Alert December 04, 2012

CFTC Approves Final Clearing Requirement Determination and Issues Related No-Action Relief

The CFTC approved its first final clearing requirement determination.  The determination requires that four types of interest rate swaps (specifically, certain fixed-to-floating swaps, basis swaps, forward rate agreements, and overnight index swaps, in each case pertaining to several major world currencies) and two types of credit default swaps (North American untranched CDS indices and European untranched CDS indices meeting certain specifications) be cleared through registered derivatives clearing organizations, unless an exception to the clearing requirement applies.  The classes of swaps covered by the determination are identical to those included in the proposed version, which was previously released (discussed in the July 31, 2012 Financial Services Alert).

Compliance requirements will phase in, as follows:

  • Category 1 entities (swap dealers, security-based swap dealers, major swap participants, major security-based swap participants, and active funds) must come into compliance with the clearing requirement by March 11, 2013.
  • Category 2 entities (commodity pools, private funds other than active funds, and persons predominantly engaged in activities that are in the business of banking or in activities that are financial in nature according to Section 4(k) of the Bank Holding Company Act, excluding third-party subaccounts) will be required to clear applicable swaps by June 10, 2013.
  • Category 3 entities (all other entities, including third-party subaccounts and ERISA plans) will be required to clear swaps beginning on September 9, 2013.

The determination states that any swaps entered into prior to the applicable clearing requirement compliance date are not required to be cleared.

On the same day that the CFTC approved the determination, its Division of Clearing and Risk (the “Division”) issued two no-action letters pertaining to clearing.  The first no-action letter provides that the Division will not recommend that the CFTC commence an enforcement action against a person for failure to clear a credit default swap or interest rate swap with a majority-owned affiliate, if certain other conditions are met.  The second no-action letter provides that the Division will not recommend that the CFTC commence an enforcement action against a counterparty for failure to clear a credit default swap or interest rate swap if one of the counterparties is an “exempt cooperative” and the swap is entered into with a member of the exempt cooperative in connection with originating a loan for the member or hedging or mitigating commercial risk related to or associated with loans to members.  Each no-action letter addresses matters that are the subject of rule proposals on which the CFTC has yet to take final action.  (The CFTC’s proposal to exempt swaps between two affiliated counterparties from mandatory clearing, subject to certain conditions, is available here; the CFTC’s proposal to exempt certain swaps entered into by qualifying cooperatives from mandatory clearing, subject to certain conditions, is available here.)  The relief provided by each no-action letter expires on the earlier of April 1, 2013, or the effective date of a CFTC rulemaking finalizing a corresponding exemption.