The CFTC approved new rules today requiring certain credit default swaps (CDS) and interest rate swaps to be cleared by registered derivatives clearing organizations (DCOs). Under the rules, market participants are required to submit the identified swaps for clearing by a DCO as soon as technologically practicable and no later than the end of the day of execution.
Classes of Swaps Required to be Cleared
The CFTC’s clearing determination requires that swaps in four interest rate swap classes and two CDS classes be cleared under section 2(h) of the Commodity Exchange Act and identifies these classes by basic specifications. Although the text of the final rule has not been released, the CFTC’s press release identifies the swap classes and specifications in tabular form. The determination applies only to swaps currently cleared by four DCOs: CME; ICE Clear Credit; ICE Clear Europe; and LCH.Clearnet Ltd.
Implementation of the Clearing Requirement
Under the final rule, market participants must only clear those swaps executed on or after their applicable compliance date. Swap dealers and private funds active in the swaps market will be required to comply beginning on March 11, 2013, for swaps they enter into on or after that date. Accounts managed by third party investment managers, as well as ERISA pension plans, will have until September 9, 2013, to begin clearing swaps entered into on or after that date. All other financial entities will be required to clear swaps beginning on June 10, 2013, for swaps entered into on or after that date.
End User Exception
The end user exception allows non-financial entities hedging commercial risk to elect not to clear swaps subject to the CFTC’s mandatory clearing determination. Market participants electing to utilize the end user exception do not have to comply with the reporting requirements for the exception until September 9, 2013.