June 7 - In a recent bulletin, the Office of the Comptroller of the Currency reminded management of national banks, federal savings associations, and federal branches and agencies of foreign banks to be aware of U.S. Commodity Futures Trading Commission swap clearing rules. Section 2(h) of the Commodity Exchange Act, as added by section 723 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, establishes a clearing requirement for swaps.1 This new section makes it unlawful for any person (including financial institutions) to engage in a swap that the CFTC has determined requires clearing unless the person submits the swap for clearing to a derivatives clearing organization or an exception applies.
Pursuant to section 2(h), the CFTC requires certain interest rate and credit default swaps to be cleared by a DCO.2 Mandatory clearing of these swaps began on March 11, 2013, for swap dealers, major swap participants, and private funds active in the swaps market. For banks that are not swap dealers or major swap participants, mandatory clearing of these swaps begins on June 10, 2013.3
A bank may clear swaps by becoming a member of a DCO or through a futures commission merchant. It likely will be difficult for a bank to join a DCO or find a clearing FCM by June 10 if the bank has not begun the process of doing so; developing the capability to clear swaps likely will involve new legal documentation and updates to existing contracts. A bank that has not started the process and that cannot qualify for a clearing exception should adjust its activities and develop a contingency plan for managing its risks without the swaps that will be subject to mandatory clearing, pending development of the capability to clear those swaps. Banks remain responsible for managing all risks related to derivative activities, including legal, operational and liquidity risks.
Exceptions to the clearing requirement exist for smaller banks (total assets of $10 billion or less) and for swaps with affiliates.4 Each of the clearing exceptions has terms and conditions. Among other things, if a bank is a public company or a subsidiary of a public company then the appropriate committee of the bank’s board of directors may have to review and approve the bank’s decision to use a clearing exception.5 A bank wishing to use a clearing exception should carefully review the CFTC’s rules and guidance to ensure it qualifies for the exception.
Please direct questions concerning the CFTC’s requirements to the CFTC (Meghan Tente, attorney-advisor, Division of Clearing and Risk, 202-418-5785) or qualified legal counsel. Federal branches and agencies may particularly benefit from having legal counsel explain the extraterritorial applicability of the CFTC’s rules. General questions about central clearing may be directed to Kurt Wilhelm, director, Financial Markets Group, 202-649-6360; or Roman Goldstein, senior attorney, Securities and Corporate Practices Division, 202-649-5210.
1 7 USC 2(h).
2 The list of swaps subject to mandatory clearing is at 17 CFR 50.4.
3 For banks that are not swap dealers or major swap participants, mandatory clearing for credit default swaps on certain iTraxx indices begins on July 25, 2013. See www.cftc.gov/ucm/groups/public/@newsroom/documents/generic/cftcfiveswapclasses031113.pdf.
4 “Clearing Requirement Determination Under Section 2(h) of the CEA,” 77 FR 74284 (December 13, 2012) (to be codified at 17 CFR 50.50); “Clearing Exemption for Swaps Between Certain Affiliated Entities,” 78 FR 21750 (April 11, 2013) (to be codified at 17 CFR 50.52).
5 7 USC 2(j); “End-User Exception to the Clearing Requirement for Swaps,” 77 FR 42560, 42570 (July 19, 2012).