to whether
acting as an intermediary always is indicative of swap dealing, as some
commenters said that a person is not a swap dealer when it simply
stands between two parties by entering into offsetting swaps with each
party.\89\
---------------------------------------------------------------------------

    \89\ See letters from BOKF, National Association (``BOK'') dated
January 13, 2012 (``BOK V''), MFX I, Newedge and Northland Energy
Trading LLC (``Northland Energy''); see also Roundtable Transcript
at 48 (remarks of John Nicholas, Newedge). One commenter queried
whether the final rule should clarify whether a customer
relationship between the parties to a swap is necessary in order for
the swap to be relevant in determining whether either of the parties
is a swap dealer. See letter from Representative Scott Desjarlais
(``Rep. Desjarlais'').
---------------------------------------------------------------------------

ii. ``Accommodating Demand'' and ``Facilitating Interest''
    A number of commenters addressed the Proposing Release's view that
a tendency to accommodate demand for swaps and a general availability
to enter into swaps to facilitate other parties' interest in swaps
(referred to here as ``accommodating demand'' and ``facilitating
interest'') are characteristic of swap dealers. Some commenters stated
that accommodating demand and facilitating interest would not be
effective factors to identify swap dealers, particularly in bilateral
negotiations where it is difficult to say which party is accommodating
demand for swaps.\90\ Other commenters said the activities of
accommodating demand or facilitating interest are indicative of swap
dealing only in certain circumstances, such as when they are not
related to a person's commodity business,\91\ or when done with the
purpose of serving the needs of the other party to the swap.\92\ Some
commenters argued that the statement in the Proposing Release that swap
dealers are likely involved in most or all significant parts of the
swap markets is incorrect in the market for energy swaps. There, the
commenters said, persons can find counterparties for swaps without the
intermediation of a swap dealer, and swaps entered into directly by two
end users are more frequent.\93\
---------------------------------------------------------------------------

    \90\ See letters from NextEra I and Peabody and meeting with
Vitol on February 15, 2011.
    \91\ See letter from Shell Trading I.
    \92\ See letters from IECA-Credit I, National Association of
Insurance Commissioners (``NAIC''), Vitol and WGCEF I. One of these
commenters also said that entering into a bespoke swap with a
registered swap dealer, in which the swap dealer lays off risk,
should not be viewed as accommodating demand or facilitating
interest. See letter from Vitol.
    \93\ See letter from BG LNG I, NCGA/NGSA I, NFPEEU, NRG Energy,
Inc. (``NRG Energy'') and WGCEF I and meeting with Vitol on February
16, 2011.
---------------------------------------------------------------------------

    Other commenters, though, said that the proposal's focus on
accommodating demand and facilitating interest strikes the right
balance and that the proposed approach is generally correct.\94\
Another commenter did not object to including accommodating demand and
facilitating risk as factors in the definition, but said that those
factors should be applied flexibly.\95\
---------------------------------------------------------------------------

    \94\ See letters from AFR and MFX I.
    \95\ See letter from National Grain and Feed Association
(``NGFA'') dated February 22, 2011 (``NGFA I'').
---------------------------------------------------------------------------

iii. Application of Objective Criteria, and Additional Factors
    Some commenters, specifically addressing the CFTC's proposed
interpretive approach to the ``swap dealer'' definition, said that the
final rule should set out objective criteria that market participants
could use to determine whether or not they are covered by the
definition and therefore required to register as swap dealers.\96\

Others focused especially on statements in the Proposing Release to the
effect that swap dealers are those persons who ``tend to'' engage in
certain activities, and that persons who engage in certain activities
are ``likely'' to be swap dealers, as being overly subjective and
difficult to interpret.\97\
---------------------------------------------------------------------------

    \96\ See letters from BG LNG I, EEI/EPSA, Peabody, Rep.
Desjarlais and Utility Group. Some commenters said that the CFTC's
interpretive approach to the swap dealer definition should be
codified in the text of the final rule. See letters from Alternative
Investment Management Association Limited (``AIMA'') dated February
22, 2011 (``AIMA I'') and COPE I.
    \97\ See letters from BG LNG I, Chesapeake Energy Corporation
(``Chesapeake Energy''), COPE I, ISDA I, Vitol and WGCEF I. Some
commenters focused on particular aspects of the swap dealer
definition as requiring further detail, such as, for example, what
it means to be ``commonly known in the trade'' as a swap dealer (see
letter from Peabody) and the definition of market making (see
letters from Midsize Banks and Peabody).
---------------------------------------------------------------------------

    Certain commenters suggested specific objective criteria to use to
identify swap dealers. One commenter said that swap dealing activity is
characterized by more frequent use of swaps; having substantial staff
and technological resources devoted to swaps; a larger portion of
revenue and profit being derived from swap activity; and owning fewer
physical assets related to the type of swaps entered into.\98\ Another
commenter said that to identify swap dealers, the CFTC should compare a
person's revenue or profits generated by swap activity to its overall
revenue or profits; compare a person's total business volume to the
volume, VaR and exposure associated with the swap activity; compare a
person's total business resources to the resources devoted to swap
activity; and consider ownership or control of physical assets in the
specific market or region to which the person's swap activity is
tied.\99\
---------------------------------------------------------------------------

    \98\ See letter from Hess.
    \99\ See letter from NextEra I.
---------------------------------------------------------------------------

    More generally, some commenters supported codification of more
concrete tests in connection with the dealer definitions.\100\ However,
other commenters said that the use of bright line rules to determine
whether a person is a dealer would be inappropriate given the dynamic
nature of the swap and security-based swap markets. These commenters
supported a facts and circumstances approach to the dealer definition
as a better approach.\101\ One commenter also raised issues about the
sources of information that may be considered as part of a dealer
determination.\102\
---------------------------------------------------------------------------

    \100\ See, e.g., letters from EEI/EPSA, FSR I, ISDA I, NextEra I
and WGCEF I.
    \101\ See letters from Better Markets I, Chris Barnard
(``Barnard'') and Prof. Michael Greenberger, University of Maryland
School of Law (``Greenberger'').
    \102\ See letter from ISDA I (stating that sources of
information considered by the Commissions in determining dealer
status should be revealed to the entity being evaluated).
---------------------------------------------------------------------------

    e. Application of Exchange Act ``Dealer-Trader'' distinction
    i. Security-Based Swap Dealer Definition
    A number of commenters supported the proposed use of the dealer-
trader distinction under the Exchange Act to interpret the ``security-
based swap dealer'' definition.\103\ Two commenters, however,
specifically opposed use of the distinction in the context of security-
based swaps, arguing that use of the distinction would create confusion
or would be inconsistent with the goal of improved transparency.\104\
---------------------------------------------------------------------------

