Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

Commodity Futures Trading Commission

Office of Public Affairs

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

www.cftc.gov

Q & A – Final Rulemaking Regarding Further Defining “Swap Dealer,” “Major 

Swap Participant” and “Eligible Contract Participant”

What is the goal of the final rulemaking?

The final rulemaking further defines the terms “swap dealer,” “major swap participant” and “eligible contract participant.” 

The terms “swap dealer” and “major swap participant” were added to the Commodity Exchange Act (CEA) by Section 721 of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 712(d)(1) of the Dodd-Frank 

Act requires the Commission and the SEC, in consultation with the Federal Reserve Board, to jointly further define those 

terms. In addition, the final rulemaking, as required by Section 712(d)(1) and as authorized by Section 721(d)(2)(A), includes 

changes to the term “eligible contract participant,” which is currently defined in Section 1a(18) of the CEA.

Persons that meet the definitions of “swap dealer” or “major swap participant” will be subject to certain statutory 

requirements that are the subject of other separate rulemakings, including, registration, margin, capital and business conduct 

standards. With respect to the term “eligible contract participant, the Dodd-Frank Act makes it unlawful for a person that is 

not an eligible contract participant to enter into a swap other than on, or subject to the rules of, a designated contract market.

How should a person apply the rules and guidance further defining the term “swap dealer”?

The person should begin with the statutory definition and the provisions of the rule which implement the four statutory tests

and the exclusion of activities that are not part of “a regular business,” in order to determine if the person is engaged in swap 

dealing activity. In that review, the person would apply the interpretive guidance in the release that provides for consideration 

of all of the relevant facts and circumstances. As part of this consideration, the person could apply elements of the SEC’s 

dealer-trader distinction.

The rule provides that certain swaps may be excluded from the determination – swaps entered into between an insured 

depository institution and a customer in connection with originating a loan, swaps between majority-owned affiliates, swaps 

between a cooperative and its members, and swaps entered into for hedging physical positions.

If this review shows that the person is engaged in swap dealing activity, the next step is to determine if the person is engaged 

in more than a de minimis quantity of swap dealing. If so, the person must register as a swap dealer. In doing so, the person 

may apply to limit its designation to specified categories of swaps or specified activities of the person in connection with 

swaps.

What are some of the principles that apply in determining if a person is a swap dealer?

The adopting release gives further interpretive guidance on concepts from the proposing release. It explains that whether a 

person’s activities cause it to be covered by the swap dealer definition should be determined in the context of the four parts of 

the statutory definition. For example, the guidance provides that market making is appropriately described as routinely 

standing ready to enter into swaps at the request or demand of a counterparty, and it clarifies that it is possible for a person 

making a one-way market in swaps to be a market maker. On whether a person’s swap activity constitutes “a regular 

business,” and is therefore potentially indicative of swap dealing, the guidance focuses on activities that are usual and normal 

in the person’s course of business and identifiable as a swap dealing business. Also, the release explains that although the 

CFTC is not formally adopting the SEC’s dealer-trader precedents, those precedents may be applied to determine if a person is 

a swap dealer.
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Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

How are hedging swaps relevant in the swap dealer determination?

The statutory definition does not specifically address hedging activity. However, the CFTC believes it is appropriate to 

provide, in an interim final rule, that swaps a person enters into for the purpose of hedging price risks related to physical

positions are inconsistent with swap dealing, and are excluded from the swap dealer determination. The interim final rule 

draws upon principles in the Commission’s long standing interpretation of bona fide hedging. It excludes swap activity for the 

purpose of portfolio hedging and anticipatory hedging. However, the CFTC is not adopting a per se exclusion of all swaps 

that hedge or mitigate risk. If a swap is not entered into for the specific hedging purposes identified in the rule, then all 

relevant facts and circumstances about the swap would be considered in determining if the person is a swap dealer. The 

CFTC is looking forward to receiving comment on whether the interim final rule appropriately excludes swaps for hedging.

When are swaps between an insured depository institution and a customer in connection with 

the origination of a loan excluded from the dealer analysis?

The rule balances the need for flexibility in lending practices, the constraints of the statutory text providing for this exclusion, 

and the risk of creating a gap in swap dealer regulation. It provides that the exclusion applies to a swap that is connected to 

the financial terms of a loan or is required to hedge the borrower’s commodity price risks, if the swap is entered into within 90 

days before or 180 days after the execution of the loan agreement or any principal draw under the loan. The loan must be 

within the common law meaning of the term “loan” and the insured depository institution must be the sole lender or, if it is in 

a loan syndicate, be responsible for at least 10% of the loan. Other incidental conditions also apply. 

