On November 28, the Commodity Futures Trading Commission (CFTC) issued final clearing determinations (Final Determinations) with respect to four classes of interest rate swaps (IRS) and two classes of credit default swaps (CDS). The CFTC was scheduled to adopt the Final Determinations at an open meeting to be held yesterday, but the meeting was canceled and the Final Determinations were issued by seriatim on November 28 instead.
The Final Determinations were widely anticipated by market participants and are significant because they mark the first set of swaps that will be subject to mandatory clearing pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. CFTC Chairman Gary Gensler, in a statement of support for the Final Determinations, indicated that the Final Determinations “[complete] the clearing building block” that “is one of three major building blocks of Dodd-Frank [Act] swaps market reform.”
The CFTC’s proposal to clear the IRS and CDS that are the subjects of the Final Determinations (conforming IRS and CDS) was issued last summer. Based on the CFTC’s press release and a pre-publication copy of the Final Determinations, there do not appear to be any changes between the types of swaps that were proposed to be subject to mandatory clearing and those that will be.
The pre-publication release for the Final Determinations sets the following staggered compliance dates for mandatory clearing, which are based counterparty type.1 The pre-publication release makes clear that the mandatory clearing requirement will only apply to conforming IRS and CDS executed on or after the applicable compliance date.
- Swap dealers, major swap participants, security-based swap dealers, major security-based swap participants and active funds2 (Category 1 Entities) must clear conforming IRS and CDS that are executed on or after March 11, 2013;
- Financial entities, other than ERISA pension plans (Category 2 Entities), must clear conforming IRS and CDS that are executed on or after June 10, 2013; and
- Third-party subaccounts, ERISA pension plans and all other entities (Category 3 Entities) must clear conforming IRS and CDS that are executed on or after September 9, 2013.
To the extent that counterparties to a swap fall in different compliance date categories, the later compliance date will govern. For example, if a Category 1 Entity and a Category 2 Entity enter into a conforming IRS on March 12, 2013, such conforming IRS would not need to be cleared, despite the Category 1 Entity compliance date. However, if those two entities enter into the conforming IRS on June 11, 2013, such conforming IRS would need to be cleared. Despite this, market participants may voluntarily clear conforming IRS and CDS prior to the applicable compliance dates.
The tables on the following pages, taken from the CFTC’s press release, summarize the types of IRS and CDS that will be subject to mandatory clearing pursuant to the Final Determinations.
No-Action Relief Related to Clearing
In addition to the Final Determinations, on November 28, the CFTC’s Division of Clearing and Risk issued two no-action letters that afford relief from the mandatory clearing requirement for conforming IRS and CDS transacted between affiliated entities or cooperatives and their members. Both no-action letters: (1) were issued due to pending CFTC action on two sets of proposed rules that would extend the end-user exception from mandatory clearing to (a) interaffiliate swaps and (b) swaps between cooperatives and their members, each subject to certain conditions; and (2) will expire on the earlier of April 1, 2013, or the effective date of final CFTC action with respect to the proposed rules.