Derivatives Clearing Organizations Regulation - Comment Letters

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Gavel.png FINAL RULE: Derivatives Clearing Organization General Provisions and Core Principles
Gavel.png FINAL RULE: CFTC Final Rule: Process for Review of Swaps for Mandatory Clearing Approved at CFTC Open Meeting, July 19, 2011
Dodd-Frank Timeline, Financial Resources Requirements for Derivatives Clearing Organizations
Proposal Date Final Rule Issue Effective Date
December 13, 2010 October 18, 2011 January 9, 2012
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
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
Dodd-Frank Timeline, Reporting, Recordkeeping, Public Information and Information Sharing Requirements for DCOs
Proposal Date Final Rule Issue Effective Date
December 13, 2010 October 18, 2011 January 9, 2012
Dodd-Frank Timeline, DCO,DCM, SEF Governance Standards, Additional Requirements
Proposal Date Comment Deadline Final Rule Issue
January 6, 2011 June 3, 2011 TBA; 2013
Dodd-Frank Timeline, Risk Management Requirements for DCOs
Final Rule Issue Effective Date Effective Date, SIDCOs Compliance Date, SIDCOs
October 18, 2011 January 9, 2012 October 15, 2013 December 31, 2013

Comment Letters addressing Derivatives Clearing Organizations Regulation. The letters are grouped according to the rule proposal being addressed. Comment letters addressing regulations common to all swap entities - Derivative Clearing Organizations (DCOs), Designated Contract Markets (DCMs), Swap Execution Facilities (SEFs), and Swap Data Repositories (SDRs) can be found here.

Contents

Inter-Affiliate Clearing Exemption

On August 16, 2012, the CFTC issued a proposed rule that would exempt from the clearing requirement swaps between certain affiliated corporate entities. Under the rule, such inter-affiliate swaps would be exempt from the clearing mandate, provided certain conditions are met:

  • the counterparties are majority-owned affiliates whose financial statements are included in the same consolidated financial statements; and
  • the entities possess centralized risk management, file necessary swap trading relationship documentation, post applicable variation margin, and satisfy reporting requirements.
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Financial Resources Requirements for Derivatives Clearing Organizations

According to Dodd-Frank, derivatives clearing organizations must maintain sufficient financial resources to maintain solvency under "extreme but plausible" market conditions. The financial resource requirements proposal would direct DCOs to use the following sources in the calculation of available resources:

  • margin of a defaulting clearing member;
  • the DCO’s own capital;
  • guaranty fund deposits;
  • default insurance; and
  • potential assessments for additional guaranty fund contributions.

The value of assessments would be subject to a 30 percent haircut, and a DCO would only be permitted to count the value of assessments, after the haircut, to meet up to 20 percent of the requirement. The DCO must, on a regular interval, but no less than quarterly, perform the calculations, apply any haircuts, and report results to the commission. Additional reserves will be required for "systemically important" derivatives clearing organizations (SIDCOs).[1]

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Review Process for Swaps for Mandatory Clearing

Under the proposal, DCOs would be presumed to be eligible for clearing 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;
  • manage risks associated with the clearing of the swap.

The proposal also sets out the procedure for submission of swaps to the commission, as well as the review process for a counterparty to a swap transaction seeking a stay of the mandatory clearing requirement.[2]

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Derivative Clearing Organization Definitions, Procedures and Core Principles

According to the summary from the Federal Register, December 13, 2010, this proposed rule would:

  • revise procedures for derivatives clearing organization (DCO) applications;
  • clarify procedures for the transfer of a DCO registration:
  • add requirements for approval of DCO rules establishing a portfolio margining program for customer accounts carried by a Futures Commission Merchant (FCM) that is also registered as a securities broker-dealer (FCM/BD);
  • make certain technical amendments; and
  • update the definitions of “clearing member” and “clearing organization,” and to add definitions for certain other terms.[3]
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Information Management Requirements for Derivatives Clearing Organization

This proposed rule outlines the procedures and timeline requirements of the various types of information that DCOs are or will be required to share with the public and with regulators. The requirements are divided into timing categories such as "daily," "quarterly," "annually," and "event-specific." The proposal, which entered the Federal Register on December 9, 2010, also included a chart explaining the requirements.[4]

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Governance Requirements for DCOs, DCMs, SEFs

The governance proposal would require that DCOs:

  • report to the Commission when its board rejects a recommendation from of the Risk Management Committee;
  • implement rules regarding conflicts of interests and make any potential conflicts known to the public; and
  • establish procedures on rule infractions among members, enforcement of financial fitness standards, and market transparency.[5]
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Risk Management Requirements for DCOs

In the DCO risk management proposal, several requirements were outlined, including:

  • creating and maintaining a risk management framework, subject to internal audit;
  • measuring credit exposure of credit exposure, margin, price data, and daily review;
  • maintaining other risk control mechanisms, including risk limits, review of large trader reports, stress tests, and portfolio compression; and
  • if the DCO is deemed systemically important (a "SIDCO"), establishing business continuity and disaster recovery plans.[6]

Note: The CFTC reopened the comment period on March 24, 2011, in order to allow comments after a correction to the wording of a portion of the proposal:

"End-of-day positions for each clearing member, by customer origin and house origin’’ should read, "End-of-day positions for each clearing member, by customer origin and house origin; and for customer origin, separately, the gross positions of each beneficial owner."[7]

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References

  1. Financial Resources Requirements for Derivatives Clearing Organizations. CFTC. Retrieved on March 14, 2011.
  2. Open Meeting on Third Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 3, 2011.
  3. General Regulations and Derivatives Clearing Organizations. Federal Register. Retrieved on March 2, 2011.
  4. DCO Information Management Chart. Commodity Futures Trading Commission. Retrieved on March 14, 2011.
  5. Governance Requirements for Derivatives Clearing Organizations. Federal Register. Retrieved on March 14, 2011.
  6. Risk Management Requirements for Derivatives Clearing Organizations. Federal Register. Retrieved on March 14, 2011.
  7. Risk Management Requirements for Derivatives Clearing Organizations; Correction. CFTC. Retrieved on May 4, 2011.

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