Alert July 17, 2012

CFTC Approves Final Rule on End-User Exception to Clearing Requirement for Swaps

The CFTC unanimously approved a final rule on the end-user exception to the clearing requirement for swaps.  The rule further develops a provision of the Dodd-Frank Act that requires swaps to be submitted for clearing to a derivatives clearing organization unless one of the counterparties to a 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 rule sets out the reporting requirements that apply if the counterparties choose to avail themselves of the exception.  In contrast to the proposed rule, which would have required reporting on a swap by swap basis, the final rule adds the option of annual reporting.  It also establishes criteria for determining whether a swap is “hedging or mitigating commercial risk.” Finally, the rule establishes a “small financial institution exemption” that exempts banks, savings associations, farm credit system institutions, and credit unions with total assets of $10 billion or less from the definition of “financial entity,” thereby potentially allowing them to use the end-user exception. 

The rule will become effective 60 days after its forthcoming publication in the Federal Register.