At an open meeting of the U.S. Commodity Futures Trading Commission (CFTC) last Thursday, September 8, Chairman Massad indicated that adopting a final rule to expand the scope of interest rate swaps (IRS) required to be cleared under Section 2(h) of the Commodity Exchange Act (the Clearing Requirement) is a priority for the end of 2016.  The CFTC published a proposed rule to amend CFTC Regulation 50.4(a) on June 9, 2016 (the Proposal).  As proposed, the expanded Clearing Requirement generally consists of adding new currencies to the various classes of IRS and extending the termination date for Overnight Index IRS already subject to the Clearing Requirement.  The proposed additions to the Clearing Requirement are:

Fixed-to-Floating IRS – New Currencies: Australian Dollar, Canadian Dollar, Hong Kong Dollar, Mexican Peso, Norwegian Krone, Polish Zloty, Singapore Dollar, Swedish Krona and Swiss Franc.
Basis IRS – New Currency: Australian Dollar
Forward Rate Agreements – New Currencies: Australian Dollar, Norwegian Krone and Polish Zloty
Overnight Index IRS – New Currencies: Australian Dollar and Canadian Dollar
Overnight Index IRS – Extended Termination Dates: Euro, Sterling and U.S. Dollar expanded to 3 years from the current 2 years.

Upon the effective date of the final regulation, these new products must be cleared through a registered derivatives clearing organization (DCO) or a DCO that is exempted from registration under the Commodity Exchange Act (Exempt DCO).  We note that at the time of the Clearing Requirement’s adoption in December 2012, there were no Exempt DCOs.  At the time of the Proposal, there are four Exempt DCOs: ASX Clear (Futures) Pty Limited, Japan Securities Clearing Corporation, Korea Exchange, Inc. and OTC Clearing Hong Kong Limited.

Effective Date/Implementation
This is the first proposed expansion of the Clearing Requirement since it was initially adopted in December 2012 and implemented over the course of 2013.  In the Proposal, the CFTC sets forth two alternative implementation schedules.

Under the first alternative, market participants subject to the Clearing Requirement must comply with respect to all new IRS products 60 days after the final regulation is published in the Federal Register.

Under the second alternative, the CFTC proposed a staggered implementation schedule, which would coincide with the adoption of an analogous clearing requirement in the non-U.S. jurisdictions for the relevant currencies.  Market participants would be required to comply with the expanded Clearing Requirement on the earlier of (1) 60 days after the effective date of the analogous clearing requirement adopted by a regulator in a non-U.S. jurisdiction, or (2) two years after the final regulation is published in the Federal Register.  Under this scenario, market participants must comply two years after the regulation finalized, even if a regulator in a non-U.S. jurisdiction does not adopt an analogous clearing requirement.  The majority of commenters prefer this second alternative, with certain recommended revisions.

The comment period for the Proposal closed on July 18, 2016, with nearly all commenters expressing general support for the expanded Clearing Requirement.

Tables illustrating the expanded Clearing Requirement, as proposed, are on the CFTC’s website here.

The Proposal can be found here.


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