CFTC Final Rule: Process for Review of Swaps for Mandatory Clearing
|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 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 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.<ref>Open Meeting on Three Final Rule Proposals and Two Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on July 19, 2011.</ref>
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.<ref>Open Meeting on Third Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 3, 2011.</ref>
The proposal appeared in the Federal Register on November 2, 2010.