    \103\ See, e.g., letters from Coalition for Derivatives End-
Users (``CDEU''), CCMR I, ISDA I and MetLife.
    \104\ See letters from AFR and AFSCME.
---------------------------------------------------------------------------

    ii. Swap Dealer Definition
    Some commenters said that the CFTC should apply the dealer-trader
distinction as it has been interpreted with respect to the definition
of ``dealer'' under the Exchange Act to identify swap dealers.\105\
Some commenters said that the applicable interpretations under the
Exchange Act mean that swaps a person uses for proprietary trading
(including for speculative purposes) should not be considered in
determining if the person is a swap dealer because dealers enter into
transactions in order to profit from spreads or fees regardless of
their view of the market for the underlying item, whereas traders enter
into transactions in order to take a view on the direction of the
market or to obtain exposure to movements in the price of the
underlying item.\106\ Two commenters said that if the CFTC applied the
distinction, traders should be subject to potential registration as
major swap participants, and dealers should be subject to regulation as
swap dealers.\107\ Commenters acknowledged differences between the
market for swaps and the market for securities, but said that the
Exchange Act interpretations are still relevant.\108\
---------------------------------------------------------------------------

    \105\ Some of these commenters said that, since some provisions
in the statutory swap dealer definition are similar to the
definition of a ``dealer'' under the Exchange Act, Congress intended
that the two definitions would be applied in the same way. See
letters from API I, BG LNG I, CDEU, IECA-Consumers and WGCEF I.
Others said that the CFTC should apply these interpretations because
they have been effectively applied for a long time in the context of
securities. See letters from CCMR I and MFA I.
    \106\ See letters from Gavilon II, and Next Era I, and meetings
with Electric Companies on April 13, 2011 and WGCEF on April 28,
2011. Another commenter said the interpretations mean that dealers
and traders can be distinguished by their activities: dealers hold
themselves out as buying and selling on a regular basis, derive
income from providing services in the chain of distribution, and
profit from price spreads, while traders do not provide services or
extend credit but, rather, profit from changes in the market value
of underlying items. See letter from API I.
    \107\ See letters from EDF Trading and IECA-Consumers.
    \108\ See letters from API I, Gavilon I and IECA-Consumers.
---------------------------------------------------------------------------

    On the other hand, some commenters agreed with the CFTC's view not
to apply Exchange Act interpretations to the definition of the term
``swap dealer.'' These commenters said that it is appropriate not to
apply the interpretations under the Exchange Act to identify persons
that meet the swap dealer definition under the CEA.\109\
---------------------------------------------------------------------------

    \109\ See letters from AFR and AFSCME; see also joint meeting
with AFR and Better Markets on March 17, 2011 (dealer-trader
distinction not helpful in identifying swap dealers because the
transparency and operational robustness of the swap market is much
lower than in the securities market). One commenter said the
precedents should be applied only by the SEC to identify security-
based swap dealers. See letter from NAIC.
---------------------------------------------------------------------------

e. Application to Particular Swap Markets
i. Aggregators
    Certain commenters addressed persons who enter into swaps as
aggregators, with most of those commenters discussing agricultural
cooperatives. Commenters said that agricultural cooperatives that hedge
their own risks or the risks of their members regarding agricultural
commodities should be excluded from the swap dealer definition because
Congress did not intend to treat agricultural cooperatives as swap
dealers and because agricultural cooperatives are in effect an
extension of their members.\110\ Some commenters said that the
agricultural cooperatives' use of swaps allows their members to hedge
risks when the members' transactions are too small for (or otherwise
not qualified for) the futures markets.\111\
---------------------------------------------------------------------------

    \110\ See letters from Dairy Farmers of America (``DFA''),
Growmark, Land O'Lakes, Inc. (``Land O'Lakes'') dated February 22,
2011 (``Land O'Lakes II''), National Council of Farmer Cooperatives
(``NCFC'') dated February 22, 2011 (``NCFC I'') and NMPF. One
commenter also said that a subsidiary of an agricultural cooperative
that enters into swaps with its parent cooperative, and the members
of the parent cooperative, should be excluded from the swap dealer
definition for the same reason. See meeting with Agrivisor. Another
commenter said that an agricultural cooperative's swaps with farmers
and other persons for risk management should be disregarded in
determining if the cooperative is a swap dealer so long as the swaps
relate to the marketing function of the cooperative, even if the
swaps are not with members of the cooperative. See letter from NMPF.
    \111\ See letters from DFA and Growmark.
---------------------------------------------------------------------------

    Some commenters said that an exclusion from the swap dealer
definition also should be available to private companies that serve as
aggregators for swaps in agricultural commodities or otherwise offer
swaps

for agricultural risk management.\112\ These commenters said that such
an exclusion would reduce the costs and regulatory burdens imposed on
such companies and therefore provide a broader choice of swap providers
to farmers and other agricultural market participants, which they said
would reduce risks.\113\
---------------------------------------------------------------------------

    \112\ See letters from Farmers' Associations, NGFA I and NMPF.
    \113\ See id.
---------------------------------------------------------------------------

    One commenter discussed a small energy firm that aggregates demand
for swaps from small energy retailers and consumers. This commenter
said that such aggregators should be excluded from the swap dealer
definition because imposing the swap dealer regulations (which would be
promulgated with large financial firms in mind) on such firms would
increase costs for the aggregators, discourage the aggregators'
offering of swaps, and thereby reduce choice and efficiency in the
market.\114\ Another commenter said that a firm that enters into swaps
with microfinance lenders and offsetting swaps with commercial banks is
akin to an introducing broker or FCM, and should be excluded from the
swap dealer definition on the grounds that it does not enter into swaps
on its own initiative, but rather to provide access to the swap markets
to smaller counterparties.\115\
---------------------------------------------------------------------------

    \114\ See letter from Northland Energy. This commenter defined
an ``aggregator'' as a person who: (i) Enters into swaps
predominantly in one direction with counterparties that are using
swaps to establish bona fide hedges; and (ii) offsets risks
associated with such swaps using regulated futures contracts or
cleared swaps.
    \115\ See letter from MFX dated June 3, 2011 (``MFX II''). This
commenter said that the exclusion should be available to a person
who operates primarily on a not-for-profit basis and limits its swap
activities to offering swaps to persons in underserved markets and
offsetting such swaps, and who meets other requirements to limit the
scope of the exclusion.
---------------------------------------------------------------------------

    Another commenter said that there is no need for any special
treatment of aggregators in the swap dealer definition. According to
this commenter, the CFTC's guidance regarding the definition and the de
minimis exception from the definition address the relevant issues
properly and completely.\116\
---------------------------------------------------------------------------

