The CFTC approved a final rule that provides a schedule to phase in compliance with Dodd-Frank Act clearing requirements for swaps. Under this schedule, compliance with clearing requirements for a particular type or types of swaps will phase in based upon the type of market participant and the date of publication in the Federal Register of the “final clearing requirement determination” announcing the implementation of clearing requirements for such swaps. The CFTC concurrently proposed the first such clearing requirement determination, which would require certain credit default swaps and interest rate swaps to be cleared. The proposal is discussed elsewhere in this issue of the Financial Services Alert.
The final rule divides market participants into the following three categories:
"Category 1 Entities" include swap dealers, security-based swap dealers, major swap participants, major security-based swap participants, and active funds, a new category introduced in the final rule. An “active fund” is a private fund as defined in Section 202(a) of the Investment Advisers Act of 1940 (i.e., an issuer that would be an investment company but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940) that is not a third-party subaccount and that has executed an average of at least 200 swap trades per month over the 12 months preceding the issuance of a clearing requirement determination. A “third-party subaccount,” in turn, is an account that is managed by an investment manager that (1) is independent of and unaffiliated with the account’s beneficial owner or sponsor, and (2) is responsible for the documentation necessary for the account’s beneficial owner to clear swaps.
"Category 2 Entities" include commodity pools, private funds other than “active funds”, and certain persons predominantly engaged in activities that are in the business of banking or in activities that are financial in nature as defined by the Bank Holding Company Act.
"Category 3 Entities" are all entities that are not Category 1 Entities nor Category 2 Entities.
Under the schedule in the final rule, a swap between two Category 1 Entities must comply with the applicable clearing requirement no later than 90 days following the publication of the related final clearing requirement determination in the Federal Register. Swaps between a Category 2 Entity and a Category 1 Entity or between two Category 2 Entities must comply within 180 days following such publication. All other swaps must comply within 270 days following such publication.