The U.S. Commodity Futures Trading Commission (CFTC) today finalized new rules that require certain interest rate swaps and credit default swaps (CDS) to be cleared by derivatives clearing organizations (DCOs). The rule “establishes the first clearing determination by the Commission under the Dodd Frank Wall Street Reform and Consumer Protection Act,” the CFTC said in a statement. The commission voted unanimously through seriatim to issue the rules.
The new rules mandate that market players submit a swap for clearing by a DCO as soon as “technologically practiceable and no later than the end of the day of execution. Swap dealers and private funds must comply with the new rules on March 11, 2013, for swaps entered into on that date or afterward.
The clearing requirement so far applies to only four registered DCOs: CME, ICE Clear Credit, ICE Clear Europe, and LCH.Clearnet Ltd. These DCOs are now required to post a list of all swaps that require clearing on their respective websites.
The CFTC has divided swaps into six classes: two CDS classes and four interest rate swap classes. The classes our as follows: fixed-to floating swap, basis swap, forward rate agreement class, overnight index swap, North American untranched CDS, European untranched CDS.
CFTC Chairman Gary Gensler issued a statement calling central clearing “one of the three major building blocks of Dodd-Frank swaps market reform—in addition to promoting market transparency and bringing swap dealers under comprehensive oversight—and this rule completes the clearing building block.”
One of the operating motives behind swaps reform is the idea that in a cleared market, the playing field will be leveled.
“Central clearing lowers the risk of the highly interconnected financial system. It also democratizes the market by eliminating the need for market participants to individually determine counterparty credit risk, as now clearinghouses stand between buyers and sellers,” Gensler said.