The following is a brief update for our clients and friends who are end-users of swaps (for example, interest rate, commodity, energy or currency/FX swaps).
In addressing the Securities Industry and Financial Markets Association’s 2012 Annual Meeting Tuesday, Gary Gensler, Chairman of the U.S. Commodity Futures Trading Commission (CFTC), clarified that any determination by the CFTC regarding the mandatory clearing of specified types of swap transactions will apply only to swaps executed on and after a swap counterparty’s applicable compliance date.
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Commodity Exchange Act to provide that it will be unlawful for any person to engage in a swap unless the swap is submitted for clearing to a derivatives clearing organization if the CFTC has determined that the swap must be cleared (the clearing requirement). This past July, the CFTC adopted a schedule for complying with the clearing requirement and proposed that certain classes of credit default swaps and interest rate swaps be cleared. The compliance schedule is based on the type of market participant entering into a swap that is subject to the clearing requirement and allows for a phase-in period of 90, 180 or 270 days, depending on the type of entity.
Recently, there was some uncertainty whether the CFTC was interpreting the compliance schedule for the clearing requirement differently than many market participants had expected. There was concern that once the CFTC determined that a particular type of swap must be cleared, then any swap entered after the effective date of that determination would be required to be cleared, regardless of the type of counterparty. Under that interpretation of the clearing requirement compliance schedule, the phase-in period allowed parties to swaps that must be cleared varying amounts of time (90, 180 or 270 days) to submit the swaps to a clearinghouse.
Chairman Gensler clarified Tuesday, “Market participants will be required only to clear swaps executed on and after their applicable compliance date, thus providing time to comply with the clearing requirement.” Thus, a typical end-user of swaps will have up to 270 days after the CFTC makes a clearing requirement determination for a particular type of swap before any such swap it enters will be subject to the clearing requirement.
This is welcome news for swaps end-users, particularly public company end-users. Many end-users anticipate using the so-called end-user exception to the clearing requirement for some or all of the swaps they enter. However, public companies who intend to use this exception to the clearing requirement must have that decision reviewed and approved by an appropriate board committee. This clarification from Chairman Gensler confirms that end-users will have adequate time to take appropriate steps in response to any clearing requirement determination by the CFTC.