Title VII of the Dodd-Frank Act broadly requires many swap transactions to be subject to exchange trading and clearing requirements. However, many end-users of swaps that use derivatives for legitimate hedging purposes are in many cases not subject to the clearing and exchange trading requirements. It is anticipated most end-users will elect to enter into transactions that are not traded on an exchange or subject to clearinghouse requirements so as to avoid margin requirements and the like – although such economics may be passed along by a counterparty.
Section 723(b) of the Dodd-Frank Act (Section 2(j) of the Commodity Exchange Act) provides that a public company may not enter into non-cleared swaps unless an “appropriate committee of the issuer’s board or governing body has reviewed and approved its decision to enter into swaps that are subject to such exemptions.” A public company is a company that has securities registered pursuant to Section 12 of the Securities Exchange Act or is required to file reports pursuant to Section 15(d) of the Securities Exchange Act. As the CFTC rule making process progresses public companies who wish to avoid the exchange trading and clearing requirements should obtain the requisite authorization.
A similar requirement for “approval by an appropriate committee” is included for security-based swaps under the SEC’s jurisdiction pursuant to Section 763 of the Dodd-Frank Act (Section 3C(i) of the Securities Exchange Act).
It is also important to note that for pre-Dodd-Frank swaps, in order to not be subject to the clearing requirements, the swaps must be reported to a swap data depository, or SDR, under Section 723 of the Dodd-Frank Act (Section 2(h)(6) of the Commodity Exchange Act). See our commentary here. Likewise, those same provisions require reporting of post-Dodd-Frank swaps entered into before the clearing requirements become effective. We recommend end-users discuss and document reporting obligations when entering into new swaps with their counterparties.
Check dodd-frank.com frequently for updates on the Dodd-Frank Act.