The Commodity Futures Trading Commission (CFTC) on Wednesday issued new rules that require market participants to clear six classes of credit default and interest rate swaps at a registered derivatives clearing organization (DCO).
The rules, which are slated to take effect in March, represent the agency’s first clearing determination under the Dodd-Frank Wall Street and Consumer Protection Act, and apply only to certain credit default swaps (CDS) and interest rate swaps cleared by CME, ICE Clear Credit, ICE Clear Europe and LCH.Clearnet Ltd.
“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,” CFTC Chairman Gary Gensler said in a statement.
Pursuant to the determination, market participants must submit swaps for clearing on the day the trade is executed if they are trading in the following six classes: the fixed-to-floating swap class, the basis swap class, the forward rate agreement class, the overnight index class, the North American untranched CDS indices class or the European untranched CDS Indices class.
Swap dealers and private funds active in the swaps market have until March 11, 2013 to comply with the new rule, while accounts managed by third-party investment managers will have until Sept. 9 of next year. The CFTC set the compliance date for other financial entities at June 10, 2013.
The agency noted that its rules apply only to four currencies: the U.S. dollar, euro, British pound sterling and Japanese yen, as those four currencies “account for over 90% of both notional amounts outstanding and trading volumes for the overall interest rate swap market.”
Tranched swaps are exempt from the new requirements, as are swaps enacted before the passage of either the Dodd-Frank Act or Wednesday’s determination.
Following the 2008 financial crisis, the CFTC and other government agencies have moved to increase transparency and reduce the risk of certain financial transactions.