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 subjected to a formal definition 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.

According to Section 721 of the Dodd-Frank Act, a swap dealer is any person who: 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).

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. Currently, the threshold is $8 billion (gross notional amount over 12 months) and is supposed to descend to $3 billion, a much lower level that would force many more entities into the realm of regulatory oversight. Absent an official change to this part of the Dodd-Frank Act, the CFTC in late 2017 postponed the reduction of the threshold by one year to the end of 2019. It had been set for the end of 2018, but that meant entities would have had to begin tracking swap activity beginning on January 1, 2018.