The Federal Reserve, FDIC and OCC each have issued guidance reminding depository institutions and holding companies about new mandatory clearing requirements for certain interest rate and credit default swap transactions. The rules of the Commodity Futures Trading Commission (“CFTC”) that implement the clearing requirements became effective on June 10 for banks and other financial institutions that are not swap dealers or major swap participants. Section 723 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) amended the Commodity Exchange Act to authorize the CFTC to determine whether particular types or categories of swaps should be submitted for clearing to a registered derivatives clearing organization (“DCO”). The CFTC has determined that certain interest rate and credit default swaps must be cleared by a DCO. Mandatory clearing of these types of swaps began on March 11 for swaps between swap dealers, major swap participants and private funds active in the swaps market. There are exceptions to the mandatory clearing requirement for banks with total assets of $10 billion or less, and for swaps with affiliates. A bank wishing to use a clearing exception must first satisfy the terms and conditions applicable to the exception. For example, a bank that is a public company or a subsidiary of a public company must have the appropriate committee of the bank’s board of directors review and approve the decision to use a clearing exception. Each of the federal banking agencies recommends that a bank intending to use a clearing exception review the CFTC’s rules and guidance carefully.
Nutter Notes: The exception to the mandatory clearing requirement for banks with total assets of $10 billion or less is commonly referred to as the end-user exception. Where the counterparty to the swap is a swap dealer or major swap participant, the parties to a swap may avoid the mandatory clearing requirement if the small bank meets the CFTC’s end-user exception eligibility requirements under the swap clearing rules. The end-user exception under the Dodd-Frank Act provides that the clearing requirements do not apply to a swap if one of the counterparties to the swap is not a “financial entity,” is using the swap to hedge or mitigate commercial risk and notifies the CFTC how it generally meets its financial obligations associated with entering into non-cleared swaps. The CFTC’s swap clearing rules exempt depository institutions with total assets of $10 billion or less from the definition of “financial entity,” making such small institutions eligible for the end-user exception. To implement the notification requirement, the CFTC’s swap clearing rules require that notice of the election to rely on the exception and certain information that verifies the electing counterparty’s eligibility for the end-user exception be reported to a swap data repository (“SDR”) (or if no SDR is available, directly to the CFTC) for each swap for which the end-user exception is elected. The electing counterparty (i.e., the small institution) is responsible for filing (or causing to be filed) the electing counterparty information, and may do so in an annual filing or on a swap-by-swap basis. If the electing counterparty information is reported by an annual filing, the report is effective for 365 days, but the electing counterparty must amend the report as necessary to reflect any material changes.