Final Schedule for Swap Clearing Compliance under Dodd-Frank Approved by CFTC | Practical Law

Final Schedule for Swap Clearing Compliance under Dodd-Frank Approved by CFTC | Practical Law

On July 24, 2012, the CFTC approved final rules establishing a schedule to phase in entity compliance with new clearing requirements for non-security-based swaps under Title VII of the Dodd-Frank Act.

Final Schedule for Swap Clearing Compliance under Dodd-Frank Approved by CFTC

Practical Law Legal Update 2-520-6090 (Approx. 3 pages)

Final Schedule for Swap Clearing Compliance under Dodd-Frank Approved by CFTC

by PLC Finance
Published on 01 Aug 2012 • USA (National/Federal)
On July 24, 2012, the CFTC approved final rules establishing a schedule to phase in entity compliance with new clearing requirements for non-security-based swaps under Title VII of the Dodd-Frank Act.
On July 30, 2012, the CFTC published final rules establishing a schedule to phase in compliance with forthcoming clearing requirements under Title VII of the Dodd-Frank Act (see Legal Update, CFTC Issues Final Rules on Review Process of Non-security-based Swaps for Clearing under Dodd-Frank). This schedule identifies three categories of market participants and allots a compliance timeframe for each based on the participant's risk profile, compliance burden, resources and market experience. The triggering event for the compliance schedule will be the publication of a final clearing determination in the Federal Register. Swap clearing determinations are beginning to be made by the CFTC for certain classes of non-security-based swaps, such as interest rate swaps and credit default swaps (CDS) (see Legal Update, Mandatory Clearing for Interest Rate Swaps and Most CDS Proposed by CFTC).

Phase 1

Entities included in the first phase of compliance (category 1 entities) are:
  • Swap dealers (SDs).
  • Security-based swap dealers (SBSDs).
  • Major swap participants (MSPs).
  • Major security-based swap participants (MSBSPs).
  • Active private funds, as defined in section 202(a) of the Investment Advisors Act of 1940, which are not third-party subaccounts and that execute 20 or more swaps per month.
A swap between a category 1 entity and either of the following entities will be required to be cleared in accordance with any applicable clearing requirements within 90 days after the CFTC publishes such applicable final clearing determination in the Federal Register:
  • Another category 1 entity.
  • Any counterparty that is exempted from compliance with Dodd-Frank's swap clearing requirement but which elects to clear the swap anyway.

Phase 2

The following entities are included in the second phase of compliance (category 2 entities), so long as they do not qualify as category 1 entities:
  • Commodity pools.
  • Private funds as defined in section 202(a) of the Investment Advisors Act of 1940, other than active funds.
  • Persons predominantly engaged in activities that are in the business of banking or in activities that are financial in nature as defined in Section 4(k) of the Bank Holding Company Act of 1956, provided that the entity is not a third-party subaccount (nor a SD, MSP, SBSD or MSBSP).
Any swaps between a category 2 entity and any of the following entities will be required to be cleared in accordance with any applicable clearing requirements within 180 days after the CFTC publishes such applicable final clearing determination in the Federal Register:
  • A category 1 entity.
  • Another category 2 entity.
  • A counterparty that is exempted from compliance with Dodd-Frank's swap clearing requirement but which elects to clear the swap anyway.

Phase 3

Swaps between all other entities that are not covered in the first and second phases of compliance (category 3 entities) will be required to be cleared in accordance with any applicable clearing requirements within 270 days after the CFTC publishes such applicable final clearing requirement determination in the Federal Register. These include:
  • Third-party subaccounts, defined as accounts that are managed by an investment manager that is:
    • independent of and unaffiliated with the account's beneficial owner or sponsor; and
    • responsible for the documentation necessary for the account's beneficial owner to clear swaps.
  • ERISA plans.
  • All other swaps that are not exempted from Dodd-Frank mandatory swap clearing requirements.
The CFTC anticipates that the staggered compliance schedule will enable category 2 and 3 entities to adopt technological, legal and operational standards developed by category 1 entities. The compliance schedule allows for any type of market participant to voluntarily comply with the applicable clearing requirements sooner than the compliance deadline.