Vol. 77 Thursday, 

No. 240 December 13, 2012 

Part II 

Commodity Futures Trading Commission 

17 CFR Parts 39 and 50 

Clearing Requirement Determination Under Section 2(h) of the CEA;

Final Rule 


sroberts on DSK5SPTVN1PROD with 
74284 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

1Clearing Requirement Determination Under 

Section 2(h) of the CEA; Proposed Rule, 77 FR 

47170 (Aug. 7, 2012). 

2On October 3, 2008, President Bush signed the 

Emergency Economic Stabilization Act of 2008, 

which was principally designed to allow the U.S. 

Department of the Treasury and other government 

agencies to take action to restore liquidity and 

stability to the U.S. financial system (e.g., the 

Troubled Asset Relief Program—also known as 

TARP—under which the U.S. Department of the 

Treasury was authorized to purchase up to $700 

billion of troubled assets that weighed down the 

balance sheets of U.S. financial institutions). See 

Public Law 110–343, 122 Stat. 3765 (2008). 

3See Financial Crisis Inquiry Commission, ‘‘The 

Financial Crisis Inquiry Report: Final Report of the 

National Commission on the Causes of the 

Financial and Economic Crisis in the United 

States,’’ Jan. 2011, at xxviii, available at http://

www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPOFCIC.pdf. 

4See id. at 386. 

5 Financial Regulatory Reform: A New 

Foundation, June 2009, available at http://

www.treasury.gov/initiatives/Documents/Final

Report_web.pdf and cited in S. Rep. 111–176 at 29– 

30 (Apr. 30, 2010). 

6Adam Davidson, ‘‘How AIG fell apart,’’ Reuters, 

Sept. 18, 2008, available at http://www.reuters.com/ 

article/2008/09/18/us-how-aig-fell-apart-idUS

MAR85972720080918. 

7Hugh Son, ‘‘AIG’s Trustees Shun ‘Shadow 

Board,’ Seek Directors,’’ Bloomberg, May 13, 2009, 

available at http://www.bloomberg.com/apps/

news?pid=newsarchive&sid=aaog3i4yUopo&

refer=us. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 39 and 50 

RIN 3038–AD86 

Clearing Requirement Determination 

Under Section 2(h) of the CEA 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is adopting regulations to 

establish a clearing requirement under 

new section 2(h)(1)(A) of the 

Commodity Exchange Act (CEA or Act), 

enacted under Title VII of the DoddFrank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). The 

regulations require that certain classes 

of credit default swaps (CDS) and 

interest rate swaps, described herein, be 

cleared by a derivatives clearing 

organization (DCO) registered with the 

Commission. The Commission also is 

adopting regulations to prevent evasion 

of the clearing requirement and related 

provisions. 

DATES: The rules will become effective 

February 11, 2013. Specific compliance 

dates are discussed in the 

supplementary information. 

FOR FURTHER INFORMATION CONTACT: 

Sarah E. Josephson, Deputy Director, 

202–418–5684, sjosephson@cftc.gov; 

Brian O’Keefe, Associate Director, 202– 

418–5658, bokeefe@cftc.gov; or Erik 

Remmler, Associate Director, 202–418– 

7630, eremmler@cftc.gov, Division of 

Clearing and Risk, Camden Nunery, 

Economist, 202–418–5723, 

cnunery@cftc.gov, Office of the Chief 

Economist, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Clearing Requirement Proposal 

B. Financial Crisis 

C. Central Role of Clearing in the DoddFrank Act 

D. G–20 and International Commitments 

on Clearing 

E. Overview of Section 2(h) and § 39.5 

F. Submissions From DCOs 

II. Comments on the Notice of Proposed 

Rulemaking 

A. Overview of Comments Received 

B. Generally Applicable Comments 

C. Credit Default Swaps 

D. Determination Analysis for Credit 

Default Swaps 

E. Interest Rate Swaps 

F. Determination Analysis for Interest Rate 

Swaps 

III. Final Rule 

A. Regulation 50.1: Definitions 

B. Regulation 50.2: Treatment of Swaps 

Subject to a Clearing Requirement 

C. Regulation 50.3: Notice to the Public 

D. Regulation 50.4: Classes of Swaps 

Required To Be Cleared 

E. Regulation 50.5: Clearing Transition 

Rules 

F. Regulation 50.6: Delegation of Authority 

G. Regulation 50.10: Prevention of Evasion 

of the Clearing Requirement and Abuse 

of an Exception or Exemption to the 

Clearing Requirement 

IV. Implementation 

V. Cost Benefit Considerations 

A. Statutory and Regulatory Background 

B. Overview of Swap Clearing 

C. Consideration of the Costs and Benefits 

of the Commission’s Action 

D. Consideration of Alternative Swap 

Classes for Clearing Determination 

E. Section 15(a) Factors 

VI. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

I. Background 

A. Clearing Requirement Proposal 

On August 7, 2012, the Commission 

published a notice of proposed 

rulemaking (NPRM) to establish a 

clearing requirement under new section 

2(h)(1)(A) of the CEA, as provided for 

under section 723 of Title VII of the 

Dodd-Frank Act.1 The Commission 

proposed that swaps meeting the 

specifications identified in two classes 

of CDS and four classes of interest rate 

swaps, and available for clearing by an 

eligible DCO, would be required to be 

cleared. The Commission also proposed 

rules related to the prevention of 

evasion of the clearing requirement and 

prevention of abuse of an exception or 

exemption to the clearing requirement. 

