CFTC Final Rule: Process for Review of Swaps for Mandatory Clearing

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Gavel.png FINAL RULE: At its July 19, 2011 open meeting, the CFTC approved its final rules regarding the process for review of swaps for mandatory clearing. The changes can be found in the following rule:
  • Final Rule, which presumes that derivatives clearing organizations (DCOs) are eligible to clear any swap that is "within a group, category, type, or class of swaps that the DCO already clears." In order to receive eligibility, the DCO must:
  • file a written request to the Commission;
  • prove its ability to maintain compliance with DCO core principles;
  • maintain sufficient financial reserves; and
  • manage risks associated with the clearing of the swap.
Dodd-Frank Timeline, Process for Review of Swaps for Mandatory Clearing
Final Rule Issue Effective Date Compliance Date
November 2, 2010 September 26, 2011 September 26, 2011

As of the compliance date, September 26, 2011, derivatives clearing organizations (DCO)s must begin submitting to the Commission any swap, or group, category, type, or class of swaps that they plan to accept for clearing.

The CFTC will now take five factors into consideration when reviewing a DCO's written request:

  • "The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data;
  • The availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded;
  • The effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the DCO available to clear the contract;
  • The effect on competition, including appropriate fees and charges applied to clearing; and
  • The existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one or more of its clearing members with regard to the treatment of customer and swap counterparty positions, funds, and property."

The final rules also set procedures for Commission-initiated reviews of swaps and stays of clearing.[1]

Commissioner Scott O'Malia Letter, July 28, 2011

On July 28, 2011, Commissioner Scott O'Malia submitted a letter seeking input from market participants regarding the "Five Factors" to be taken into consideration when reviewing a swap clearing request from a derivatives clearing organization. Specifically, O'Malia asks:

  • What criteria should the Commission consider when evaluating whether the DCO has properly categorized “group, category, type, or class of swaps”?
  • Should the Commission accord more weight to one or more of the factors than others? If so, why?
  • Should the Commission consider the factors differently depending on asset class (e.g., interest rate swaps, credit default swaps, and physical commodities)? If so, how should the Commission consider the factors for each asset class (or instruments therein)?
  • To what extent should the Commission take into account, in its consideration of the five factors, the connection between (i) mandatory clearing under Section 2(h)(1) through (4) of the CEA and (ii) the trade execution requirement under Section 2(h)(8) of the CEA?
  • What, if any, additional information should the Commission routinely obtain to aid in its consideration of the five factors?

Also, O'Malia seeks input as to the criteria that the Commission may employ in determining whether to grant a stay of the clearing requirement.

Related Documents: Fact Sheet, Q&A, Federal Register Entry, O'Malia Letter

Background on CFTC Proposed Rule

On October 26, 2010, the CFTC held its third in the series of open meetings to consider the issuance of proposed rulemakings under the Dodd-Frank Act. One of the agenda items was a proposed rule regarding the review of swaps for mandatory clearing.[2]

The proposal appeared in the Federal Register on November 2, 2010.

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References

  1. Open Meeting on Three Final Rule Proposals and Two Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on July 19, 2011.
  2. Open Meeting on Third Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 3, 2011.

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