“They’ve made this option that you can basically follow the bank rules and it will be interesting to see how many people choose to do that,” says Geoffrey Goldman, partner, derivatives and structured products practice at Shearman & Sterling LLP. “That will probably make a lot of sense for some, but it will be interesting to see whether [non-banks] can find an advantage in the complexity of the rule and in the options of the rule.”
The Commission’s three-to-two vote on capital requirements completed its portion of Dodd Frank rulemakings, lowering the minimum capital requirement for non-bank swap dealers from the proposed eight percent to two percent.
The ruling provides greater flexibility in reporting requirements for swap dealers around meeting capital requirements, allowing them to elect a net liquids assets method, a bank-based method or a tangible net worth method.
“Most people who are facing the rule will probably prefer the flexibility, even though it is more complicated and is going to take more work to figure out what the best answer is,” says Goldman.
He believes firms will face an increased workload in ensuring compliance even if they don’t need to adjust capital. But despite creating a more complicated regime, the ruling offers opportunities for a greater number of swap dealers to succeed.
“I think it’s risk and opportunity – some people may find ways to do this business in a more capital efficient way that gives them an advantage, and others may be hurt by it and find that capital would go up significantly in a way that hurts their business.There’s probably a question as to the overall level of capital and is it enough, and I think that’s one time is going to have to tell,” he says.
“[The CFTC] doesn’t want there to be fewer swap dealers, they don’t want fewer futures commission merchants. I think they’re sensitive to criticisms that rules can make it difficult for smaller players to survive. They are sensitive to that issue and they want there to be a broad range of dealers out there so I think they will be sensitive to avoiding things that would cause contraction in the industry or making it difficult for people to stay in business.”
But the ruling has faced criticism over its lack of analysis to determine the appropriate level of capital required by swap dealers. According to dissenting Commissioner Dan M Berkovitz, the ruling was designed to ensure that most dealers will not need to raise capital.
“There’s a procedural aspect of if they’re going to make that kind of large change, they should have proposed that. But I think more fundamentally there’s a concern on the part of the dissenters and probably others that they’ve reduced the capital requirements and that could have implications,” says Goldman.