What is a Swap Dealer?

A swap dealer is an individual or entity that deals in swaps, makes markets in swaps or enters into swaps with counterparties. Swap dealer, as a term, was formally defined in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a piece of legislation born in the aftermath of the 2008-2009 financial crisis.

Understanding Swap Dealer

According to Section 721 of the Dodd-Frank Act, a swap dealer is an entity that:

1) Holds itself out as dealer in swaps;

2) Makes a market in swaps;

3) Regularly enters into swaps with counterparties as an ordinary course of business for its own account; or

4) Engages in activity causing itself to be commonly known in the trade as a dealer or market maker in swaps, provided, however, in no event shall an insured depository institution be considered to be 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.

Prior to the financial crisis, swaps had been traded in the over-the-counter market, mainly between firms and financial institutions, in largely unregulated transactions. In 2011 the SEC finalized proposals requiring security-based swap dealers and participants to register with the commission, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The swap market is now overseen by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

Key Takeaways

  • A swap dealer is an individual or entity that deals in swaps, makes markets in swaps or enters into swaps with counterparties.
  • The de minimus threshold for swap trading has been set at $8 billion. This means that an entity will not be considered a swap dealer unless the aggregate notional amount of its deals exceeds that figure.

De Minimus Exception

The Republican-led administration took steps in 2017 to repeal the Dodd-Frank Act. The legislation is comprehensive, touching on many aspects of banking and finance. The definition of a swap dealer is not controversial, but there is one provision in the Dodd-Frank Act that Republicans would like to address — the de minimus exception rule, which exempts swap dealer designation of an entity that engages in de minimus quantity of swap dealing in connection with transactions with or on behalf of its customers.

The threshold for aggregate gross notional amount (AGNA) that a swap dealer must have completed has been set to $8 billion, as of November 2018. It was supposed to fall to $3 billion, a much lower level that would have brought many more entities into the realm of regulatory oversight. However, the CFTC voted on a bipartisan basis to set $8 billion as the permanent in a Nov 2018 meeting. The federal agency cited the increased regulatory coverage for $8 billion as well as the potential for lower liquidity at a lower threshold figure for non-financial commodity swaps. In addition, the agency stated that it wanted to signal long-term stability of the de minimus threshold to allow market participants to plan for the long term.