Major Swap Participant

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A Major Swap Participant is a person or entity that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions creates such significant exposure to others that it requires monitoring.[1]

Background

Prior to the Dodd-Frank Act, no formal definition of "major swap participant" existed, as the swaps market was largely unregulated. In order to control systemic risk to the financial structure, the act calls for regulation of swaps and swap participants. As such, specific rules have been proposed by the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) to define the terms "swap dealer," "security-based swap dealer" and "major swap participant".[2]

Definition according to Final Regulations

There are three parts to the definition of “major swap participant” under the Dodd-Frank Act. A person who satisfies any one of them is a major swap participant:

  1. A person or entity who maintains a “substantial position” in any of the major swap categories, excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan.
  2. A person or entity whose outstanding swaps create "substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets."
  3. Any "financial entity" that is "highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking agency" and that maintains a “substantial position” in any of the major swap categories.[3]

Scope of Proposed Regulations

When final rules become effective, major swap participants will face more stringent requirements, such as:

  • Registration with the CFTC and SEC;
  • Specific minimum amounts for collateral and margin;
  • Reporting and recordkeeping;
  • Business conduct; and
  • Compliance procedures.[4]

CFTC and SEC Final Rules, April 18, 2012

On April 18, 2012, the two agencies approved a joint final rulemaking on definitions of final joint rulemaking on the further definitions of "swap dealer," "major swap participant," "security-based swap dealer," "security-based major swap participant" and "eligible contract participant." (so-called "entity definitions"). The final rules define in detail what it means to be a major swap participant, what constitutes a "substantial position," "financial entity," "substantial counterparty exposure," and "highly leveraged." The rule also details which types of activity qualify as "hedging or mitigating commercial risk." For more information, see the MarketsReformWiki page on the final rule.


References

  1. Financial Services Committee Approves Legislation to Regulate Derivatives. U.S. House Financial Services Committee.
  2. SEC Proposes Joint Rules with CFTC to Define Swap Related Terms. Securities and Exchange Commission.
  3. Federal Register/Vol. 75, No. 244/Tuesday, December 21, 2010/Proposed Rules. Federal Register.
  4. Dodd-Frank Essentials for End-users of OTC Derivatives. Sidley Austin, LLP.