On June 10, 2013, mandatory clearing under Title VII of the Dodd-Frank Act of certain CDS and interest rate swaps will begin for swaps entered into between:

For details on the specific CDS and interest rate swaps that must be cleared, see Legal Update, Final Clearing Determination for CDS and Interest Rate Swaps Issued by CFTC.

Category 2 Entities generally include most "buy-side" market participants such as commodity pools, hedge funds (other than "active funds," which enter into at least 200 swaps per month) and persons predominantly engaged in activities that are in the business of banking or in "activities that are financial in nature," excluding accounts managed by third-party investment managers. The latter primarily includes banks that are not swap dealers (SDs). These entities are referred to as "buy-side" entities because they are customers of futures commission merchants (FCMs), which Category 2 Entities must engage in order to enter into cleared swaps. Category 2 Entities were required to select an FCM by May 15, 2013.

Category 1 Entities are SDs, major swap participants (MSPs), security-based swaps dealers (SBSDs), major security-based swap participants (MSBSPs) and active funds. Category 1 Entities were required to begin mandatory clearing for swaps with other Category 1 Entities on March 11, 2013.

The deadline will require these entities to finalize their legal agreements and operational set-ups with their clearing members (usually the FCMs), affirmation platforms and clearinghouses to ensure that they can continue to transact in these cleared swaps products after June 10, 2013.

According to research conducted by the TABB Group, there are approximately 500 buy-side Category 2 Entities subject to this deadline, many of which are unprepared for the clearing deadline because they have yet to complete installation and testing of the technological infrastructure they will require to clear swaps and comply with the rules. For more information on swap clearing and exchange trading, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Clearing and Exchange Trading under Title VII.