Mandatory Clearing for Interest Rate Swaps and Many CDS Proposed by CFTC | Practical Law

Mandatory Clearing for Interest Rate Swaps and Many CDS Proposed by CFTC | Practical Law

The CFTC issued proposed rules under the Dodd-Frank Act that would require certain classes of credit default swaps (CDS) and interest rate swaps to be cleared by derivatives clearing organizations (DCOs).

Mandatory Clearing for Interest Rate Swaps and Many CDS Proposed by CFTC

Practical Law Legal Update 3-520-6301 (Approx. 4 pages)

Mandatory Clearing for Interest Rate Swaps and Many CDS Proposed by CFTC

by PLC Finance
Published on 02 Aug 2012 • USA (National/Federal)
The CFTC issued proposed rules under the Dodd-Frank Act that would require certain classes of credit default swaps (CDS) and interest rate swaps to be cleared by derivatives clearing organizations (DCOs).
On July 24, 2012, the CFTC issued proposed rules under the Dodd-Frank Act that would require certain classes of credit default swaps (CDS) and interest rate swaps (IRS) to be cleared by derivatives clearing organizations (DCOs), a swap clearinghouse registered with the CFTC. The proposed rules would require market participants to submit these swaps for clearing by a DCO as soon as technologically practicable after execution and no later than the end of the day of execution. This marks the first determination of classes of swaps that will be subject to mandatory clearing under Title VII of Dodd-Frank. The CFTC will consider at a later date the clearing of other types of swaps, such as agricultural, energy and equity swaps.
The proposed rules would require clearing of swaps in four IRS classes and two CDS classes. The IRS classes are:
The CDS classes are:
  • North American untranched CDS indices, which are US dollar-denominated CDS covering North American corporate credits.
  • European untranched CDS indices, which are euro-denominated CDS referencing European obligations.
The proposed rules set out a table detailing the criteria for each class of swap that must be cleared.
As noted, the proposed rules would require market participants to submit these swaps for clearing by a DCO "as soon as technologically practicable" after execution and no later than the end of the day of execution.
Market participants would be required to undertake reasonable efforts to determine whether a swap is required to be cleared under the rules, such as:
  • Checking the CFTC's or DCO's website to verify whether a swap is required to be cleared.
  • Consulting third-party service providers for this verification.
A DCO would be required to post on its website:
  • A list of all swaps that it will accept for clearing.
  • Which of those swaps the CFTC has determined are required to be cleared.
The CFTC would be required to post on its website:
  • A list of swaps it has determined are required to be cleared.
  • A list of all DCOs that are eligible to clear those swaps.
The proposed rules would not apply to entities eligible for an exception from clearing, such as non-financial end users hedging commercial risk (to learn more about the end-user exception to swap clearing requirements, see Legal Update, Final Rules on End-user Exception to Swap Clearing Requirement under Dodd-Frank Issued by CFTC). The rules would also not apply to swaps entered into before:
  • July 21, 2010, the enactment date of the Dodd-Frank Act.
  • The effective date of the clearing requirement.
Under the proposed rules, it would be unlawful for any person to knowingly or recklessly evade, or abuse any exception to, the clearing requirements.
The CFTC is accepting comments until 30 days after publication of the proposal in the Federal Register.
For more information on swap clearing requirements under the Dodd-Frank Act, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Clearing and Exchange Trading under Title VII.
To learn about the final schedule for swap clearing compliance under Dodd-Frank, see Legal Update, Final Schedule for Swap Clearing Compliance under Dodd-Frank Approved by CFTC.