Higher Swaps Costs Still Likely

Regulators clear up some uncertainty, but more rules yet to come.

Regulators’ tighter definitions for determining which companies must register as swap dealers and major swap participants should come as a relief to many large corporations, but the cost to hedge risky exposures using swaps is nevertheless likely to rise for most end users.

The rules approved by the Securities and Exchange Commission and the Commodities Futures Trading Commission on Wednesday ramped up the threshold at which a company is required to register as a highly regulated swap dealer to $8 billion in notional value of swaps generated annually, up from $100 million in the proposal. That threshold—only for swaps not used as hedges—drops to $3 billion within five years unless regulators opt for a different level.

The more than 1,500 swap-related rules stemming from the Dodd-Frank Act are expected to increase swap dealers’ compliance costs. Institutions whose swap activity falls below the thresholds, mainly regional banks, will not face that hurdle.

“The biggest sigh of relief is from smaller corporates that couldn’t get swap lines with the big global banks,” says Jiro Okochi, CEO and founder of Reval. He adds that those companies worried their swap-market liquidity would dry up if their banks deemed compliance costs excessive.

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