Mandatory Clearing Looms Even Larger: Resistance is Futile

As scheduled, the CFTC announced the second phase of compliance for mandatory derivatives clearing. From 10 June 2013, subject to certain (hedging and corporate) exemptions, it will become unlawful[1] for any Category 2 entity to engage in any Covered Swap (new swaps and novations), unless the swap in question is submitted for clearing to a registered or exempt derivatives clearing organization (DCO).

“Category 2 Entities” include:

• those entities not classified as Category 1
• Commodity Pools (including mutual funds)
• Private funds (other than active funds)[2]
• Other entities predominantly engaged in “financial activities”[3] (excluding “third-party subaccounts)[4]

The rules require market participants to submit an eligible swap for clearing to a DCO as soon as technologically practicable and no later than the end of the day of execution. The product classifications are necessarily the same as for the Category 1 entities and may be found in full here. However, broadly, the following types of swaps will be subject to the clearing requirement:

Rate Swaps

	IRS	Basis	FRA	OIS
Currencies	USD,EUR,GBP, JPY	USD,EUR,GBP, JPY	USD,EUR,GBP, JPY	USD,EUR,GBP
Floating Rates	LIBOR (Euribor for EUR)	LIBOR (Euribor for EUR)	LIBOR (Euribor for EUR)	Fed Funds, EONIA, SONIA
Date Range	28 days to 50 yrs.  (30yrs. JPY)	28 days to 50 yrs.  (30yrs. JPY)	3 days to 3 years	7 days to 2 yrs.

 CDS

	Type	Region	Indices	Tenor	Series
North   American Untranched	Corporate	North   America	CDX.NA.IGCDX.NA.HY	CDX.NA.IG: 3Y, 5Y, 7Y, 10YCDX.NA.HY: 5Y	CDX.NA.IG 3Y: Series 15 and all subsequent Series, up to and including the current SeriesCDX.NA.IG 5Y: Series 11 and all subsequent Series, up to and including the current Series CDX.NA.IG 7Y: Series 8 and all subsequent Series, up to and including the current Series CDX.NA.IG 10Y: Series 8 and all subsequent Series, up to and including the current Series CDX.NA.HY 5Y: Series 11 and all subsequent Series, up to and including the current Series
European   Untranched	Corporate	Europe	iTraxx   EuropeiTraxx   Europe Crossover iTraxx   Europe HiVol	iTraxx Europe: 5Y, 10YiTraxx Europe Crossover: 5Y iTraxx Europe HiVol: 5Y	iTraxx Europe 5Y: Series 10 and all subsequent Series, up to and including the current SeriesiTraxx Europe 10Y: Series 7 and all subsequent Series, up to and including the current   Series iTraxx Europe Crossover 5Y: Series 10 and all subsequent Series, up to and including the current Series iTraxx Europe HiVol 5Y: Series 10 and all subsequent Series, up to and including the current Series

The classifications denote “vanilla” instruments, of market standard tenor and reference rate, uniformly excluding optionality, dual currencies and conditional notionals. The CFTC estimate that, at least for IRS, these broad classifications will account for 90% of the existing notional volume. It should be noted that, despite eligibility according to the criteria, if no DCO clears a particular swap- then the clearing requirement will not apply. Idiosyncratic terms that complicate mechanical acceptance by a DCO may render a swap unacceptable for clearing.

The inclusion of this second tier has widened the scope of mandatory clearing beyond the “market professionals” that comprise Category 1. It will be of interest to both the market and regulators to assess initial readiness and compliance within this more disparate group.

The final announcement that will embrace Category 3 (effectively everyone else who is non-exempt, including typical “end-users”) is scheduled for 9 September 2013.

---

Contact Us