Eligible Contract Participant (ECP) What is an ECP?
An entity that is classified by the Commodity Exchange Act (CEA) based on its regulated status or amount of assets. The definition of “Eligible Contract Participant” (ECP) is found in Section 1a(18) of the CEA (7 U.S.C. 1a(18)). ECP classification permits these persons to engage in transactions (such as trading on a derivatives transaction execution facility) not generally available to non-eligible contract participants such as retail customers. These entities include, among others:
- Corporations, partnerships, proprietorships, organizations, trusts, or other entities with more than $10 million in assets, or any entity guaranteed by such entity.
- Individuals with aggregate amounts of more than $10 million invested on a discretionary basis (or $5 million if hedging).
- Entities with a net worth of at least $1 million that are hedging commercial risk.
- Financial institutions.
- Insurance companies.
- Investment companies subject to regulation under the Investment Company Act of 1940 (and similar foreign entities subject to similar foreign regulation).
- Commodity pools with more than $5 million in assets under management (AUM).
- Employee benefit plans subject to ERISA with total assets exceeding $5 million or whose investment decisions are made by a registered commodity pool advisor (CPO) or commodity trading advisor (CTA) subject to regulation under the Investment Advisers Act of 1940, or by a financial institution or insurance company.
- Governmental entities (including the US, a state or a foreign government).
- Brokers and dealers subject to regulation under the Securities Exchange Act of 1934 (Exchange Act) and similarly regulated foreign entities. If the broker or dealer is an individual it must have discretionary investments of greater than $10 million.
- Futures commission merchants (FCMs) and similarly regulated foreign entities, except that if the FCM is an individual it must have discretionary investments of greater than $10 million.
The Dodd-Frank Act makes it unlawful for a person who is not an ECP to enter into a swap other than on or subject to the rules of a designated contract market (DCM). Final Title VII definitional rules (see Legal Update, Final Rules Defining “Swap Dealer” and “Major Swap Participant” under Dodd-Frank Issued by Regulators) therefore designate:
- swap dealers (SDs) and MSPs as ECPs under the CEA, whether or not they would otherwise qualify, making them eligible to enter into swaps off-exchange.
- SBSDs and MSBSPs as ECPs under the Exchange Act, whether or not they would otherwise qualify.
- Section 763(e) of the Dodd-Frank Act (15 U.S.C. § 78f) makes it unlawful for a person to effect a transaction in a SBS with or for a person that is not an ECP unless the transaction is effected on a national securities exchange registered with the SEC.
- Section 768(b) of Dodd-Frank (15 U.S.C. § 77e) makes it unlawful for a person to sell, offer to sell, or offer to buy or purchase a SBS to or from a person that is not an ECP unless a registration statement under the Securities Act of 1933 is in effect with respect to that SBS.
Dodd-Frank also amended the ECP definition by:
- Providing that, for purposes of CEA Sections 2(c)(2)(B)(vi) and 2(c)(2)(C)(vii) (7 U.S.C. § 2), the term ECP does not include a commodity pool in which any participant is not itself an ECP.
- Raising the monetary threshold that governmental entities may use to qualify as ECPs, in certain situations, from $25 million in investments owned and invested on a discretionary basis to $50 million in investments owned and invested on a discretionary basis.
- Replacing the ‘‘total asset’’ standard for individuals to qualify as ECPs with an ‘‘amounts invested on a discretionary basis’’ standard.
The CFTC has also issued interpretive guidance stating that swap guarantors must generally be ECPs. This rule became effective on March 31, 2013. For more information, see Legal Update, No-action Guidance on SD, MSP and CPO Rules under Dodd-Frank Issued by CFTC: Eligible contract participantsand Practice Note, The Dodd-Frank Act’s Swap Guarantor Rule: Implications for Secured Bank Financings.