Today, swap dealers, major swap participants and private funds active in the swaps market are required to begin clearing certain index credit default swaps (CDS) and interest rate swaps that they entered into on or after March 11, 2013.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the Commodity Exchange Act (CEA) to require clearing of certain swaps. The Dodd-Frank Act also requires the Commission to determine whether a swap is required to be cleared by either a Commission-initiated review or a submission from a DCO for the review of a swap, or group, category, type, or class of swap. The clearing requirement determination does not apply to those who are eligible to elect an exception from clearing because they are non-financial entities hedging commercial risk.
"One of the most significant Dodd-Frank reforms begins implementation today," said CFTC Chairman Gary Gensler. "Central clearing lowers the risk of the highly interconnected financial system. It promotes competition in and broadens access to the market by eliminating the need for market participants to individually determine counterparty credit risk, as now clearinghouses stand between buyers and sellers."
As of today, swap dealers and private funds active in the swaps market began clearing certain CDS and interest rate swaps that they entered into on or after March 11. The clearing requirement applies to newly executed swaps, as well as changes in the ownership of a swap. The five swap classes that are required to be cleared include the swaps can be found here: See Related Link.
Market participants electing an exception from mandatory clearing under section 2(h)(7) of the CEA do not have to comply with the reporting requirements for electing the exception until September 9, 2013.
"This week's implementation of mandatory clearing continues the process of implementing key goals of the Dodd-Frank Act," Chairman Gensler said. "It is an historic change for the markets that will benefit the public and the economy at large. This achievement is a real testament to the dedication and excellence of the CFTC staff working as a team and with other regulators, both domestic and international. I also would like to thank Commissioners Sommers, Chilton, O'Malia and Wetjen for their significant contributions to making the implementation of these reforms now a reality."
Separately, MarkitServ, the most widely-used electronic trade processing service for over-the-counter (OTC) derivative transactions, is ready with connections to multiple clearinghouses to help the swaps industry comply with the first US Commodity Futures Trading Commission (CFTC) mandate to clear OTC derivatives.
Even before regulatory mandates, the network and trade management tools provided by MarkitSERV support a significant portion of OTC derivatives transactions that clear. In February, a total of 148 buy-side firms and swaps dealers used MarkitSERV to match and process approximately 190,000 cleared OTC swap trades. Those transactions included nearly 9,000 cleared buy-side trades (transactions in which at least one party is not a clearinghouse member).
Beginning today, institutions categorized under CFTC rules as swap dealers, major swap participants or active funds are required to centrally clear several types of interest rate swaps (in four currencies) and certain credit default swap index trades.
Henry Hunter, Head of Product Management at MarkitSERV, said: "When it comes to complying with regulatory deadlines from the CFTC and regulators worldwide, MarkitSERV is supporting the majority of OTC derivative market participants. Our cross-asset class network links traders and execution venues to clearinghouses and trade reporting facilities, making it much more straightforward to manage, clear and report OTC derivatives."
MarkitSERV provides a single point of connectivity for swap market participants to route trades to eight major clearinghouses that are registered with the CFTC (or have registration pending) as derivatives clearing organizations (DCOs) for OTC credit and rates products and also provides trade parties with real-time updates of clearing registration status and clearing broker take-up. MarkitSERV automatically determines for trade parties whether a trade is subject to mandatory clearing based on Regulation 50.4 (which defines which classes of swaps must clear), Regulation 50.25 (which defines the compliance schedule for swap market participants) and the MarkitSERV database of counterparty jurisdictions. MarkitSERV also supports mandatory and voluntary real-time trade reporting and reporting of primary economic terms for both cleah cleared and non-cleared trades.
The CTFC-registered DCOs to which MarkitSERV is connected are: CME, ICE Clear Credit, ICE Clear Europe, LCH.Clearnet LLC (SwapClear US), LCH.Clearnet Ltd (SwapClear UK), and Options Clearing Corp (OCC). MarkitSERV is also connected to Eurex Clearing AG and LCH.Clearnet SA (CDSClear), both of which have DCO registrations pending with the CFTC.
MarkitSERV first provided routing for central clearing in 2004 and is today connected to 12 clearinghouses worldwide.
MarkitSERV provides a comprehensive, venue-neutral, global middleware solution for OTC derivatives trade processing for cleared and non-cleared trades, across electronic execution venues and off-facility execution in credit, rates, equity and foreign exchange derivatives. With a connection to MarkitSERV, market participants have efficient and simplified access to key pieces of market infrastructure without having to incur the duplicative costs and risks of building and maintaining their own direct connections.