June 10, 2013

CFTC Announces that Mandatory Clearing for Category 2 Entities Begins Today

Washington, DC — The second phase of required clearing for certain credit default swaps (CDS) and interest rate swaps begins today. Commodity pools, private funds, and persons predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature, are included within the definition of Category 2 Entities. These entities are required to begin clearing swaps executed on or after June 10, 2013.

“Today marks another critical step on the path to financial reform,” said CFTC Chairman Gary Gensler. “Most financial entities will be required to bring certain credit default and interest rate swaps into central clearing. Clearing benefits the public by lowering the risk of the interconnected swaps market to the rest of the economy. It also significantly promotes competition by broadening access to the market.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the Commodity Exchange Act (CEA) to require the Commission to determine whether a swap is required to be cleared and to prevent a market participant from entering into such swaps unless that person submits the swap for clearing to a derivatives clearing organization (DCO).

The Commission’s clearing requirement does not apply to those market participants who are eligible for and elect an exception from clearing because they are non-financial entities hedging commercial risk. In addition, the Commission has adopted an exemption from the clearing requirement for certain swaps entered into by eligible corporate affiliates, and the Commission has granted relief from the clearing requirement for certain treasury affiliates.

Pursuant to the Commission’s clearing requirement determination, swaps in four interest rate swap classes and two CDS classes are required to be cleared under section 2(h) of the CEA. The determination identifies these classes by using basic specifications. Therefore, counterparties contemplating entering into a swap will be able to determine quickly whether or not the particular swap is subject to the clearing requirement. The clearing requirement generally applies to newly executed swaps, including swaps resulting from changes in the ownership of existing swaps.

On March 11, 2013, swap dealers and private funds active in the swaps market began clearing swaps entered into on or after that date. All other parties, including accounts managed by third party investment managers and ERISA pension plans, who enter into swaps within the established classes must, by September 9, 2013, begin clearing those swaps or satisfy the terms of an applicable exception or exemption.

The five swap classes that are required to be cleared subject to this timing include the swaps meeting the following specifications:

With regard to the iTraxx CDS indices on European corporate names, the following compliance dates apply: Category 1 entities began clearing April 26, 2013; Category 2 entities begin clearing July 25, 2013; and all other entities begin clearing October 23, 2013. The specifications for iTraxx include the following:

Last Updated: June 10, 2013