On July 24, the Commodity Futures Trading Commission issued the first proposed clearing determinations pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) revisions to the Commodity Exchange Act that generally prohibit market participants from engaging in a swap transaction that is required to be cleared unless it is submitted for clearing to a derivatives clearing organization (DCO). The proposed clearing determination would require market participants, other than persons relying on the “end-user exemption” from clearing, to submit certain credit default swaps (CDS) and interest rate swaps for clearing by a DCO as soon as technologically practicable and no later than the end of the day of execution.
The proposal addresses CDS and interest rate swaps that are currently cleared by DCOs and would subject swaps in four interest rate swap classes and two CDS classes to mandatory clearing. The six classes identified in the proposal are fixed-to-floating swaps, basis swaps, forward rate agreements, overnight index swaps, North American untranched CDS indices, and European untranched CDS indices. The CFTC is expected to make a determination with respect to each swap within 90-days following publication of the proposed clearing determination in the Federal Register.
The proposal does not apply to entities that are eligible for the end-user exception to the clearing requirement, such as non-financial entities hedging commercial risks. In addition, the clearing requirement does not apply to swaps entered into prior to the enactment of the Dodd-Frank Act or prior to the application of the mandatory clearing requirement.
The proposed rule is available here.