CFTC Approves Final Swap Dealer Capital Rule, Completing All Required Rulemakings Under Section 731 of the Dodd-Frank Act - 13 August 2020

The Commodity Futures Trading Commission at its open meeting on July 22, 2020 approved a final rule regarding new capital and financial reporting requirements for swap dealers (SDs) and major swap participants (MSPs). Adoption of this rule marks the completion of the CFTC’s required rulemakings under Section 731 of the Dodd-Frank Act, which was enacted 10 years ago this week.

Final rule: capital requirements of swap dealers and major swap participants. The final rule imposes new capital requirements on SDs and MSPs that are not subject to supervision by a banking regulator, and imposes financial reporting requirements for SDs and MSPs generally. According to DSIO analysis, 56 firms, with varying business structures and characteristics, would be subject to the new rules. To accommodate the variety in business operations of impacted firms, SDs will be provided with the option of selecting from one of three alternative methods to establish and meet minimum capital requirements. These include the following:

• net liquid assets method, which is based primarily on existing capital requirements for FCMs, and on the capital requirements adopted by the Securities and Exchange Commission for security-based swap dealers and major security-based swap participants;
• bank-based method, which is based primarily on existing capital requirements for bank holding companies under the supervision of the Federal Reserve Board; and,
• tangible net worth method, designed specifically for SDs which are part of a larger commercial enterprise.

Under the rule, MSPs are required to maintain positive tangible net worth. Additionally, the final rule includes 1) a comprehensive model approval process overseen by the National Futures Association; 2) accompanying financial reporting, recordkeeping, and notification requirements; and, 3) a substituted compliance determination process for those SDs which may already be required to maintain capital in accordance with a foreign regulator. This final rule will be effective 60 days after publication in the Federal Register. The rule’s compliance date is October 6, 2021.