Dodd-Frank controvesy: What is a ‘swaps dealer’?

April 18, 2012

From Reuters: “Major Wall Street firms that trade in derivatives, like Goldman Sachs or Morgan Stanley, have been widely expected to fall into the swap dealer category. But large energy companies and traders such as Royal Dutch Shell, BP and Vitol contend that while they may trade billions of dollars a year in swaps, their trades are done to shield themselves from market risk such as changes in commodity prices or fluctuations in currency. As a result, they say they should not be subjected to the new regulations. Disagreements between the SEC and the CFTC on the final rules have led to numerous delays and kept companies waiting with great anticipation 16 months after the rules were first proposed.”

CFTC Commissioner Scott O’Malia has published his letter of dissent to the proposed rules here. My favorite sentence: “the Commission advanced a definition focusing on activities, rather than the entities conducting these activities”.  But I’ll offer an Imperial pint (568 mL vs. the American 473 mL) to anyone who can distill the rest of the letter for me.  Specifically, I’m not sure I grasp what he means by ‘Unnecessary Statutory Contortions’.

7 Responses to “Dodd-Frank controvesy: What is a ‘swaps dealer’?”


  1. “Unnecessary Statutory Contortions” sounds like a great premise for a party game, like Twister for sociologists of law.


  2. Does this also presuppose ‘necessary statutory contortions’? If so, what the hell are they?

    Anyway, distilling this endlessly dull letter is, I’m glad to say, all too easy. The author does it himself in the fourth paragraph, to wit: “I have always disagreed with the Proposal.”

    That was his starting premise and, surprise suprise, that’s where he ends, Can I have my pint now……?

  3. yuvalmillo Says:

    I’m not an expert, of course, in the CEA set of rules, but, as I understand it, the CEA section 1a(49)(C) exempts commercial users of futures contracts from the need to register as commodities traders (and, following the inherent regulatory precedence, the need to register as swap dealers). However, the CFTC decided to impose the rules on commercial end users (i.e. ones who use futures to protect against commodities transactions and not one who trade futures for a living) because such actors may also take non-hedging positions and profit from such positions. Hence, the CFTC’s view, to which this commissioner is opposing, is to rule according to activities and not according to the characteristics of the entity.
    Mine’s a bitter, please.

  4. yuvalmillo Says:

    And I think that Angus deserves one, too. His answer made me laugh out loud (and it also correct!)


  5. It seems odd that the criteria for whether or not an entity is classified as a dealer would come down to the presence of hedging activities – foremost because most dealers usually attempt to fully hedge the products they sell to clients (e.g. they usually want to be delta and vega neutral). For instance, when selling a fixed/floating interest rate swap to a client, a dealer would most likely hedge their exposure to that with a series of forward rate agreements that it would trade with other interdealer banks. Do those FRAs count towards the $8 billion threshold that would bump the bank into dealer status? It would seem that they would be excluded under the hedging exception.


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