Competition among swaps dealers young and old will be fierce, yet what constitutes a “dealer” still remains unclear. Defining dealer is important because those who register as Swaps Dealers will face tougher scrutiny — including more reporting and higher capital requirements — from regulators. And since the Commodity Futures Trading Commission recently passed a few rules relating to Swap Dealer registration, I thought it would be a good time to review the issues.
There are two sides to the debate over what a dealer is: the regulatory definition and the practical definition. The most pronounced regulatory definition comes from the CFTC.
According to the CFTC, activities that make someone a Swaps Dealer are:
- Holding oneself out as a dealer in swaps or security-based swaps,
- Making a market in swaps or security-based swaps,
- Regularly entering into swaps or security-based swaps with counterparties as an ordinary course of business for one’s own account, or
- Engaging in activity causing oneself to be commonly known in the trade as a dealer or market maker in swaps or security-based swaps.
Looking at this definition broadly, the most significant question is whether or not a firm that satisfies some, but not all, of these conditions should be required to register as a Swaps Dealer. Reporting, margin capital and other requirements for registered Swaps Dealers will likely be more onerous, so even firms that aspire to provide liquidity to clients will try to avoid the “capital S, capital D” label. It could be argued that being registered as a Swaps Dealer might act as an ironic competitive disadvantage. Principal Trading Groups (PTG), for example, fall into this bucket (see "Higher Frequency Swaps Trading: Market Making and Arbitrage," August 2011).