    \116\ See letter from Better Markets I.
---------------------------------------------------------------------------

ii. Physical Commodity Swaps
    Commenters that discussed physical commodity swaps primarily
focused on swaps related to energy commodities such as oil, natural gas
and electricity. The commenters said that the market for these swaps is
different from the market for swaps on interest rates and other
financial commodities because, among other things, the swaps are used
to mitigate price and delivery risks directly linked to a commercial
enterprise; less swap activity flows through intermediaries; the
markets for the underlying physical commodities are separately
regulated; and the failure of a commodity market participant is not
likely to impact financial markets as a whole.\117\ Therefore, these
commenters believe, the application of the swap dealer definition to
participants in these physical commodity swap markets should be
different from the application to participants in the financial
commodity swap markets.\118\ Some commenters said that imposing the
costs of swap dealer regulation on participants in the markets for
physical commodity swaps would discourage participation in the market,
thereby reducing liquidity and increasing market concentration.\119\
---------------------------------------------------------------------------

    \117\ See letters from BG LNG I, Dominion Resources, National
Energy Marketers Association (``NEM''), NFPEEU, Vitol and WGCEF I
joint letter from Senator Debbie Stabenow and Representative Frank
Lucas (many commercial end-users of swaps with inherent physical
commodity price risk use swaps to hedge such risk and otherwise for
their own trading objectives and not for the benefit of others) and
meetings with Bunge on May 18, 2011 and Electric Companies on April
13, 2011.
    \118\ See id.
    \119\ See letters from Dominion Resources, NEM and NFPEEU.
---------------------------------------------------------------------------

iii. Electricity Swaps
    Commenters on the use of swaps in connection with the generation
and transmission of electricity addressed a variety of issues. First,
commenters said that markets related to electricity are different from
markets for other physical commodities in that electricity must be
generated and transmitted at the time it is needed (it cannot be stored
for future use); the overall demand for electricity is inelastic but
demand at any particular time is subject to external variables, such as
weather; the generation, transmission and use of electricity is widely
dispersed and geographically specific; the markets are overseen by
regulators such as state Public Utility Commissions, regional
transmission organizations (``RTOs'') and the Federal Energy Regulatory
Commission (``FERC''); and government mandates require continuous
supply of electricity and treat electricity as a ``public good.'' \120\
Commenters said that because of these differences, the use of swaps
related to electricity is different from the use of swaps on other
physical commodities in that electricity swaps: Are more highly
customized to a particular place and time; are more likely to relate to
a short time period or be more frequently entered into; typically can
be tied to a specific generation, transmission or use of electricity;
are more likely to be entered into directly by end-users rather than
through dealers; are likely to be entered into by electricity companies
on both sides of the market; and in many cases were subject to
regulatory oversight prior to the Dodd-Frank Act.\121\
---------------------------------------------------------------------------

    \120\ See letters from Edison Int'l, the staff of the FERC
(``FERC Staff''), National Association of Regulatory Utility
Commissioners (``NARUC''), NEM, NextEra I, NFPEEU and National Rural
Utilities Cooperative Finance Corporation (``NRU CFC'') dated
February 14, 2011 (``NRU CFC I''), joint letter from NRECA, APPA,
LPPC, EEI and EPSA (``Electric Trade Associations'') and meetings
with Electric Companies on April 13, 2011 and NFPEEU on January 29,
2011.
    \121\ See letters from Edison Int'l, EEI/EPSA, Electric Trade
Associations, FERC Staff, NextEra I and NFPEEU and meeting with
Electric Companies on April 13, 2011.
---------------------------------------------------------------------------

    Commenters made various points regarding how swaps related to
electricity should be treated for purposes of the swap dealer
definition. A coalition of not-for-profit power utilities and electric
cooperatives said that electricity cooperatives should be excluded from
the swap dealer definition because they are non-profit entities that
enter into swaps for the benefit of their members, they do not hold
themselves out as swap dealers, they do not make markets, and their
swaps are not necessarily reflective of market rates.\122\ Other
commenters said that swaps related to transactions on tariff schedules
approved by FERC or the Electric Reliability Council of Texas should be
disregarded in determining if a person is a swap dealer.\123\ And, some
commenters said that any special treatment of swaps related to
electricity should apply not only to companies that generate, transmit
or distribute electricity, but also to energy marketing companies that
use swaps to benefit from price changes in the underlying energy
commodities or to hedge related risks.\124\
---------------------------------------------------------------------------

    \122\ See letter from NFPEEU. This commenter said the exclusion
from the swap dealer definition should extend to persons acting as
an operating or purchasing agent for other utilities in connection
with energy infrastructure products, or otherwise entering into
energy commodity swaps on behalf of other end users.
    \123\ See letters from EDF Trading, FERC Staff and NARUC.
    \124\ See letters from DC Energy, EDF Trading and EEI/EPSA.
---------------------------------------------------------------------------

    On the other hand, some commenters acknowledged that a person who
makes a market in swaps related to electricity by standing ready to
enter into such swaps in order to profit from a bid/ask spread would be
a swap dealer, even if the person was in the business of generating,
transmitting or distributing

electricity and owned physical facilities for that purpose.\125\
---------------------------------------------------------------------------

    \125\ See letter from EEI/EPSA and meeting with Electric
Companies on April 13, 2011.
---------------------------------------------------------------------------

f. Suggested Exlusions From the Dealer Definitions
    Several commenters took the view that the swap dealer and security-
based swap dealer definitions should categorically exclude, or should
be interpreted in a way that would be expected to exclude, a variety of
types of persons or transactions. Commenters particularly suggested
that the following categories of persons should be excluded from the
dealer definitions: Agricultural cooperatives and electric cooperatives
(as addressed above), employee benefit plans as defined in the Employee
Retirement Income Security Act of 1974 (``ERISA''),\126\ farm credit
system institutions,\127\ Federal Home Loan Banks,\128\ insured
depository institutions that limit their swap dealing activity to
riskless principal transactions,\129\ FCMs and broker-dealers that
limit their swap dealing activity to riskless principal
transactions,\130\ financial guaranty insurers and their affiliates
that do not enter into new swaps,\131\ asset managers,\132\ non-
financial companies offering swaps related to their physical commodity
business,\133\ any person who enters into swaps or security-based swaps
only with registered dealers and major participants,\134\ persons that
do not pose systemic risk,\135\ hedge funds \136\ and entities that
enter into swaps or security-based swaps solely in a fiduciary
capacity.\137\
---------------------------------------------------------------------------

