CFTC Issues Final Rule Regarding Swap Transaction Compliance and Implementation Schedule for Clearing Requirement

in Commodity Futures Trading Commission, Derivatives, Securities and Exchange Commission

 By Hyun K. Kim

The Commodity Futures Trading Commission (the “CFTC”) recently issued a final rule to establish an implementation schedule to phase in compliance with the clearing requirement under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  The CFTC’s compliance and implementation schedule (the “Schedule”) allows additional time for some entities to comply in order to facilitate the transition to the new clearing regime without unduly disrupting markets and transactions.  The final rule was published in the Federal Register on July 30, 2012 and becomes effective on September 28, 2012.

Section 723(a)(3) of Dodd-Frank amended the Commodity Exchange Act (the “CEA”) to add a new section 2(h).  Under new section 2(h)(1)(A) of the CEA, a person may not enter into a swap that is required to be cleared unless that person submits the swap for clearing to a derivatives clearing organization (a “DCO”) registered under the CEA or a DCO exempt from registration.  Section 2(h)(2) of the CEA requires the CFTC to determine whether a swap is required to be cleared (such determination, a “Clearing Requirement Determination”).  The CFTC has proposed rules regarding its first Clearing Requirement Determination, but has yet to finalize them.  Once those rules are finalized, entities engaging in swaps (other than end-users electing to rely on the end-user exception) will be required to comply with the mandatory clearing requirement pursuant to the Schedule.  The Schedule requires such compliance to begin 90, 180 or 270 days from the date (the “publication date”) on which a Clearing Requirement Determination is published in the Federal Register, depending on the type of entity.

The Schedule divides entities into three categories as follows: 

Category 1 Entity – This includes swap dealers, security-based swap dealers, major swap participants, major security-based swap participants, and active funds;[1]

Category 2 Entity – This includes commodity pools, private funds as defined in section 202(a) of the Investment Advisers Act of 1940 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 as defined in section 4(k) of the Bank Holding Company Act of 1956, provided that in each case, the entity is not a third-party subaccount;[2] and

Category 3 Entity – This includes third-party subaccounts and all other entities (including ERISA plans) not included in Category 1 or Category 2 Entity that are not excepted from the mandatory clearing requirement.

Under the Schedule, a swap entered into between a Category 1 Entity and another Category 1 Entity will be required to be cleared no later than 90 days from the publication date.  A swap entered into between a Category 2 Entity and another Category 2 Entity or a Category 1 Entity will be required to be cleared no later than 180 days from the publication date.  All other swaps will be required to be cleared no later than 270 days from the publication date.  In other words, if a swap is between entities in two different categories, the later of the two applicable compliance dates will apply.  If the entity subject to the later compliance date, however, elects to clear the swap earlier, its counterparty will be required to do so by the earlier compliance date applicable to it.


[1] “Active fund” means any private fund as defined in section 202(a) of the Investment Advisers Act of 1940 that is not a third-party subaccount and that executes 200 or more swaps per month based on a monthly average over the 12 months preceding the CFTC issuing a Clearing Requirement Determination.

[2] “Third-party subaccount” means an account that is managed by an investment manager that is independent of and unaffiliated with the account’s beneficial owner or sponsor, and is responsible for the documentation necessary for the account’s beneficial owner to clear swaps.

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