CFTC Final Rule: End-User Exception to the Clearing Requirement for Swaps

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Gavel.png FINAL RULE: approved at July 10, 2012 open meeting and entered the Federal Register on July 19, 2012.
Dodd-Frank Timeline, End-user Exception to Mandatory Clearing of Swaps, CFTC
Final Rule Issue Effective Date Compliance Date
July 19, 2012 September 17, 2012 April 10, 2013
Dodd-Frank Timeline, End-User Exception to Mandatory Clearing of Swaps, SEC
Proposal Date Comment Deadline Reopened Comment Period Deadline
December 21, 2010 February 4, 2011 July 22, 2013

The Dodd-Frank Act requires, among other things, that the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), create and implement rules regarding mandatory clearing of swaps transactions. A major topic of contention has been whether end-users should be granted an exception to the Dodd-Frank requirement for mandatory clearing of swap transactions. At its July 10, 2012 open meeting the CFTC approved a final rulemaking that implements an exception to the clearing requirement for non-financial entities and small financial institutions that use swaps to hedge or mitigate commercial risk ("commercial end-users"). <ref>CFTC to Hold Open Meeting to Consider Final Rule on the Further Definition of the term “Swap,” Final Rule on the End-User Exception to Clearing, and Proposed Rule to Exempt from Clearing Certain Swaps by Cooperatives. CFTC. Retrieved on July 10, 2012.</ref> The rule entered the Federal Register on July 19, 2012 and its effective date was September 17, 2012. End-users are expected to be compliant by April 10, 2013.


Among the provisions of Title VII of the Dodd-Frank Act is a requirement that swap transactions shall be cleared through a derivatives clearing organization unless the swap:

  1. is not a financial entity;
  2. uses swaps to hedge or mitigate commercial risk; and
  3. notifies the commission as to how it generally meets its financial obligations when entering into uncleared swaps.

These criteria are referred to as the "end-user exception."

At its December 9, 2010 open meeting, the CFTC approved a rule proposal regarding an exception to the mandatory clearing of swaps for qualified end-users. The proposal explained the process of applying for an exception to mandatory clearing, and sought public comments on the proposed process, and whether the exception should be extended to small financial institutions.

Summary of the Final Rules[edit]

The final rulemaking approved at the commission's July 10, 2012 open meeting contains all three of the above conditions.

Small Financial Institutions qualifying for the exemption include the following organizations with assets under $10 billion:

  • small banks,
  • savings associations,
  • farm credit system institutions, and
  • credit unions.

Hedging or Mitigating Commercial Risk provisions are virtually the same as those used in defining "major swap participants" as defined in the CFTC/SEC Joint Final Rule on Swap Entity Definitions, from the CFTC Open Meeting, April 18, 2012.

Notification to the Commission is required to be reported to a swap data repository ("SDR") or, if no SDR is available, the swap must be reported to the commission. Required information should include notice of the election of the exception and the name of the electing counterparty ("the eligible end-user"). A filing must also be made annually citing the nature of the exception and, if the electing counterparty is an SEC filer, whether its board has approved the decision to enter into non-cleared swaps.

The definition covers swaps hedging and the mitigation business risks, and is irrespective of any accounting guidelines for hedging, or the CFTC's bona fide hedging rule.

Related Documents: Fact Sheet, Q&A, and Final Rule as it Appeared in the Federal Register[edit]


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