Regulatory Developments: CFTC Publishes Proposed Rules on the Clearing Requirement Determination Under Section 2(h) of the CEA
The CEA, as amended by the Dodd-Frank Act, requires a swap: (1) to be cleared through a derivatives clearing organization (DCO) if the CFTC has determined that the swap, or group, category, type, or class of swap, is required to be cleared, unless an exception to the clearing requirement applies; (2) to be reported to a swap data repository (SDR) or the CFTC; and (3) if the swap is subject to a clearing requirement, to be executed on a designated contract market (DCM) or swap execution facility (SEF), unless no DCM or SEF has made the swap available to trade. The Dodd-Frank Act requires the CFTC to determine whether a swap is required to be cleared by either a CFTC-initiated review or a submission from a DCO.
On July 24, 2012, the CFTC proposed rules to establish a clearing requirement under new Section 2(h)(1)(A) of the CEA. The rules would require that swaps in four interest rate swap (IRS) classes and two credit default swap (CDS) classes set forth below be cleared by registered DCOs and represent the first clearing determination by the CFTC under the Dodd-Frank Act. The contracts that are subject to the proposed clearing determination are all currently being cleared by DCOs. The CFTC has indicated that it intends subsequently to consider other swaps submitted by DCOs, such as agricultural, energy, and equity indices.
Interest Rate Swaps: The CFTC is proposing a clearing requirement for four classes of interest rate swaps: fixed to- floating swaps, basis swaps, overnight indexed swaps, and forward rate agreements that reference U.S. dollars, Euros, Sterling or Yen. To the extent that any such swap is of a tenor such that it is scheduled to terminate prior to July 1, 2013, such swap would not be subject to the proposed clearing determination.
Credit Default Swaps: The CFTC is proposing to require clearing of North American untranched corporate index CDS and European untranched corporate index CDS.
Swaps that are subject to the mandatory clearing requirements must be submitted to a DCO for clearing as soon as technologically practicable and no later than the end of the day of execution.
The proposed rules would apply only to swaps entered into on or after the enactment of the Dodd-Frank Act. Additionally, swaps entered into after the enactment of the Dodd-Frank Act but before the application of the clearing requirement would be exempt from the clearing requirement but would remain subject to reporting requirements.
The clearing requirement will be phased-in depending on the type of market participant entering into the swap. The CFTC addressed the proposed phase-in of the clearing requirements in a separate rulemaking also published on July 24, 2012.
The proposed rules provide that DCOs would be required to post on their websites a list of all swaps that such DCO will accept for clearing and clearly indicate which of those swaps the CFTC has determined are required to be cleared. The proposed rules would also require the CFTC to post on its website a list of those swaps it has determined are required to be cleared and a list of all DCOs that are eligible to clear such classes of swaps.
The CFTC's proposed rules also address evasion and would prohibit (a) evasion of the clearing requirements, (b) abuse of the end-user exception to the clearing requirement, and (c) abuse of any exemption or exception to the clearing requirements. The proposed rules would make it unlawful for any person to knowingly or recklessly evade, participate in, or facilitate an evasion of any of the clearing requirements.
The proposed rule is open for public comment for 30 days following publication in the Federal Register. Comments must be received on or before September 6, 2012.
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