What is the threshold for determining if a person is engaged in a de minimis quantity of swap 

dealing?

The rule provides that a person shall not be deemed a swap dealer if its swap dealing activity over the preceding 12 months 

results in swap positions with an aggregate gross notional amount of no more than $3 billion, and an aggregate gross notional

amount of no more than $25 million with regard to swaps with a “special entity” (which includes municipalities, other political 

subdivisions and employee benefit plans). Swaps that are not connected to swap dealing activity, as defined in the rule and 

interpretive guidance, do not count against the de minimis threshold. 

The rule also provides for a phase-in of the de minimis threshold to facilitate orderly implementation of swap dealer 

requirements. During the phase-in period, the de minimis threshold would effectively be $8 billion (while the $25 million 

threshold for swaps with special entities would apply). Two and one-half years after data starts to be reported to swap data 

repositories, the Commission’s staff will prepare a study of the swap markets, including data and information that becomes 

available about the de minimis threshold. Nine months after this study, the Commission may end the phase-in period, or 

propose new rules to change the de minimis threshold (either up or down). If the Commission period does not take action to 

end the phase-in period, it will terminate automatically five years after data starts to be reported to swap data repositories.

What are the threshold levels adopted in the final rules further defining “major swap participant” 

(MSP)for determining whether a person has a “substantial position” or “substantial counterparty 

exposure”?

For a person to have a “substantial position” in a major category of swaps, the final rules require a daily average current 

uncollateralized exposure of at least $1 billion (or $3 billion for the rate swap category), or a daily average current 

uncollateralized exposure plus potential future exposure of $2 billion (or $6 billion for the rate swap category.

For a person’s swap positions to pose “substantial counterparty exposure,” the final rules require positions that present a daily 

average current uncollateralized exposure of $5 billion or more, or present daily average current uncollateralized exposure plus 

potential future exposure of $8 billion or more.

The final rules further defining “major swap participant” (MSP) include rules on the calculation of

“substantial position.” How do the final rule on substantial position account for the effect

of central clearing?
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Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

The method of calculating substantial position as adopted accounts for the risk-mitigating effects of central clearing. First, the 

method deducts from current exposure the value of any collateral posted with respect to a swap position. Since centrally 

cleared swaps are typically subject to full mark-to-market margining, the swaps would generally be eliminated from the 

calculation of current exposure. Also, in the calculation of potential future exposure, centrally cleared swaps are subject to a 

90% discount in value.

How do the final rules on substantial position account for potential short-term variations in

the value of a person’s swap positions?

The calculations in the substantial position test would be applied as the mean of the amounts measured at the close of each 

business day in a calendar quarter. This method takes into account concerns that swap positions should not be evaluated based 

on a single point in time because short-term market fluctuations may not fairly reflect risks. The Commission expects that use 

of a daily average approach should also help preclude the possibility that a person may use short-term transactions to distort 

the measure of substantial position.

Why do the final rules on substantial position include an element to account for potential

future exposure?

The Commission believes that rules which focus solely on current uncollateralized exposure could be overly narrow by failing 

to identify risky entities until after they begin to pose risk. Because exposure can change quickly over short periods of time, 

swaps may already pose significant risk even before uncollateralized mark-to-market exposure increases up to the applicable 

threshold.

Did the Commission consider other tests for determining if a person has a substantial position in

swaps for purposes of the “major swap participant” (MSP) definition?

Yes. The Commission considered several other types of tests that, but does not believe their advantages justify their 

disadvantages. For example, a test based on the number of a person’s counterparties could identify highly interconnected 

entities, but a large number of counterparties also means that the losses from that person’s default may be more easily 

absorbed by the market. A threshold based on a person’s financial strength would not address risks that arise before the 

person defaults, such as price movements caused when an MSP faces a large margin call. A threshold based on the financial 

strength of a person’s counterparties could encourage concentration of swaps within a few counterparties.

Is the definition of “hedging or mitigating commercial risk” limited to positions that

qualify for hedge accounting treatment or bona fide hedging treatment?

