CFTC Final Rule: Derivatives Clearing Organization General Provisions and Core Principles

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Gavel.png FINAL RULE: CFTC Final Rule: Derivatives Clearing Organization General Provisions and Core Principles Approved at CFTC Open Meeting, October 18, 2011
Dodd-Frank Timeline, Derivative Clearing Organization Definitions, Procedures and Core Principles
Final Rule Issue Effective Date Compliance Date* Compliance Date, Gross Margining
October 18, 2011 January 9, 2012 May 7, 2012 January 14, 2013

The rules, which implements Section 725 of the Dodd-Frank Act, finalize the following five proposed rulemakings:

The final rules follow the proposed rules, with a few revisions. Among the provisions:

  • The regulation requires a DCO to maintain sufficient financial resources to "meet its financial obligations to its clearing members notwithstanding a default by the clearing member creating the largest financial exposure for the DCO in extreme but plausible market conditions," and to cover its operating costs for at least one year. This marks a change from the original proposal, which would have required "systemically important" DCOs ("SIDCOs") to maintain enough funds to cover the default of their two largest members.[2]
  • The regulation addresses permitted types of financial resources, computation, valuation, liquidity, and reporting requirements. Of note, letters of credit are not listed among acceptable resources for swaps, even though they are currently allowed in futures markets.
  • A DCO’s risk management framework must include margin methodology and coverage, price data, daily review, periodic back tests, and other risk control mechanisms (including risk limits, review of large trader reports, stress tests, and reviews of clearing members’ risk management policies and procedures).
  • DCOs will be required to submit certain periodic and event-specific reports, as highlighted in a chart that accompanied the rule proposal.
  • All registrants will be required to file new Form DCO with the commission.

Gross Margin

Among the risk management provisions (Reg. 39.13) is a move toward the collection of margin by DCOs on a gross basis, rather than a net basis:

"A derivatives clearing organization shall collect initial margin on a gross basis for each clearing member’s customer account(s) equal to the sum of the initial margin amounts that would be required by the derivatives clearing organization for each individual customer within that account if each individual customer were a clearing member."

The compliance date for the gross margin requirement is January 14, 2013.

Related Documents: Fact Sheet, Q&A, Federal Registry Entry

References

  1. Final Rule on Derivatives Clearing Organization General Provisions and Core Principles. CFTC. Retrieved on October 21, 2011.
  2. CFTC backs off on systemically important clearinghouse. Reuters. Retrieved on October 21, 2011.

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