Third Phase of Mandatory Clearing Begins

The third phase of mandatory compliance with clearing requirements for certain Credit Default Swaps and Interest Rate Swaps was implemented on September 9, 2013.

The most recent round of implementation will affect third-party investment managers and ERISA pension plans (“Category 3 Entities”), and other entities that were not subject to the Commodity Futures Trading Commission’s Division of Clearing and Risk’s first two implementation deadlines.

Unless an exception, exemption, or other relief applies, the CFTC requires market participants to clear swaps within the definition of CFTC Regulation 50.4.  The limited instances where relief from the clearing requirement is granted include exceptions for non-financial entities hedging commercial risk, relief for certain swaps entered into by eligible treasury affiliates, exemptions for swaps between affiliates and certain swaps entered into by cooperatives.

The swap counterparty is required to fulfill all conditions and requirements of the exception, exemption or other claimed relief in order to qualify for relief from the clearing requirement.  One of the conditions required for an exemption from clearing swaps is that certain information regarding the swap and the counterparty must be reported to a registered swap date repository.

The first clearing requirement determination by the CFTC was adopted on November 29, 2012. The swaps that are required to be cleared are listed in CFTC Regulation 50.4 – “Classes of Swaps Required To Be Cleared.” These swaps include all four classes of interest rate swaps and two classes of credit default swaps (CDX CDS indices).   “Category 1 Entities” such as swap dealers, major swap participants, and private funds active in the swaps market were required to comply with clearing requirements as of March 11, 2013.  All other entities, besides Category 3 entities, were considered “Category 2 Entities” and were required to clear swaps as of June 10, 2013.


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