No. Although the final rule includes swaps that are recognized as hedges for accounting purposes or as bona fide hedging 

under Commission rules, the swaps included within the proposed exclusion for hedging or mitigating commercial risk are not 

limited to those categories. Rather, the final rule covers swaps hedging or mitigating any of a person’s business risks, regardless 

of their status under accounting guidelines or the bona fide hedging rule.

What are swap positions held for a purpose that is in the nature of speculation, investing or 

trading for purposes of the definition of “hedging or mitigating commercial risk”?

The definition of substantial position excludes positions held for “hedging or mitigating commercial risk.” The final definition 

of hedging or mitigating commercial risk, however, does not encompass any swap position that is held for a purpose that is in

the nature of speculation, investing or trading. The Commission believes that the meaning of “speculation, investing or 

trading” is apparent when read in the overall context of the definition of “hedging or mitigating commercial risk.” As a result, 

swap positions executed for the purpose of speculating, investing, or trading are those positions executed primarily to take an 

outright view on market direction or to obtain an appreciation in value of the swap position itself and not primarily for 

hedging or mitigating underlying commercial risks. For example, swaps positions held primarily for the purpose of generating 

profits directly upon closeout of the swap, and not to hedge or mitigate underlying commercial risk, are speculative or serve as 
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Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

investments. Further, as an alternative example, swaps executed for the purpose of offsetting potential future increases in the 

price of inputs that the entity reasonably expects to purchase for its commercial activities serve to hedge a commercial risk.

How would a person be designated as a “major swap participant” (MSP)?

Similar to a swap dealer, a person that meets the definition of major swap participant must register with the Commission. This 

would require each market participant whose swap activities exceed any of the thresholds for “substantial position” or 

“substantial counterparty exposure” to register. In addition, the final rules permit persons to apply to be designated as a major 

swap participant with respect to only specified categories of swaps or activities.

Does the final rule regarding “major swap participant” (MSP) provide for an implementation 

process in connection with registration?

Yes. A person would be deemed to be a major swap participant upon the earlier of the date on which it submits a complete 

application for registration, or two months after the end of the quarter in which it meets the major swap participant criteria. 

In addition, if any person meets the criteria for qualifying as a major swap participant, but does not exceed any applicable 

threshold by more than 20 percent in that particular quarter, the person will not immediately be subject to the timing 

requirements noted above, but will become subject to the timing requirements at the end of the next fiscal quarter if such 

person exceeds any of the applicable daily average thresholds in that next fiscal quarter. The final rules also provide that a 

person retains major swap participant status until it does not exceed any of the applicable thresholds for four consecutive 

quarters following registration.

Does the final rule defining “major swap participant” (MSP) provide for safe harbor(s) so that 

market participants would be relieved of daily calculations?

Yes. The final rules regarding major swap participant provide for three (3) alternative safe harbors. First, a person will not be 

deemed to be a major swap participant if: (1) the express terms of the person’s arrangements relating to swaps with its 

counterparties at no time would permit the person to maintain a total uncollateralized exposure of more than $100 million to 

all such counterparties, including any exposure that may result from the application of thresholds or minimum transfer 

amounts established by credit support annexes or similar arrangements; and (2) the person does not maintain notional swap or 

security-based swap positions of more than $2 billion in any major category of swaps or security-based swaps, or more than $4 

billion in aggregate. 

Second, a person will not be deemed to be a major swap participant if: (1) the express terms of the person’s arrangements 

relating to swaps with its counterparties at no time would permit the person to maintain a total uncollateralized exposure of 

more than $200 million to all such counterparties, including any exposure that may result from thresholds or minimum 

transfer amounts; and (2) the person performs the major swap participant (e.g., the “substantial position” and “substantial 

counterparty exposure” calculations associated with the major swap participant tests) as of the end of every month, and the 

results of each of those monthly calculations indicate that the person’s swap positions lead to no more than one-half of the 

level of current exposure plus potential future exposure that would cause the person to be a major swap participant. 

Third, a person will not be deemed to be a major swap participant if the person’s current uncollateralized exposure is in 

connection with a major category of swaps or security-based swaps is less than $500 million or $1.5 billion with regard to the 

rate swap category and the person performs certain modified major swap participant calculations (e.g., the “substantial 

position” and “substantial counterparty exposure” calculations, simplified based on assumptions that are adverse to the 

person) as of the end of every month, and the results of each of those monthly calculations indicate that the person’s swap 

positions in each major category of swaps are less than one-half of the substantial position threshold.

