Alert July 31, 2012

CFTC Proposes Clearing Requirement for Certain Credit Default Swaps and Interest Rate Swaps

The CFTC voted to issue a rule proposal that would require certain credit default swaps and interest rate swaps to be cleared by a derivatives clearing organization.  This is the first “clearing requirement determination” issued by the CFTC pursuant to the Dodd-Frank Act.  If adopted, the publication of this clearing requirement determination in the Federal Register will trigger implementation of the requirement to clear the swaps to which the determination relates.  The CFTC concurrently adopted a final rule that provides a uniform schedule for the implementation of newly adopted swap clearing requirements.  The final rule is discussed elsewhere in this edition of the Financial Services Alert

The proposal covers four “classes” of index swaps (fixed-to-floating swaps, basis swaps, forward rate agreements, and overnight index swaps) as well as two classes of credit default swaps (North American untranched CDS indices and European untranched CDS indices), each meeting certain specifications set out in the proposed rule.  Under the proposal, once the rule is effective and compliance has become mandatory, market participants would be required to submit these swaps for clearing by a derivatives clearing organization “as soon as technologically practicable and no later than the end of the day of execution” unless a party to the swap is excepted from the clearing requirement.

Comments are due 30 days after the proposal’s forthcoming publication in the Federal Register