CFTC Proposes Swaps Clearing Determinations Under Dodd-Frank

By Silla Brush


       Interest-rate and credit-default swaps must be guaranteed by clearinghouses starting this fall under a proposal approved by the U.S. Commodity Futures Trading Commission to reduce risk in the $648 trillion global market.

     The proposal, approved 5-0 by CFTC commissioners in a private vote, would require that four types of interest-rate swaps denominated in U.S. dollars, euros, British pounds and Japanese yen be settled at clearinghouses that stand between buyers and sellers, according to an agency statement released yesterday.

     The measure would govern swaps conducted by companies including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Cargill Inc. Credit swaps in two indexes would face clearing requirements under the proposal, the CFTC said.

     “One of the primary benefits of swaps-market reform is that standard swaps between financial firms will move into central clearing, which will significantly lower the risks of the highly interconnected financial system,” CFTC Chairman Gary Gensler said in a statement.

     The 2010 Dodd-Frank Act directed the CFTC and Securities and Exchange Commission to reduce risk in the market after largely unregulated swaps helped fuel the 2008 credit crisis that led to the collapse of Lehman Brothers Holdings Inc. and U.S. bailouts of companies including American International Group Inc. The agencies are striving to meet an end-of-year deadline set by Group of 20 member nations to bolster oversight.

Public Comment

     The CFTC has 90 days to complete proposed determinations, which may lead the first swaps to face mandatory clearing beginning in late October or early November. In a separate 5-0 vote, CFTC commissioners yesterday approved a rule governing when banks and other firms must comply with clearing requirements. The rule requires swap dealers to be first among firms to clear swaps 90 days after the determinations are final.

If the determination is completed by November, swap dealers might need to complete the requirement by February.

     Clearinghouses operated by CME Group Inc., IntercontinentalExchange Inc. and LCH.Clearnet Group Ltd.

guarantee swaps. The determinations proposal will be open for 30 days of public comment.

     The measure would require clearing of credit swaps tied to North American and European indexes. Clearing wouldn’t be required for tranches of credit indexes.

     The CFTC may later decide to require clearing for energy, agricultural and equity indexes, the agency said.

 ‘Safety and Fairness’

      “These rules bring safety and fairness to the swaps customer, while protecting the U.S. taxpayer in the next crisis,” James Cawley, board member of the Swaps and Derivatives Markets Association, said in a statement. The group includes Newedge USA LLC, Jefferies Group Inc. and R.J. O’Brien & Associates among other members. “The list of clearable swaps is rather complete and consistent with what clearinghouses are currently processing,” Cawley said in a telephone interview.

     Gensler said in 2010 before Dodd-Frank was enacted that he expected clearing for many standardized swaps. “I believe that a significant portion of the market will be subject to this mandatory clearing requirement,” Gensler said in a July 1, 2010 letter to Senator Maria Cantwell, a Washington Democrat, that cited industry estimates that as much as 75 or 80 percent of the swaps market was standard enough to be cleared.