    \126\ See letter from ABC/CIEBA.
    \127\ See letter from Farm Credit Council dated February 22,
2011 (``Farm Credit Council I'').
    \128\ See letters from Credit Union National Association
(``CUNA'') and Federal Home Loan Banks (``FHLB'') dated February 22,
2011 (``FHLB I'').
    \129\ See letter from BOK dated January 31, 2011 (``BOK I'');
but see letter from Vitol at 7 (riskless principal transactions are
a ``good model for true swap dealing activity'').
    \130\ See letter from Newedge.
    \131\ See letter from Association of Financial Guaranty Insurers
(``AFGI'').
    \132\ See letter from BlackRock, Inc. (``BlackRock'') dated
February 22, 2011 (``BlackRock I'').
    \133\ Commenters making this point varied in their phrasing of
potential exclusions, and particularly suggested exclusions for:
Agricultural firms offering swaps as risk management tools related
to physical commodities (see letter from NGFA I); all firms, other
than financial entities whose primary business is swap dealing (see
letter from NEM); any person that uses swaps only to reduce price
volatility, enters into a volume of swaps relating to any physical
commodity that is less than the volume of its trading in that
commodity, and is not making a market (see letter from Chesapeake
Energy); or any person that limit its use of swaps to hedging or
speculating (see letters from API I).
    \134\ See letter from ISDA I.
    \135\ See letters from NARUC and NCGA/NGSA I.
    \136\ See letter from MFA I.
    \137\ See letters from FSR dated February 22, 2011 and Midsize
Banks.
---------------------------------------------------------------------------

    Commenters also suggested that the dealer definitions categorically
exclude, or should be interpreted to exclude, the following types of
swaps and security-based swaps: Exchange-cleared swaps and security-
based swaps,\138\ options to make or receive delivery of physical
commodities,\139\ cash forward transactions with embedded swaps and
book-out transactions,\140\ swaps or security-based swaps that are used
for hedging or mitigating commercial risk,\141\ swaps entered into to
profit from future changes in the price of the underlying
commodity,\142\ swaps or security-based swaps entered into as a
fiduciary or agent for another person,\143\ swaps or security-based
swaps entered into for purposes of price discovery,\144\ and, as noted
above, swaps related to items that are covered by a tariff approved by
FERC or the Electric Reliability Council of Texas.\145\
---------------------------------------------------------------------------

    \138\ See letters from Commodity Markets Council (``CMC''), EEI/
EPSA, IECA-Credit I, NextEra I, Shell Trading I, Utility Group and
Vitol.
    \139\ See letters from NextEra I and WGCEF I. The commenters
acknowledged that such options may or may not be included in the
definition of ``swap.''
    \140\ See letter from CMC.
    \141\ See, e.g., letters from Edison Int'l and WGCEF I and joint
letter from Senator Stabenow and Representative Lucas (also saying
that definition of ``hedging'' should be consistent with respect to
the dealer and major participant definitions and the end-user
exception from clearing).
    \142\ See letters from EEI/EPSA, NextEra I, Utility Group and
WGCEF I.
    \143\ See letters from Midsize Banks, NFPEEU and FSR I.
    \144\ See letters from EEI/EPSA, Vitol and WGCEF I.
    \145\ See letters from EDF Trading, FERC Staff and NARUC.
---------------------------------------------------------------------------

    In contrast, some commenters opposed providing any categorical
exclusions from the dealer definitions. One commenter stated that the
definitions' focus on a person's activities--as opposed to whether that
person falls within a particular category--is a better means of
determining whether the person is a swap dealer.\146\ Another commenter
described the requested exclusions as attempts to achieve carve-outs
that are not provided for in the statute.\147\
---------------------------------------------------------------------------

    \146\ See letter from Better Markets I.
    \147\ See letter from AFSCME. Additional commenters emphasized
the need for transparency about swaps and swap activities. See
letters from Jason Cropping and BJ D'Milli.
---------------------------------------------------------------------------

    Lastly, several commenters addressed the extraterritorial
application of the definitions of the terms ``swap dealer,''
``security-based swap dealer,'' ``major swap participant,'' ``major
security-based swap participant,'' and ``eligible contract
participant.'' In general, the commenters addressed when and how the
definitions should be applied to persons based outside the U.S. and how
the definitions should take account of non-U.S. requirements that may
be applicable to such persons.\148\ The Commissions intend to
separately address issues related to the application of these
definitions to non-U.S. persons in the context of the application of
Title VII to non-U.S. persons.
---------------------------------------------------------------------------

    \148\ See, e.g., letters from FSR I, Institute of International
Bankers, ISDA I, Investment Management Association, Japan Financial
Services Agency, Securities Industry and Financial Markets
Association (``SIFMA'') dated February 3, 2011 (``SIFMA I''), and
the World Bank Group, joint letter from the Autorit[eacute] de
contr[ocirc]le prudential and the Autorit[eacute] des marches
financiers, joint letter from Bank of America Merrill Lynch,
Barclays Capital, BNP Paribas S.A. (``BNP Paribas''), Citi,
Cr[eacute]dit Agricole Corporate and Investment Bank, Credit Suisse
Securities (USA), Deutsche Bank AG (``Deutsche Bank''), HSBC, Morgan
Stanley, Nomura Securities International, Inc. (``Nomura
Securities''), Soci[eacute]t[eacute] G[eacute]n[eacute]rale and UBS
Securities LLC (``Twelve Firms''), joint letter from the Bank of
Tokyo-Mitsubishi UFJ, Ltd., Mizuho Corporate Bank, Ltd. and Sumitomo
Mitsui Banking Corporation, and joint letter from Barclays Bank PLC,
BNP Paribas, Credit Suisse AG, Deutsche Bank, HSBC, Nomura
Securities, Rabobank Nederland, Royal Bank of Canada, the Royal Bank
of Scotland Group pLc, Soci[eacute]t[eacute] G[eacute]n[eacute]rale,
the Toronto-Dominion Bank and UBS AG.
---------------------------------------------------------------------------

g. Cost-Benefit Issues and Hedging Deterrence
    Several commenters emphasized the cost of being regulated as a
dealer, and emphasized that an overbroad scope of the dealer
definitions would impose significant unwarranted costs on entities
contrary to the goals of the Dodd-Frank Act, and would deter the use of
swaps and security-based swaps for hedging.\149\ Some commenters also
noted that impact of the provisions of section 716 of the Dodd-Frank
Act on entities that are deemed to be swap

dealers or security-based swap dealers.\150\ Also, one commenter
suggested that using a qualitative test for the dealer definition might
increase costs due to regulatory uncertainty.\151\
---------------------------------------------------------------------------

