The SEC & CFTC finally defined what an SD or MSP is:

• http://www.sec.gov/news/press/2012/2012-67.htm
• http://cftc.gov/PressRoom/Events/opaevent_cftcdoddfrank041812
• http://cftc.gov/ucm/groups/public/@newsroom/documents/file/msp_ecp_factsheet_final.pdf

I went through the rules and my summary is this:

Register as Swap Dealer if:

• Your firm routinely stands ready to enter into swaps at the request or demand of a counterparty
• Makes a market in swaps (‘swaps’ meaning OTC / ISDA products, including options), and/or including exchange trades ‘swaps’
• Entering into swaps to satisfy the business or risk management needs of the counterparty
• You are maintaining a separate profit and loss statement for swap activity
• You are allocating staff and resources to dealer-type activities
• Your firm engages in activity causing you to be commonly known in the trade as a dealer or market maker in swaps

And for firms outside the US – the current reach of Dodd Frank means any firm transacting business with a US firm or branch of a US firm will require to register as a Swap Dealer.

Exceptions to registering as a Swap Dealer

There are a variety of exceptions to the above including:

• The swap is hedging a loan (see the above PDF for more detail)
• Hedging:
  • the price risks arise from the potential change in the value of assets that the person owns, produces, manufactures, processes, or merchandises, liabilities that the person owns or anticipates incurring, or services that the person provides or purchases;
  • the swap represents a substitute for transactions or positions in a physical marketing channel;
  • the swap is economically appropriate to the reduction of the person’s risks in the conduct and management of a commercial enterprise; and
  • the swap is entered into in accordance with sound commercial practices and is not structured to evade designation as a swap dealer
• Affiliates
  • The determination of whether a person is a swap dealer excludes swaps between majority-owned affiliates. Similarly, the determination also excludes swaps between a cooperative – including agricultural cooperatives and cooperative financial institutions – and its members.
• Notional aggregate (CFTC)
  • Dodd Frank sets an exclusion that the aggregate gross notional amount of the swaps that the person enters into over the prior 12 months in connection with dealing activities must not exceed $3 billion.
  • During the 2.5 year phase in of Swap reporting, the de minimis threshold would effectively be $8 billion
  • 9 months after the 2.5 years the results of a study by the CFTC will determine whether to increase, decrease or leave alone these thresholds
  • Either way, the $8bn expires after 5 years, and reverts to the DFA amount of $3bn
• Notional aggregates (SEC)
• • $3bn CDS over the prior 12 months, but $8bn during the SEC ‘phase in’ period, of about 3 years

Register as a Major Swap Participant if:

• You are a person that maintains a “substantial position” in any of the major swap categories,
  • excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan
• You are a person whose outstanding swaps create “substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.”
• You are a “financial entity” that is “highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking agency” and that maintains a “substantial position” in any of the major swap categories.

The CFTC PDF (third item at the top) contains more details on what a ‘substantial position’ and ‘hedging’ mean.