August 28, 2018
The necessity of today’s staff relief underscores yet again the deficiencies of using notional value as the metric for Swap Dealer Registration. As I have stated previously, notional value is a poor measure of activity and a meaningless measure of risk, and therefore is an inadequate metric by which to impose the large costs and achieve the substantial policy objectives associated with Swap Dealer regulation.
Today’s relief was necessary so that a Main Street bank could continue to serve the needs of its small and medium-sized commercial clients; in this case, by helping those clients change their interest rate hedging posture in response to recent market developments. Absent this relief, these clients would have to seek out a dealer willing to establish a trading relationship for a one-off interest rate swap instead of being serviced by their normal bank, with which they have their primary credit and commercial relationship. This bank would have been able to exclude these loan-related swaps with customers from its de minimis count, but for an arbitrary and unnecessary timing restriction that the Commission has recently proposed to eliminate.
As long as the Commission continues to rely solely on notional value as the swap dealer registration metric, I believe there will be future instances of firms seeking temporary registration relief to respond to market events or other unique circumstances, although the de minimis nature of their dealing activity remains unchanged. It is my hope that the Commission can improve upon the registration threshold so that it is more closely correlated to risk, either of the products traded or the firms themselves, and provides the flexibility necessary to continue to serve clients optimally in dynamic market conditions. An appropriately calibrated de minimis threshold should ensure that entities that pose no systemic risk and have a relatively small market presence are able to provide ancillary swap services to their customers without fear of being captured by a large, costly, and time-consuming regulatory regime that is more appropriate for the world’s biggest, most complex financial institutions.
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