    \149\ See joint letter from Representatives Spencer Bachus and
Frank Lucas at 2 (``Casting an overly-broad net in defining [dealer
and major participant] could force some smaller participants to
leave the marketplace as a result of increased costs, or eliminate
certain types of contracts used for hedging. If either occurs,
businesses will be left exposed to market volatility and the
consequences will ultimately be felt by Americans in the form of
increased consumer costs.'') and letters from ISDA Iat 7 (``The
substantial additional burdens and costs of Dealer regulation must
be reserved for those whose business it is to `make the market,'
that is, those who consistently both buy and sell. This is in accord
with Dodd-Frank Act's market regulatory goals, as well as the
legislation's obvious intent to preserve healthy growth and
innovation in the U.S. swap markets.'' (footnote omitted)), Peabody
at 2-3 (``Legal uncertainty over the application to end users of the
significant regulatory requirements for [swap dealers] could lead
end users to minimize their use of swaps in order to avoid the risk
of being deemed to be [a swap dealer].''), and Church Alliance
(stating that the risk of incurring the costs of dealer regulation
would harm employee benefit plans by reducing their use of swaps and
security-based swaps for hedging and risk mitigation).
    \150\ See letters from American Bankers Association (``ABA'')
dated November 3, 2011 (``ABA I''), BOK I, and ISDA I. Section 716
of the Dodd-Frank Act prohibits any ``swaps entity''--a term that
encompasses swap dealers and security-based swap dealers--from
receiving Federal assistance with respect to any swap, security-
based swap, or other activity of the swaps entity.
    \151\ See letter from API I (stating that costs of regulatory
uncertainty stem from the use of qualitative factors for identifying
dealing, and from regulatory efforts to reach beyond ``true'' swap
dealers); see also letter from Dominion Resources (the opportunity
costs associated with regulatory uncertainty should be considered).
---------------------------------------------------------------------------

    One commenter specifically suggested that in considering the final
rules, the Commissions should consider empirical data regarding the
costs and benefits flowing from the rules and issue a second analysis
of the costs and benefits of the rules for public comment,\152\ while
other commenters said that the consideration of cost and benefits
should include the cumulative cost of interrelated regulatory burdens
arising from all the rules proposed under the Dodd-Frank Act.\153\
Other commenters said the Commissions should consider alternatives that
would impose fewer costs.\154\
---------------------------------------------------------------------------

    \152\ See letter from WGCEF I.
    \153\ See letters from ABA I, NFPEEU and WGCEF dated December
20, 2011, enclosing a report prepared by NERA Economic Consulting
(``NERA'') (``WGCEF VIII''); see also letter from NERA dated March
13, 2012.
    \154\ See letters from NextEra I (referring to alternative de
minimis tests) and NFPEEU.
---------------------------------------------------------------------------

    Another commenter said that the cost-benefit analyses in the
Proposing Release may have understated the benefits of the proposed
rules, because focusing on individual aspects of all the rules proposed
under the Dodd-Frank Act prevents consideration of the full range of
benefits that arise from the rules as a whole, in terms of providing
greater financial stability, reducing systemic risk and avoiding the
expense of assistance to financial institutions in the future.\155\
This commenter said the consideration of benefits of the proposed rules
should include the mitigated risk of a financial crisis.\156\
---------------------------------------------------------------------------

    \155\ See letter from Better Markets dated June 3, 2011
(``Better Markets II'').
    \156\ Better Markets cited estimates that the worldwide cost of
the 2008 financial crisis in terms of lost output was between $60
trillion and $200 trillion, depending primarily on the long term
persistence of the effects. See letter from Better Markets II.
---------------------------------------------------------------------------

3. Final Rules and Interpretation--General Principles
    Consistent with the Proposing Release, the final rules that define
the terms ``swap dealer'' and ``security-based swap dealer'' closely
follow the statutory definitions' four tests and exclusion for
activities that are not part of a ``regular business.'' \157\ In
addition, this Adopting Release sets forth interpretive guidance
regarding various elements of the final rules.
---------------------------------------------------------------------------

    \157\ See CFTC Regulation Sec.  1.3(ggg)(1), (2); Exchange Act
rule 3a71-1(a), (b).
---------------------------------------------------------------------------

    Because the definitions of the terms ``swap dealer'' in the CEA and
``security-based swap dealer'' in the Exchange Act are substantially
similar, the rules further defining those terms and the accompanying
interpretations in this Adopting Release reflect common underlying
principles. At the same time, the interpretations regarding the
application of the definitions differ in certain respects given the
differences in the uses of and markets for swaps and security-based
swaps.\158\ For example, because security-based swaps may be used to
hedge or gain economic exposure to underlying individual securities
(while recognizing distinctions between security-based swaps and other
types of securities, as discussed below), there is a basis to build
upon the same principles that presently are used to identify dealers
for other types of securities. These same principles, though
instructive, may be inapplicable to swaps in certain circumstances or
may be applied differently in the context of dealing activities
involving commodity, interest rate, or other types of swaps.
---------------------------------------------------------------------------

    \158\ Section 712(a)(7)(A) of the Dodd-Frank Act provides that
in adopting rules and orders implementing Title VII, the Commissions
shall treat functionally or economically similar products or
entities in a similar manner. Section 712(a)(7)(B), though, provides
that the Commissions need not act in an identical manner.
---------------------------------------------------------------------------

    For these reasons, we separately are addressing the interpretation
of the ``swap dealer'' and ``security-based swap dealer'' definitions.
    Also, as discussed below, the Commissions are directing their
respective staffs to report separately regarding the rules being
adopted in connection with the definition and related interpretations.
These staff reports will help the Commissions evaluate the ``swap
dealer'' and ``security-based swap dealer'' definitions in all
respects, including whether new or revised tests or approaches would be
appropriate for identifying swap dealers and security-based swap
dealers.\159\
---------------------------------------------------------------------------

    \159\ See part V, infra.
---------------------------------------------------------------------------

4. Final Rules and Interpretation--Definition of ``Swap Dealer''
    The Dodd-Frank Act contains a comprehensive definition of the term
``swap dealer,'' based upon types of activities. As noted above, we are
adopting a final rule under the CEA that, like the proposed rule,
defines the term ``swap dealer'' using terms from the four statutory
tests and the exclusion for swap activities that are not part of ``a
regular business.'' \160\ The final rule includes modifications from
the proposed rule that are described below, including provisions
stating that swaps entered into for hedging physical positions as
defined in the rule, swaps between majority-owned affiliates, swaps
entered into by a cooperative with its members, and certain swaps
entered into by registered floor traders, are excluded from the swap
dealer determination.\161\ The Commissions, in consideration of
comments received, are also making certain modifications to the
interpretive guidance set out in the Proposing Release with respect to
various elements of the statutory definition of the term ``swap
dealer,'' as described below.
---------------------------------------------------------------------------

