The bank also pointed to a legal precedent for its idea: that in the Gramm-Leach-Bliley Act of 1999, "a bank that effects...not more than 500 transactions in securities in any calendar year is exempted from the definition of 'broker.'"
The threshold idea was addressed from a different vantage point by the Committee on Futures and Derivatives Regulation of the New York City Bar Association. The Bar Association recommended, instead, that regulators specify a minimum dollar amount of net exposure, below which an end-user would not be considered to have "substantial counterparty exposure." It suggested factoring in offsetting trades, central clearing to reduce counterparty risk and the amount and quality of collateral posted.
The thinking goes that counting the number of contracts is a less meaningful way to gauge risk.
In the futures world, counting contracts is more useful in assessing leverage and risk, said Holland West, a senior partner at law firm Dechert, but it doesn't work for tailor-made over-the-counter derivatives.
"Futures are standardized, so just by multiplication you can get to a rough position value, whereas with swaps your exposure bears no relation to your number of contracts or your contract value," he said.
A better test, he said, would be a specified net exposure over a reasonable period of time that would show how much the firm was in or out of the money on its trades. "It has to be a sort of average or look-back because you can't just foot-fault one day and be counted, or conversely reduce your balance sheet risk around earnings periods and not be counted," Mr. West said.
http://online.wsj.com/article/SB10001424052748704116004575522782759846268.html
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