CFTC Final Determination: Clearing Requirement for Credit Default Swaps and Interest Rate Swaps

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Gavel.png FINAL RULES: Implementation Schedule for Clearing approved July 24, 2012. Final rule on clearing determination for IRS, CDS approved November 28, 2012; entered Federal Register on December 13, 2012.
Clearing Requirement Determination for Interest Rate and Credit Default Swaps
Final Determination Effective Date Compliance Dates
December 13, 2012 February 11, 2013 Categories I,II,III phased in - March 11/June 10/Sep. 9, 2013

On November 28, 2012, the CFTC unanimously approved, via seriatim vote, a final determination of the first set of swaps to be subject to mandatory clearing under the Dodd-Frank Act. Under the final rules, any swap listed in the table below and traded by a party not subject to any exemptions from the clearing requirement must submit to a DCO for clearing "as soon as technologically practicable."

The final rule entered the Federal Register on December 13, 2012; its effective date is February 11, 2013.

Compliance will be phased in per the implementation schedule approved in July 2012, with the three categories of participants following this schedule:

  • Category 1 Entities: Monday, March 11, 2013
  • Category 2 Entities: Monday, June 10, 2013
  • Category 3 Entities: Monday, September 9, 2013

Background

On July 24, 2012, the CFTC approved a final regulation that sets a schedule for phased compliance with new clearing requirements related to the Dodd-Frank Act. According to the final rules, once the commission makes a determination on the appropriateness of the timing of implementation for a certain category of transactions, the phased compliance schedule (below) is set into motion. The commission concurrently issued its first proposed determination, for clearing of credit default swaps and interest rate swaps. [1] The final determination is virtually identical to the rules as proposed.

The proposal entered the Federal Register on August 7, 2012, and the deadline for public comment was September 6, 2012.

Highlights of the final rule

  • Interest rate swaps (IRS) for four currencies - the U.S. dollar, British pound, Japanese yen, and the euro - will face the clearing mandate. These four currencies account for over 90 percent of the notional and trading amounts of IRS.
  • Tranched CDS will not be subject to the clearing requirement.
  • Historical swaps, or swaps entered into prior to Dodd-Frank or to the enactment of the clearing requirement are not required to be cleared.
  • Compliance with the clearing requirement will be phased in per the implementation schedule approved on July 24, 2012.
  • Each derivatives clearing organization would be required to post on its website a list of all swaps it will accept for clearing and must indicate which swaps the Commission had determined are required to be cleared.
  • A special regulation is also being issued in order to prevent evasion of the clearing requirement and prevent abuse of any exemption or exception to the clearing requirement under the Dodd-Frank Act.

Summary of Swap Classes to be Cleared

Class Specifications
Fixed-to-Floating Swap U.S. Dollar LIBOR; Pound Sterling LIBOR; Yen LIBOR; Euro EURIBOR, with termination between 28 days to 50 years.
No optionality
No dual currencies
No conditional notional amounts
Basis Swaps U.S. Dollar LIBOR; Pound Sterling LIBOR; Yen LIBOR; Euro EURIBOR, with termination between 28 days to 50 years.
No optionality
No dual currencies
No conditional notional amounts
Forward Rate Agreements U.S. Dollar LIBOR, Pound Sterling LIBOR, Yen LIBOR Euro EURIBOR, with termination between 3 days to 3 years.
No optionality
No dual currencies
No conditional notional amounts
Overnight Index Swaps (OIS) U.S. Dollar (Fed Funds), Euro (EONIA), Sterling (SONIA), with termination between 7 days to 2 years.
No optionality
No dual currencies
No conditional notional amounts
North American Untranched CDS Indices CDX North America,both investment grade (CDX.NA.IG) and high yield (CDX.NA.HY)
IGs of the 3-year, 5-year, 7-year, and 10-year tenor; HYs of the 5-year tenor.
European Untranched CDS Indices **Subject to sepatate clearing schedule iTraxx Europe, 5-year and 10-year tenors
iTraxx Europe Crossover 5-year tenor
iTraxx Europe HiVol 5-year tenor

Specifications adapted from CFTC Federal Register document below
Note: At the time of the final rule release, no DCO had agreed to offer iTraxx indices, so a separate schedule was put in place for the date "60 days after a DCO offers such products for clearing. On February 25, 2013, ICE Clear Credit notified the commission of its offer to clear iTraxx indices. So an implementation schedule was set as follows:

  • Category 1 entities: Friday, April 26, 2013;
  • Category 3 entities: Thursday July 25, 2013; and
  • All other entities: Wednesday, October 23, 2013.

Related Documents: Fact Sheet, Q&A, Federal Register Entry from Proposed Rules

References

  1. CFTC Proposes Clearing Determination for Certain Credit Default Swaps and Interest Rate Swaps. CFTC. Retrieved on July 24, 2012.

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