    \160\ See CFTC Regulation Sec.  1.3(ggg)(1), (2).
    \161\ See CFTC Regulation Sec.  1.3(ggg)(6)(ii), (iii).
---------------------------------------------------------------------------

    The determination of whether a person is covered by the statutory
definition of the term ``swap dealer'' requires application of various
provisions of the rule further defining that term, as well as the
interpretive guidance in this Adopting Release, depending on the
person's particular circumstances. We intend that the determination
with respect to a particular person would proceed as follows.
    The person would begin by applying the statutory definition, and
the provisions of the rule which implement the four statutory tests and
the exclusion for swap activities that are not part of ``a regular
business,'' \162\ in order to determine if the person is engaged in
swap dealing activity. In that analysis, the person would apply the
interpretive guidance described in this part II.A.4, which provides for
consideration of the relevant facts and circumstances. As part of this
consideration, the person would apply elements of the dealer-trader
distinction, as appropriate, including as described in part II.A.4.a,
below.
---------------------------------------------------------------------------

    \162\ See CFTC Regulation Sec.  1.3(ggg)(1), (2).
---------------------------------------------------------------------------

    The rule provides that certain swaps are not considered in the
determination of whether a person is a swap dealer.\163\ In particular,
swaps entered into by an insured depository institution with a customer
in connection with originating a loan with that customer, \164\ swaps

between majority-owned affiliates, \165\ swaps entered into by a
cooperative with its members,\166\ swaps entered into for hedging
physical positions as defined in the rule,\167\ and certain swaps
entered into by registered floor traders \168\ are excluded from the
swap dealer determination.
---------------------------------------------------------------------------

    \163\ See CFTC Regulation Sec.  1.3(ggg)(5), (6).
    \164\ See CFTC Regulation Sec.  1.3(ggg)(5); see also part II.B,
infra.
    \165\ See CFTC Regulation Sec.  1.3(ggg)(6)(i); see also part
II.C, infra.
    \166\ See CFTC Regulation Sec.  1.3(ggg)(6)(ii); see also part
II.C, infra.
    \167\ See CFTC Regulation Sec.  1.3(ggg)(6)(iii); see also part
II.B.4.e, infra.
    \168\ See CFTC Regulation Sec.  1.3(ggg)(6)(iv); see also part
II.B.4.f, infra.
---------------------------------------------------------------------------

    If, after completing this review (taking into account the
applicable interpretive guidance and excluding any swaps as noted
above), the person determines that it is engaged in swap dealing
activity, the next step is to determine if the person is engaged in
more than a de minimis quantity of swap dealing.\169\ If so, the person
is a swap dealer. When the person registers, it may apply to limit its
designation as a swap dealer to specified categories of swaps or
specified activities of the person in connection with swaps.\170\
---------------------------------------------------------------------------

    \169\ See CFTC Regulation Sec.  1.3(ggg)(4); see also part II.D,
infra.
    \170\ See CFTC Regulation Sec.  1.3(ggg)(3); see also part II.E,
infra.
---------------------------------------------------------------------------

    In this part II.A.4., we provide interpretive guidance on the
application of the ``swap dealer'' definition, modified from the
Proposing Release as appropriate based on comments received. This
guidance separately addresses the following: application of the dealer-
trader framework; the ``holding out'' and ``commonly known'' criteria;
market making; the not part of ``a regular business'' exception; the
exclusion of swaps entered into for hedging physical positions as
defined in the rule; and the overall interpretive approach to the
definition.\171\
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    \171\ The Commissions note that interpretations of the
applicability of the dealer-trader distinction to the ``swap
dealer'' definition under the CEA do not affect existing, or future,
interpretations of the dealer-trader distinction under the Exchange
Act.
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a. Use of the Dealer-Trader Distinction
    We believe that the dealer-trader distinction \172\--which already
forms a basis for identifying which persons fall within the
longstanding Exchange Act definition of ``dealer''--in general provides
an appropriate framework for interpreting the statutory definition of
the term ``swap dealer.'' \173\ While there are differences in the
structure of those two statutory definitions,\174\ we believe that
their parallels--particularly their exclusions for activities that are
``not part of a regular business''--warrant analogous interpretive
approaches for distinguishing dealers from non-dealers.\175\ Thus, the
dealer-trader distinction forms the basis for a framework that
appropriately distinguishes between persons who should be regulated as
swap dealers and those who should not. We also believe that the
distinction affords an appropriate degree of flexibility to the
analysis, and that it would not be appropriate to seek to codify the
distinction in rule text.
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    \172\ See note 31, supra. The principles embedded within the
``dealer-trader distinction'' are also applicable to distinguishing
dealers from non-dealers such as hedgers or investors. See note 250,
infra.
    \173\ The Commissions note that interpretations of the
applicability of the dealer-trader distinction to the ``swap
dealer'' definition under the CEA do not affect existing, or future,
interpretations of the dealer-trader distinction under the Exchange
Act.
    \174\ For example, while the ``dealer'' definition encompasses
certain persons in the business of ``buying and selling''
securities, the ``swap dealer'' definition does not address either
``buying'' or ``selling.'' We also note that the ``dealer''
definition requires the conjunctive ``buying and selling''--which
connotes a degree of offsetting two-sided activity. In contrast, the
swap dealer definition (particularly the ``regularly enters into''
swaps language of the definition's third prong) lacks that
conjunctive terminology.
    \175\ In the Proposing Release, the CFTC did not propose to use
principles from the dealer-trader distinction to interpret the
definition of the term ``swap dealer,'' instead proposing an
interpretive approach that focused on, among other things, a
person's functional role in the swap markets and its relationships
with swap counterparties. See Proposing Release, 75 FR at 80177.
There was, however, some overlap in practice between the factors
identified in the Proposing Release relating to a swap dealer's
functional role and relationships and the principles of the dealer-
trader distinction that were proposed to be applied to identify
security-based swap dealers. Moreover, the changes to the
interpretive approach to the swap dealer definition that we are
adopting here and discussed in this part II.A.4 are in many respects
similar to the principles of the dealer-trader distinction. We also
acknowledge the commenters who asked for additional guidance
regarding the application of the definitions. See, e.g., letters
from Gavilon II, Peabody and the Utility Group, and meeting with
CDEU on April 7, 2011.
    Thus, while the incorporation of the dealer-trader distinction
in the interpretation of the term ``swap dealer'' constitutes a
change from the Proposing Release, this is simply reflective of the
other changes to the CFTC's interpretive approach that we are
adopting for the final rule and the overlap between the factors
relating to a swap dealer's functional role and counterparty
relationships and the principles of the dealer-trader distinction.
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    The Commissions recognize that the dealer-trader distinction needs
to be adapted to apply to swap activities in light of the special
characteristics of swaps and the differences between the ``dealer''
definition, on the one hand, and the ``swap dealer'' definition, on the
other. Relevant differences between the swap market and the markets for
securities (other than security-based swaps) include:
     Level of activity--Swap markets are marked by less
activity than markets involving certain types of securities (while
recognizing that some debt and equity securities are not actively
traded). This suggests that in the swap context, concepts of
``regularity'' should account for a participant's level of activity in
the market relative to the total size of the market.
     No separate issuer--Each counterparty to a swap in essence
is the ``issuer'' of that instrument; in contrast, dealers in cash
market securities generally transact in securities issued by another
party. This distinction suggests that the concept of maintaining an
``inventory'' of securities is inapposite in the context of swaps.
Moreover, this distinction--along with the fact that the ``swap
dealer'' definition lacks the conjunctive ``buying and selling''
language of the ``dealer'' definition--suggests that concepts of two-
sided markets at times would be less relevant for identifying swap
dealers than they would be for identifying dealers.\176\
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    \176\ The analysis also should account for the fact that a party
to a swap can use other derivatives or cash market instruments to
hedge the risks associated with the swap position, meaning that two-
way trading is not necessary to maintain a flat risk book.
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     Predominance of over-the-counter and non-standardized
instruments--Swaps an thus far are not significantly traded on
exchanges or other trading systems, in contrast to some cash market
securities (while recognizing that many cash market securities also are
not significantly traded on those systems).\177\ These attributes--
along with the lack of ``buying and selling'' language in the swap
dealer definition, as noted above--suggest that concepts of what it
means to make a market need to be construed flexibly in the contexts of
the swap markets.
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    \177\ Even though we expect trading of swaps on exchanges
following the implementation of Title VII, we expect there to remain
a significant amount of over-the-counter activity involving swaps.
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     Mutuality of obligations and significance to ``customer''
relationship--In contrast to a secondary market transaction involving
equity or debt securities, in which the completion of a purchase or
sale transaction can be expected to terminate the mutual obligations of
the parties to the transaction, the parties to a swap often will have
an ongoing obligation to exchange cash flows over the life of the
agreement. In light of this attribute, some market participants have
expressed the view that they have ``counterparties'' rather than
``customers'' in the context of their swap activities.
    In applying the dealer-trader distinction, it also is necessary to
apply

