An MSP is any person  (i) that is not a swap dealer, and (ii) whose swap activities satisfy one of the three statutory tests:

• Substantial Position Test: An entity that maintains a substantial position in swaps for any of the “major swap categories,” excluding positions held for hedging or mitigating commercial risk, and positions held by an “employee benefit plan” as defined in ERISA;
• Substantial Counterparty Exposure Test: An entity whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the U.S. banking system or financial markets; or
• Financial Entity Test: A financial entity that is highly leveraged relative to the amount of capital it holds, is not subject to capital requirements established by an appropriate Federal banking agency, and maintains a substantial position in outstanding swaps in any major swap category.  See CEA Section 1a(33).

The CFTC’s regulations establish a mathematical threshold for each of the tests above.  These tests are measured on a daily basis, so if a person exceeds any one threshold on a given day, the person may need to register with the CFTC and NFA as an MSP.

There are currently no entities registered as MSPs.  Given that the MSP thresholds apply on a daily basis, a market participant generally must analyze whether it is an MSP on a daily basis.  However, given the burden of performing a daily calculation, the CFTC established safe harbors that allow a market participant to make less frequent calculations.  If a market participant qualifies for any of the safe harbor calculations, it is not an MSP and is not required to perform any daily MSP calculations.  If an entity does not qualify for any of the safe harbor calculations, then it must perform the daily MSP calculations for the substantial position test, substantial counterparty exposure test, and the financial entity test.

• Calculation Safe Harbor 1. A market participant is not required to register as an MSP if (i) the “express terms” of its swap transaction agreements with all counterparties would not permit the market participant to maintain total uncollateralized outward swaps exposure of more than $100 million; and (ii) the sum of the effective notional amounts of the market participant’s swaps in any major category does not exceed $2 billion, or more than $4 billion in the aggregate across all major categories.
• Calculation Safe Harbor 2. A market participant is not required to register as an MSP if (i) the “express terms” of its swap transaction agreements with all counterparties would not permit the market participant to maintain total uncollateralized outward exposure of more than $200 million (with regard to swaps and any other instruments by which the market participant may have exposure to those counterparties); and (ii) the market participant performs an end‑of‑month calculation of uncollateralized outward exposure and potential future exposure as of such day and determines that:
  • its swap positions in any major category do not have uncollateralized outward swaps exposure plus potential future swaps exposure in excess of $1 billion (excluding hedging swaps unless the relevant entity is a “highly leveraged” “financial entity” that is not subject to direct capital regulation); and
  • its swap positions in all major categories combined do not have uncollateralized outward exposure plus potential future exposure in excess of $2 billion (no hedging exclusions are permitted).
• Calculation Safe Harbor 3. A market participant is not required to register with the CFTC as an MSP if:
  • At the end of each month: (1) the aggregate uncollateralized outward swaps exposure of the market participant’s rate swaps is less than $1.5 billion and the uncollateralized outward exposure of swaps in each other major category is less than $500 million; and (2) the aggregate uncollateralized outward exposure plus the sum of the effective notional amounts of swaps multiplied by the risk multipliers provided by the CFTC (but not the multipliers for daily mark-to-market, clearing or netting) is less than $3 billion for rate swaps and $1 billion for each other major category; or
  • At the end of each month: (1) the person’s aggregate uncollateralized outward exposure for swaps in all major categories is less than $500 million; and (2) the aggregate uncollateralized outward exposure plus the sum of the effective notional amounts of swaps multiplied by 0.15 is less than $1 billion.