On July 24, 2012, the Commodity Futures Trading Commission (the “CFTC”) proposed new rules to require certain credit default swaps (“CDS”) and interest rate swaps (“IRS”) to be cleared by registered derivatives clearing organizations (“DCOs”). On August 7, 2012 the CFTC issued proposed rules that specified the first determination of classes of swaps to be subject to mandatory clearing under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). A final rule was issued on December 13, 2012, and becomes effective on February 11. 2013. Under the rules, market participants would be required to submit a swap that is identified in the rules as being subject to clearing by a DCO as soon as technologically practicable and no later than the end of the day of execution. In a separate rule-making, the CFTC also finalized regulations on the timing of when market participants will need to comply with the new rules.
Payment, Clearing & Settlement
By Hyun K. Kim
Section 731 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) adds Section 4s(h) to the Commodity Exchange Act (the “CEA”), which imposes business conduct standards for swap dealers (“SDs”) and major swap participants (“MSPs”) dealing with counterparties generally and with “Special Entities” specifically. The Commodity Futures Trading Commission (the “CFTC”) has adopted a final rule regarding these business conduct standards, which was published in the Federal Register on February 17, 2012. The final rule became effective on April 17, 2012 (the “Effective Date”). SDs/MSPs must comply with the final rule on the later of 180 days after the Effective Date or the date on which SDs/MSPs are required to apply for registration.
On July 27, 2011 the Financial Stability Oversight Council (“FSOC”) issued a final rule (the “Final Rule”) implementing section 804 of the Dodd Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which provides the FSOC with the power to designate a financial market utility (“FMU”) as systemically important. Section 804 specifically permits such a designation if “the failure of or a disruption to the functioning of the FMU could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the United States financial system.” The Final Rule discusses the criteria, process, and procedures for the designation of FMUs as systemically important.
The Dodd-Frank Wall Street Reform and Consumer Protection Act provides that a swap or security-based swap (collectively, “Swaps”) otherwise subject to mandatory clearing is not required to be cleared if one party to such Swap (1) is not a financial entity, (2) is using such Swap to hedge and or mitigate commercial risks, and (3) notifies the Commodity Futures Trading Commission (the “CFTC”) or Securities and Exchange Commission (the “SEC” and, together with the CFTC, the “Commissions”), as applicable, how it generally meets its financial obligations associated with entering into non-cleared Swaps (such exception, the “End-User Clearing Exception”).
The Commissions have each proposed new rules to specify requirements [click to continue…]