the statutory provisions that will govern swap dealers in an effective
and logical way. Those statutory provisions added by the Dodd-Frank Act
advance financial responsibility (e.g., the ability to satisfy
obligations, and the maintenance of counterparties' funds and assets)
associated with swap dealers' activities,\178\ other counterparty
protections,\179\ and the promotion of market efficiency and
transparency.\180\ As a whole, the relevant statutory provisions
suggest that we should interpret the ``swap dealer'' definition to
identify those persons for which regulation is warranted either: (i)
Due to the nature of their interactions with counterparties; or (ii) to
promote market stability and transparency, in light of the role those
persons occupy within the swap and security-based swap markets.
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    \178\ E.g., capital and margin requirements (CEA section 4s(e)),
and requirements for segregation of collateral (CEA sections 4d(f),
4s(l)).
    \179\ E.g., requirements with respect to business conduct when
transacting with special entities (CEA sections 4s(h)(2), 4s(h)(4),
4s(h)(5)); disclosure requirements (CEA section 4s(h)(3)(B));
requirements for fair and balanced communications (CEA section
4s(h)(3)(D)); other requirements related to the public interest and
investor protection (CEA section 4s(h)(3)(D)); and conflict of
interest provisions (CEA section 4s(j)(5)).
    \180\ E.g., reporting and recordkeeping requirements (CEA
section 4s(f)); daily trading records requirements (CEA section
4s(g)); regulatory standards related to the confirmation,
processing, netting, documentation and valuation of security-based
swaps (CEA section 4s(i)); position limit monitoring requirements
(CEA section 4s(j)(1)); risk management procedure requirements (CEA
section 4s(j)(2)); and requirements related to the disclosure of
information to regulators (CEA section 4s(j)(3)).
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    There are several aspects of our interpretive approach to the swap
dealer definition that are particularly similar to the dealer-trader
distinction as it will be applied to determine if a person is a
security-based swap dealer. In particular, the following activities,
which are indicative of dealing activity in the application of the
dealer-trader distinction,\181\ similarly are indicative that a person
is acting as a swap dealer: \182\ (i) Providing liquidity by
accommodating demand for or facilitating interest in the instrument
(swaps, in this case), holding oneself out as willing to enter into
swaps (independent of whether another party has already expressed
interest), or being known in the industry as being available to
accommodate demand for swaps; (ii) advising a counterparty as to how to
use swaps to meet the counterparty's hedging goals, or structuring
swaps on behalf of a counterparty; (iii) having a regular clientele and
actively advertising or soliciting clients in connection with swaps;
\183\ (iv) acting in a market maker capacity on an organized exchange
or trading system for swaps; \184\ and (v) helping to set the prices
offered in the market (such as by acting as a market maker) rather than
taking those prices, although the fact that a person regularly takes
the market price for its swaps does not foreclose the possibility that
the person may be a swap dealer.
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    \181\ See generally part II.A.5, infra.
    \182\ To clarify, the activities listed in the text are
indicative of acting as a swap dealer. Engaging in one or more of
these activities is not a prerequisite to a person being covered by
the swap dealer definition.
    \183\ As with the interpretation of the dealer-trader
distinction with respect to securities, a nomenclature distinction
between ``counterparties'' and ``customers'' is not significant for
purposes of applying the dealer-trader distinction to swap
activities. Contractual provisions related to nomenclature, such as
a provision stating that no ``customer'' relationship is present,
would not be significant if the reality of the situation is
different. See note 271, infra, and accompanying text.
    \184\ As with the dealer-trader distinction as it has been
interpreted under the Exchange Act with respect to securities (and
as noted below in the discussion of the ``makes a market in swaps''
prong of the swap dealer definition), the presence of an organized
exchange or trading system is not a prerequisite to being a market
maker for purposes of the swap dealer definition, nor is acting as a
market maker a prerequisite to being a swap dealer.
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    The Commissions further note that the following elements of the
interpretive approach to the swap dealer definition are also generally
consistent with the dealer-trader distinction as it will be applied to
determine if a person is a security-based swap dealer: (i) A
willingness to enter into swaps on either side of the market is not a
prerequisite to swap dealer status; (ii) the swap dealer analysis does
not turn on whether a person's swap dealing activity constitutes that
person's sole or predominant business; (iii) a customer relationship is
not a prerequisite to swap dealer status; and (iv) in general, entering
into a swap for the purpose of hedging, absent other activity, is
unlikely to be indicative of dealing. Last, under the interpretive
approach to the definition of both the terms ``swap dealer'' and
``security-based swap dealer,'' whether a person is acting as a dealer
will turn upon the relevant facts and circumstances, as informed by the
interpretive guidance set forth in this Adopting Release.
    At the same time, the Commissions recognize that the dealer-trader
distinction is not static, but rather has evolved over time through
interpretive materials. The Commissions expect the dealer-trader
distinction to evolve over time with respect to swaps independently of
its evolution over time with respect to securities or security-based
swaps. Prior interpretations and future developments in the law
regarding securities or security-based swaps may inform the
interpretation of the swap dealer definition, but will not be
dispositive in identifying dealers in the swap markets.\185\
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    \185\ In interpreting the term ``swap dealer,'' we intend to
consider, but do not formally adopt, the body of court decisions,
SEC releases, and SEC staff no-action letters that have interpreted
the dealer-trader distinction.
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b. Indicia of Holding Oneself Out as a Dealer in Swaps or Being
Commonly Known in the Trade as a Dealer in Swaps
    The final rule further defining the term ``swap dealer'' includes
the provisions in the proposed rule which incorporate the statutory
requirements that the term includes a person that is holding itself out
as a dealer in swaps or is engaging in any activity causing it to be
commonly known in the trade as a dealer or market maker in swaps.\186\
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    \186\ See CFTC Regulation Sec.  1.3(ggg)(1)(i) and (iv).
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    We continue to believe that the Proposing Release appropriately
identifies a number of factors as indicia of ``hold[ing] itself out as
a dealer in swaps'' and ``engag[ing] in any activity causing [itself]
to be commonly known in the trade as a dealer or market maker in
swaps.'' \187\ In our view, those factors thus are relevant to
determining if a person is a swap dealer. For example, regarding the
proposed factor of ``membership in a swap association in a category
reserved for dealers,'' we note that the bylaws of the International
Swaps and Derivatives Association (``ISDA'') provide that any business
organization that:

