Swap Transaction Regulation - Clearing Requirement - Comment Letters

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Gavel.png FINAL RULE: Implementation Schedule for Clearing approved July 24, 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 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 determination for clearing of credit default swaps and interest rate swaps. [1] Summaries and links to key comment letters can be found below.

Contents

FIA Principal Traders Group - August 21, 2012

Clearing Requirement for Credit Default Swaps and Interest Rate Swaps
August 21, 2012

From the comment letter:

"The FIA PTG strongly supports the Proposal and believes that it encompasses the appropriate IRS and CDS swaps to initially be subject to the clearing mandate. Further, FIA PTG is encouraged that the Proposal has been published because it represents an important step toward central clearing of standardized OTC swaps, a key goal of the Dodd-Frank Act. While we know the Commission has a ninety day statutory period, we urge the Commission to move expeditiously to finalize the Proposal as we believe the impact will extend beyond central clearing and encourage central trading as well as other important market transitions.

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ISDA - September 6, 2012

Clearing Requirement for Credit Default Swaps and Interest Rate Swaps
September 6, 2012

Summary of recommendations from the comment letter:

  • "The Commission’s mandatory clearing determinations should not take effect until there has been a further determination that a product has an adequate clearing history to support a finding of operational readiness to clear.
  • The delegation of subsequent determinations under proposed Rule 50.6, to the extent the Commission declines to follow our other recommendations and decides to retain this provision, should be supplemented with certain required criteria, a public comment period and a compliance phase-in period.
  • The Commission should abandon its novel “fundamental to economic result test” (developed in its explanation of its proposed clearing determinations for interest rate swaps) and ground its analysis in the five statutory factors under Section 2(h)(2)(D)(ii) of the Commodity Exchange Act (“CEA”).
  • Mandatory clearing of iTraxx® Indices should not take effect until certain conditions relating to regulatory approvals and an operational history of voluntary client clearing have been met.
  • Various technical changes relating to swaptions and extendible swaps, ownership change events, paired trades and other matters should be made.
  • The Commission should undertake a study of DCO insolvency, with a goal of documenting uncertainties and proposing solutions.
  • The anti-evasion provision should be modified to clarify the scienter requirement and avoid chilling business conduct that is free of fraud, deceit or unlawful activity."
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R.J. O'Brien - August 27, 2012

Clearing Requirement for Credit Default Swaps and Interest Rate Swaps
August 27, 2012

From the comment letter:

"Centralized clearing and centralized price discovery provide the transparency and liquidity that all financial market participants deserve. In addition this, it levels the barriers to entry thus increasing competition which is a positive outcome for the end user. We urge the commission to implement the clearing mandate as soon as possible. It will improve the financial industry’s credibility and show the rest of the world we are serious about improving the financial safety of our markets."

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FIA - September 5, 2012

Clearing Requirement for Credit Default Swaps and Interest Rate Swaps
September 5, 2012

From the comment letter:

"FIA welcomes the proposed rules establishing a clearing requirement for swaps as an important step in implementing congressional intent favoring the centralized clearing of swaps that meet the statutory factors set out in section 2(h)(2)(D) of the Act. We support the Commission’s decision to proceed cautiously and focus first on those swaps that have the highest market shares and are already being cleared i.e., certain indices on credit default swap (“CDS”) and interest rate swaps (“IRS”) identified in proposed Rule 50.4. As the Commission notes, “for these swaps there is already a blueprint for clearing and appropriate risk management."

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TriOptima - September 6, 2012

Clearing Requirement for Credit Default Swaps and Interest Rate Swaps
September 6, 2012

From the comment letter:

"We would like to point out that when determining whether a particular transaction is subject to the mandatory clearing requirement, what should be checked is the complete transaction as agreed between the parties. This is important since, in essence, all OTC derivatives are just collections of cash flows, sometimes fixed, sometimes conditional upon future events like rate fixings. For example, an interest rate swap could be seen as a collection of FRA’s. In the same way, non-clearable transactions containing optionality, multi-currency, or conditional notional amounts will in most cases also contain cash flows that are financially equivalent to FRA’s. It would create a severe disruption to the market and create a lot of legal uncertainty if parties had to disentangle non-clearable transactions in order to find clearable components."

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Swaps & Derivatives Market Association - September 6, 2012

Clearing Requirement for Credit Default Swaps and Interest Rate Swaps
September 6, 2012

From the comment letter:

"The specific fixed‐to‐floating swaps, basis swaps, FRAs, and OIS as well as CDX and iTraxx CDS indices listed in proposed §50.4 easily satisfy the five statutory factors that the Commission is required to consider for clearing requirement determinations, as the Commission’s analysis demonstrates. These swaps are all cleared today in material volumes and we thus agree with the Commission that “there is already a blueprint for clearing and appropriate risk management.”3 We recommend that the Commission maintain the full proposed product scope in its final Determination."

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MarketAxess - September 6, 2012

Clearing Requirement for Credit Default Swaps and Interest Rate Swaps
September 6, 2012

From the comment letter:

"MarketAxess supports the Proposed Rules. The CFTC correctly determined that the index CDS subject to the proposed clearing determination satisfy the five statutory factors. These products are the most actively traded and liquid index CDS, and are suitable for mandatory clearing."

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Markit - September 6, 2012

Clearing Requirement for Credit Default Swaps and Interest Rate Swaps
September 6, 2012

From the comment letter:

"While we do not necessarily agree with all of the characterisations of our index products described by the Commission, we do believe that, in general, the Commission correctly identified certain types of IRS and CDS as suited to the clearing requirement. In particular, we believe that the clearing mandate is achievable for those swaps that are widely used and are also already cleared safely. We do not believe that the introduction of a clearing requirement for certain Markit CDX and Markit iTRAXX Index CDS would foreclose or materially affect competition in the market for CDS products, including index licences."

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Americans for Financial Reform - September 6, 2012

Clearing Requirement for Credit Default Swaps and Interest Rate Swaps
September 6, 2012

From the comment letter:

"AFR also urges the Commission to rapidly designate energy, agriculture and equity swaps for mandatory clearing as well. The DCOs have cleared these types of swaps for years and much is known regarding this activity. In some ways, the designation process will be more straightforward than the process associated with CDS and IRS. Large financial institutions carry substantial exposures in energy, agriculture and equities derivatives and, as a result, these markets are an integral part of the entire derivatives risk problem. Losses can easily migrate across markets impairing the confidence needed to sustain a properly working system."

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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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