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CFTC Issues Final Rules for Derivatives Clearing Organizations Under Dodd-Frank
Practical Law Legal Update 9-509-4744 (Approx. 4 pages)
CFTC Issues Final Rules for Derivatives Clearing Organizations Under Dodd-Frank
by PLC Finance
| Published on 20 Oct 2011 • USA (National/Federal) |
On October 18, 2011, the CFTC issued final rules governing derivatives clearing organizations (DCOs) under the Dodd-Frank Act.
On October 18, 2011, the CFTC issued final rules under the Dodd-Frank Act that establish standards for compliance with 15 of the 18 core principles applicable to derivatives clearing organizations (DCOs). DCOs are non-security-based swap clearinghouses registered with the CFTC. The rules provide that DCOs must permit entities with at least $50 million in adjusted net capital to become clearing members. While certain large financial entities and advocacy groups advocated a higher threshold, the CFTC prioritized open access to DCOs rather than an exclusionary threshold.
These final DCO rules cover, among other things:
- Financial Resources (Core Principle B). Regulation 39.11 requires that a DCO maintain sufficient financial resources to:
- meet its financial obligations to its clearing members, even if the clearing member to which it has the greatest exposure defaults, in extreme but plausible market conditions; and
- cover its operating costs for at least one year.
- Participant and Product Eligibility (Core Principle C). Regulation 39.12 addresses eligibility requirements for participants (clearing members) and cleared derivatives products, including fair and open DCO access, clearing member financial resources ($50 million in capital), operational requirements, and monitoring, reporting and enforcement.
- Risk Management (Core Principle D). Regulation 39.13 lists the requirements for a DCO's risk management framework, including its margin methodology and coverage, price data, daily review and periodic back tests, as well as other risk control mechanisms.
- Treatment of Funds (Core Principle F). Regulation 39.15 addresses segregation of customer funds and assets, acceptable types of margin assets, haircuts and methodology for valuation of assets, concentration limits and permissible investments.
- Default Procedures (Core Principle G). Regulation 39.16 addresses required procedures and actions in the event of the insolvency of a clearing member.
- System Safeguards (Core Principle I). Regulation 39.18 addresses programs for business continuity and disaster recovery, location of resources, recordkeeping and testing.
- Reporting (Core Principle J). Regulation 39.19 addresses periodic data reporting and event-specific reporting relating to either significant financial changes at the DCO or problems arising with a clearing member.
In addition, the final rules:
- Update and add related definitions, including, among others, "clearing member," "clearing organization," "clearing initial margin," "customer initial margin" and "systemically important derivatives clearing organization."
- Require DCOs to designate a chief compliance officer (CCO), specifies duties and requirements of the CCO and specifies additional related requirements, including procedures for filing the annual compliance report required by the Dodd-Frank Act.
- Revise the procedure for DCO applications, including the required use of a new "Form DCO."
The CFTC declined to adopt capital requirements for DCOs at this time.
The final rules cover regulations that were proposed in five separate notices of proposed rulemaking. Many of the regulations were adopted as proposed, though some have been revised or eliminated in response to public comment received on the proposed rules. For more information on the proposed rules covered by these final rules, see Legal Updates:
The remaining core principles will be addressed in future rulemaking. These include Core Principle O (Governance and Fitness Standards), Core Principle P (Conflicts of Interest) and Core Principle Q (Composition of Governing Boards).
The final rules will become effective 60 days after publication in the Federal Register.
To learn more about the regulation of swaps and derivatives under the Dodd-Frank Act, see Practice Notes, Summary of the Dodd-Frank Act: Swaps and Derivatives and Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: Swaps and Derivatives.