    \187\ These factors are as follows: Contacting potential
counterparties to solicit interest; developing new types of swaps or
security-based swaps and informing potential counterparties of their
availability and of the person's willingness to enter into the swap
or security-based swap; membership in a swap association in a
category reserved for dealers; providing marketing materials
describing the type of swaps or security-based swaps the party is
willing to enter into; and generally expressing a willingness to
offer or provide a range of products or services that include swaps
or security-based swaps. See Proposing Release, 75 FR at 80178.

    Directly or through an affiliate, as part of its business
(whether for its own account or as agent), deals in derivatives
shall be eligible for election to membership in the Association as a
Primary Member, provided that no person or entity shall be eligible
for membership as a Primary Member if such person or entity
participates in derivatives transactions solely for the purpose of
risk hedging or asset or liability management.\188\
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    \188\ See By-laws of ISDA at 3, available at: https://www.isdadocs.org/membership. The Commissions note that the Primary
Members of ISDA are not limited to only financial firms.

    We believe that in circumstances such as this, where a category of
association

membership requires that a person deal in derivatives and not limit its
participation in derivative transactions to solely risk hedging,
membership in the category is an indicator of swap dealer status.\189\
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    \189\ However, while such membership is an indicator of swap
dealer status, a person holding such membership could nonetheless be
excluded by other provisions of the definition of the term ``swap
dealer.'' For example, an insured depository institution that limits
its activity to offering swaps in connection with the origination of
loans, as discussed below in part II.B, would not be covered by the
definition simply because it holds such membership.
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    We take note, however, of the comments that these activities may be
insufficient to establish that a person is a swap dealer. In
particular, we generally agree with commenters that many commercial end
users of swaps do, from time to time, actively seek out and negotiate
swaps. Yet, based on the applicable facts and circumstances, these end
users do not necessarily fall within the definition of a swap dealer
solely because they actively seek out and negotiate swaps from time to
time.
    The activities described in the Proposing Release as indicia of
holding oneself out as a swap dealer or engaging in any activity
causing oneself to be commonly known as a swap dealer should not be
considered in a vacuum, but should instead be considered in the context
of all the activities of the swap participant. While the activities
listed in the Proposing Release are indicators that a person is holding
itself out or is commonly known as a swap dealer, these are factors to
be considered in the analysis. They are not per se conclusive, and
could be countered by other factors indicating that the person is not a
swap dealer.\190\ Because of the flexibility--including the
consideration of applicable facts and circumstances--needed for such an
analysis, we do not believe that it is appropriate to codify this
guidance in rule text, as suggested by some commenters.
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    \190\ The statutory definition of the term ``swap dealer''
contains four separate clauses, or ``prongs,'' joined by the
disjunctive ``or,'' the ordinary meaning of which is that the prongs
are stated as alternative types of swap dealer. Accordingly, where
an assessment of all the activities of a swap participant
demonstrates that the person is not holding itself out as a swap
dealer or engaging in any activity that causes it to be commonly
known as a swap dealer, that person may, nonetheless, be a swap
dealer based on the market making or regular business prongs of the
swap dealer definition, discussed below. The Commissions note,
however, that as discussed below in part II.A.4.g, the CFTC's
overall interpretive guidance, including guidance regarding the
dealer-trader framework, applies to identify swap dealers under all
four prongs of the statutory ``swap dealer'' definition.
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c. Market Making
    The final rule defining ``swap dealer'' includes the provision from
the proposed rule which incorporates the statutory requirement that
this term include a person that ``makes a market in swaps.'' \191\
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    \191\ See CFTC Regulation Sec.  1.3(ggg)(1)(ii). Because the
statutory swap dealer definition contains four disjunctive prongs,
the CFTC does not agree with a commenter (see letter from ISDA I)
who asserted that status as a market maker in swaps is a
prerequisite to a person being a swap dealer.
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    We have considered the comments suggesting various descriptions of
activities that should and should not be deemed to be market making in
swaps for purposes of this rule. In consideration of these comments, we
clarify that making a market in swaps is appropriately described as
routinely standing ready to enter into swaps at the request or demand
of a counterparty. In this regard, ``routinely'' means that the person
must do so more frequently than occasionally, but there is no
requirement that the person do so continuously.\192\
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    \192\ A person that occasionally, or less than routinely, enters
into a swap at the request of a counterparty is not a maker of a
market in swaps, and therefore is not a swap dealer on that basis.
However, we reiterate, as stated in the Proposing Release, that
since many types of swaps are not entered into on a continuous
basis, it is not necessary that a person enter into swaps at the