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Dodd-Frank Timeline, Process for Review of Swaps for Mandatory Clearing
| Proposal Date
| Final Rule Issue
| Effective Date
|
| November 2, 2010
| July 26, 2011
| September 26, 2011
|
Dodd-Frank Timeline, Process for Review of Swaps for Mandatory Clearing; Technical Amendments, SEC
| Proposal Date
| Comment Deadline
| Final Rule Issue
|
| December 30, 2010
| February 14, 2011
| Late 2011/Early 2012
|
One of the provisions of the Dodd-Frank Act is an amendment to the Commodity Exchange Act that would prohibit swap transactions unless it were submitted to a Derivatives Clearing Organization (DCO) for clearing, or if the swap met one of the requirements for exemption. In separate meetings, the SEC and CFTC issued proposed rules regarding the process for review of swaps for mandatory clearing.
According to Title VII of the Act, the creation and enforcement of swaps rules is divided between the SEC and CFTC. The SEC has authority over “security-based swaps,” and the CFTC has primary regulatory authority over all other swaps. The two commissions will share authority over “mixed swaps,” which are security-based swaps that also have a commodity component.
The two agencies, along with prudential regulators such as the FDIC, U.S. Department of the Treasury, and the Federal Reserve, began issuing Dodd-Frank-related rule proposals soon after Dodd-Frank was signed into law on July 21, 2010. The Act has mandated a one-year implementation deadline, but regulators have been unable to meet this deadline.[1]
CFTC Final Rule
Process for Review of Swaps for Mandatory Clearing
At its July 19, 2011 open meeting, the Commodity Futures Trading Commission (CFTC) approved final rules regarding the process for review of swaps for mandatory clearing.[2]
Under the final rules, a Derivatives Clearing Organization (DCO) seeking to clear a swap transaction must file a written request to the commission and submit proof of its ability to comply with DCO core principles, has sufficient financial reserves, and is capable of managing the risks associated with the swap. The DCO would also be required to provide "specific information relating to product specifications; participant eligibility standards; pricing sources, models, and procedures; risk management procedures; measures of market liquidity and trading activity; the effect of a clearing requirement on the market for the swap; applicable rules, manuals, policies, or procedures;terms and trading conventions on which the swap is currently traded; and a description of the manner in which the DCO has provided notice of the submission to its members and a summary of any opposition to the submission expressed by members."
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.
On October 26, 2010, the CFTC introduced the proposal for these final rules at an open meeting.[3] Proposed rules were added to the Federal Register on November 2, 2010.
SEC Proposed Rule
Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
At its December 15, 2010 open meeting, the SEC approved a rule proposal regarding the the submission to a clearing agency of a security-based swap for clearing. According to the proposal:
- A process should be established for "the submission for review of security-based swaps for mandatory clearing under Section 763(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and for the filing of changes to rules, procedures or operations in accordance with Section 806(e) of Dodd-Frank Wall Street Reform and Consumer Protection Act by clearing agencies that are designated financial market utilities."
- A new rule should "establish a procedure by which the Commission may stay the mandatory clearing requirement."
- A new rule should be established "concerning the submission to a clearing agency of a security-based swap for clearing."
References
- ↑ House committee approves extension for Dodd-Frank rule-makings. Risk.net. Retrieved on May 25, 2011.
- ↑ http://www.cftc.gov/PressRoom/Events/opaevent_cftcdoddfrank071911.html. CFTC. Retrieved on July 19, 2011.
- ↑ Open Meeting on Third Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 3, 2011.
