The Commodity Futures Trading Commission has approved final regulations that establish a schedule to phase in compliance with new clearing requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule will phase in the clearing requirement based on the type of market participant entering into swaps subject to the clearing requirement. Moreover, the compliance schedule will be used at the CFTC’s discretion when it believes that phasing is appropriate and needed by market participants.
The triggering event for the compliance schedule will be the CFTC’s issuance of a final clearing requirement determination. The Commission has issued the first proposed clearing determination for credit default swaps and interest rate swaps, and is indicating that the compliance schedule will be employed for implementation of that requirement.
Specifically, the compliance schedule applies to three categories of market participants:
Phase 1/Category 1 Entities
- Category 1 Entities include swap dealers, security-based swap dealers, major swap participants, major security-based swap participants, and active funds.
- The compliance schedule will phase in compliance with the clearing requirement for any swaps between Category 1 Entities or a Category 1 Entity and any other entity that desires to clear the transaction within the first 90 days after the Commission issues any clearing requirement.
- The compliance schedule provides these market participants with the least additional time to come into compliance based on, among other things, their level of activity, market experience, resources, and their status as registrants with the CFTC or SEC.
Phase 2/Category 2 Entities
- Category 2 Entities include commodity pools; private funds as defined in Section 202(a) of the Investment Advisors Act of 1940, other than active funds; or persons predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature as defined in Section 4(k) of the Bank Holding Company Act of 1956, provided that the entity is not a third-party subaccount. The Commission modified its proposal to remove employee benefit plans identified in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 from Category 2.
- The compliance schedule will phase in compliance for swaps between a Category 2 Entity and Category 1 Entity, another Category 2 Entity, or any other entity that desires to clear the transaction within 180 days after the Commission issues any clearing requirement.
- The compliance schedule provides these market participants 90 more days than Category 1 Entities because these market participants are not be required to be registered with the Commission and are likely to be less experienced and less frequent users of the swap markets than those in Category 1.
Phase 3/Category 3 Entities
- The compliance schedule will phase in compliance for all other swaps, including those involving third-party subaccounts, ERISA plans, and those not excepted from the clearing requirement within 270 days after the Commission issues a clearing requirement. In the final rule, the Commission has modified the definition of third-party subaccount to remove the execution authority requirement.
- The compliance schedule provides third-party subaccounts the most amount of additional time to bring their swaps into compliance as they are likely to require the most amount of time for documentation, coordination, and management.
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