A swap dealer is a firm that engages in swap transactions with counterparties as a business. Swap dealers must register with the CFTC and are subject to CFTC regulation. What is ECP in CFTC? The Commodity Futures Trading Commission (CFTC) is an independent agency of the US federal government that regulates the commodity futures and options markets. ECP stands for "Exempt Commercial Producer," which is a designation given by the CFTC to entities that produce commodities for use in their business operations, but do not engage in speculative trading.
Is a swap dealer a broker dealer?
A swap dealer is a type of broker dealer that specializes in swaps, which are derivative contracts that allow two parties to exchange certain financial instruments. Swaps can be used for a variety of purposes, including hedging risk, speculate on future movements in the underlying instruments, or to generate income.
Does the CFTC regulate swap dealers?
The Commodity Futures Trading Commission (CFTC) is the federal agency that regulates commodity futures and options markets in the United States. The CFTC also regulates certain aspects of the commodities industry, including commodity exchanges and futures commission merchants.
In recent years, the CFTC has been given additional authority to regulate the over-the-counter (OTC) derivatives market. This includes the authority to regulate so-called "swap dealers."
A swap dealer is defined as any person or entity that (1) holds itself out as a 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 any activity causing the person or entity to be commonly known in the trade as a dealer or market-maker in swaps.
The CFTC has promulgated a number of rules governing the activities of swap dealers. These rules are designed to protect market participants from fraud, manipulation, and other abusive practices.
How do swaps work?
Most swaps are over-the-counter (OTC) derivatives, meaning they are not traded on an exchange. Instead, they are agreements between two counterparties, typically financial institutions, to exchange cash flows based on the underlying value of an asset, such as a currency, interest rate, commodity, or stock index.
Swaps can be used to hedge risk or speculate on changes in the underlying asset. For example, a company that expects to receive payments in a foreign currency in the future may enter into a currency swap to exchange those payments for U.S. dollars. This hedges the company's exposure to currency risk.
Or, a hedge fund manager may believe that interest rates will rise in the next year. The manager could enter into an interest rate swap where they agree to pay a fixed rate of interest and receive a variable rate of interest, betting that the variable rate will be higher than the fixed rate.
Here's a more detailed description of how a swap works:
1. Two counterparties agree to exchange cash flows based on the underlying value of an asset.
2. The asset is typically a currency, interest rate, commodity, or stock index.
3. The cash flows are exchanged at regular intervals, typically every month or every quarter.
4. At the end of the swap, the asset is exchanged back between the counterparties. What does an AP of a swap dealer do? An AP of a swap dealer is an agent or middleman who helps to facilitate the trading of swaps between two counterparties. The AP may also provide other services such as clearing and settling trades, and acting as a custodian for collateral.