What is the significance of meeting the definition of “eligible contract participant” for purposes 

of Title VII of the Dodd-Frank Act?

ECPs can enter into swaps other than on or subject to the rules of a designated contract market. ECPs and their 

counterparties also are not subject to the retail forex regime of the CFTC or other federal regulators.
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Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

Will I still be able to rely on the Swap Policy Statement in connection with the definition of 

“eligible contract participant”?

No, but the core of the swap policy statement —hedging or mitigating commercial risk using swaps in connection with a line 

of business — is incorporated into the final rules, along with a new condition regarding ownership and a new way of 

determining net worth for the limited purpose of the new line of business prong of the ECP definition.

Will swap dealers, major swap participants, security-based swap dealers and major securitybased swap participants be per se eligible contract participants?

Yes, irrespective of whether they are registered as such.

If a commodity pool cannot satisfy the terms of CFTC Regulation § 1.3(m)(5), can it instead 

qualify as an ECP under CFTC Regulation § 1.3(m)(8)?

Yes. Under Commission Regulation § 1.3(m)(5), a commodity pool that is the counterparty to retail forex transactions (a 

transaction-level pool) and that has one or more non-ECP participants is not itself an ECP under either prong (iv) or prong 

(v) of the ECP definition for purposes of CEA sections 2(c)(2)(B) and (C) of the CEA. In determining whether a pool that is 

a direct participant in a transaction-level pool (investor pool) is an ECP for purposes of the transaction-level pool's retail forex 

transactions, the investor pool's investors will not count unless the transaction-level pool, any direct or indirect investor pool, 

or any commodity pool in which the transaction-level pool holds a direct or indirect interest, has been structured to evade 

subtitle A of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act by permitting non-ECPs to 

participate in retail forex transactions.

Notwithstanding the look-through language in Section 1a(18)(A)(iv) of the CEA and Commission Regulation § 1.3(m)(5), a 

commodity pool that enters into a retail forex transaction is an ECP with respect thereto, regardless of whether each 

participant in the pool is an ECP, if all of the following conditions are satisfied:

 the pool is not formed for the purpose of evading regulation under Section 2(c)(2)(B) or Section 2(c)(2)(C) of the Act 

or related Commission rules, regulations or orders;

 the pool has total assets exceeding $10,000,000; and

 the pool is formed and operated by a registered CPO.

When does the look through become effective?

Not until December 31, 2012, consistent with the compliance date for CPOs who previously claimed exemption from CPO 

registration pursuant to now-withdrawn CFTC Regulation § 4.13(a)(4).

How can a CPO comply with the element of CFTC Regulation § 1.3(m)(8)(iii) requiring formation 

and operation by a registered CPO if the relevant pool was formed by a person other than a 

registered CPO?

Compliance with the formation element of CFTC Regulation § 1.3(m)(8)(iii) is not required of any person seeking to rely on 

CFTC Regulation § 1.3(m)(8)(iii) with respect to a commodity pool formed prior to December 31, 2012. Such compliance will 

be required with respect to a commodity pool formed on or after December 31, 2012, however, for any person seeking to rely

on CFTC Regulation § 1.3(m)(8)(iii).

If a CPO is located outside the United States, its territories or possessions and operates a 

commodity pool whose participants are limited solely to non-U.S. persons, is the pool subject to 

the look through for purposes of determining whether it is an ECP for purposes of CFTC 

Regulation § 1.3(m)(5)?
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Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

In such circumstances, the pool will be considered an ECP for purposes of CFTC Regulation § 1.3(m)(5) irrespective of the 

ECP status of its participants. For this purpose, a pool participant is a non-U.S. person if it satisfies the definition of “NonUnited States person” in CFTC Regulation § 4.7(a)(1)(iv); provided, however, that, if a participant is an entity organized 

principally for passive investment, such as a pool, investment company or other similar entity, unlike in CFTC Regulation § 

4.7(a)(1)(iv)(D) (which permits any amount of beneficial interests in such an entity up to 10% to be held by U.S. persons), all 

units of participation in such passive investment vehicle participant must be held by Non-United States persons for such 

passive investment vehicle participant to be a Non-United States person for purposes of determining the ECP status of a 

commodity pool in which such passive investment vehicle participates.