CFTC Issues First Clearing Determination for Certain Credit Default Swaps and Interest Rate Swaps
On November 28, 2012, the CFTC issued its final clearing determination requiring certain credit default swaps and interest rate swaps be cleared by registered derivatives clearing organizations (DCOs). This is the CFTC’s first clearing determination under the Dodd-Frank Act and will become effective upon publication in the Federal Register. Under the rules, market participants must submit a swap that is identified in the rule for clearing by a DCO as soon as technologically practicable and no later than the end of the day of execution. A DCO is required to post on its website a list of all swaps that it will accept for clearing and clearly indicate which of those swaps the CFTC has determined must be cleared. The CFTC will also post on its website a list of the swap classes required to be cleared.
The clearing requirement determination applies only to swaps currently cleared by four DCOs: CME, ICE Clear Credit, ICE Clear Europe, and LCH.Clearnet Ltd. Any swaps entered into prior to the enactment of the Dodd-Frank Act or prior to the application of the clearing requirement are not required to be cleared. The determination does not apply to those persons who are eligible to elect an exception from clearing, such as non-financial entities hedging commercial risk who satisfy the applicable requirements.
Category 1 Entities are subject to the clearing determination as of March 11, 2013, for swaps they enter into on or after that date. Category 1 Entities include swap dealers, major swap participants and "active funds". An "active fund" means any private fund as defined in Section 202(a) of the Investment Advisors Act of 1940, that is not a third-party subaccount and that executes 200 or more swaps a month based on a monthly average over the 12 months preceding the CFTC issuing a mandatory clearing determination. Other funds that do not meet the definition of an Active Fund and all other financial entities are Category 2 Entities and are subject to the clearing mandate as of June 10, 2013. Accounts managed by third party investment managers and those entities that do not fall within definition of either a Category 1 Entity or Category 2 Entity, have until September 9, 2013 before clearing is mandatory. Finally, market participants electing an exception from mandatory clearing under Section 2(h)(7) of the Commodity Exchange Act do not have to comply with the reporting requirements for electing the exception until September 9, 2013.
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