The Commission is hereby adopting 

§§ 50.1–50.6 and § 50.10, subject to the 

changes discussed below. 

B. Financial Crisis 

In the fall of 2008, a series of large 

financial institution failures triggered a 

financial and economic crisis that 

threatened to freeze U.S. and global 

credit markets. As a result of these 

failures, unprecedented governmental 

intervention was required to ensure the 

stability of the U.S. financial system.2

These failures revealed the vulnerability 

of the U.S. financial system and 

economy to widespread systemic risk 

resulting from, among other things, poor 

risk management practices of financial 

firms and the lack of supervisory 

oversight for a financial institution as a 

whole.3

The financial crisis also illustrated the 

significant risks that an uncleared, overthe-counter (OTC) derivatives market 

can pose to the financial system. As the 

Financial Crisis Inquiry Commission 

explained: 

The scale and nature of the [OTC] 

derivatives market created significant 

systemic risk throughout the financial system 

and helped fuel the panic in the fall of 2008: 

millions of contracts in this opaque and 

deregulated market created interconnections 

among a vast web of financial institutions 

through counterparty credit risk, thus 

exposing the system to a contagion of 

spreading losses and defaults.4

Certain OTC derivatives, such as CDS, 

played a prominent role during the 

crisis. According to a white paper by the 

U.S. Department of the Treasury, ‘‘the 

sheer volume of these [CDS] contracts 

overwhelmed some firms that had 

promised to provide payment of the 

CDS and left institutions with losses 

that they believed they had been 

protected against.’’ 5 In particular, AIG 

reportedly issued uncleared CDS 

transactions covering more than $440 

billion in bonds, leaving it with 

obligations that it could not cover as a 

result of changed market conditions.6

As a result of AIG’s CDS exposure, the 

Federal government bailed out the firm 

with over $180 billion of taxpayer 

money in order to prevent AIG’s failure 

and a possible contagion event in the 

broader economy.7

More broadly, the President’s 

Working Group (PWG) on Financial 

Markets noted shortcomings in the OTC 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74285 

8The President’s Working Group on Financial 

Markets, ‘‘Policy Statements on Financial Market 

Developments,’’ Mar. 2008, available at http://

www.treasury.gov/resource-center/fin-mkts/

Documents/pwgpolicystatemktturmoil_

03122008.pdf. 

9 ISDA, ISDA Margin Survey, 2009, available at 

http://www.isda.org/c_and_a/pdf/ISDA-MarginSurvey-2009.pdf. 

10The TED spread measures the difference in 

yield between three-month Eurodollars as 

represented by London Interbank Offered Rate 

(LIBOR), and three-month Treasury Bills. LIBOR 

contains credit risk while T-bills do not. As the 

spread got larger, it meant that lenders demanded 

more return to compensate for credit risk than they 

would need if they loaned the money to the U.S. 

Department of the Treasury without any credit risk. 

11The U.S. Financial Crisis: Credit Crunch and 

Yield Spreads, by James R. Barth et al., page 5, 

available at http://apeaweb.org/confer/bei08/

papers/blp.pdf. 

12See Federal Reserve Bank of New York, Press 

Release, ‘‘New York Fed Welcomes Further 

Industry Commitments on Over-the-Counter 

Derivatives,’’ Oct. 31, 2008, available at http:// 

www.newyorkfed.org/newsevents/news/markets/ 

2008/an081031.html, which references documents 

prepared by market participants describing the 

importance of clearing. See also Ciara Linnane and 

Karen Brettell, ‘‘NY Federal Reserve pushes for 

central CDS counterparty,’’ Reuters, Oct. 6, 2008, 

available at http://www.reuters.com/article/2008/ 

10/06/cds-regulation-idUSN0655208920081006. 

13The Commission has proposed rules that would 

establish a separate process for determining 

whether a swap has been made ‘‘available to trade’’ 

by a DCM or SEF. Those rules, and any 

determinations made under those rules, will be 

finalized separately from the clearing requirements 

discussed herein. See Process for a Designated 

Contract Market or Swap Execution Facility to 

Make a Swap Available to Trade Under Section 

2(h)(8) of the Commodity Exchange Act, 76 FR 

77728 (Dec. 14, 2011). 

14S. Rep. 111–176, at 32 (April 30, 2010). See 

also Letter from Senators Christopher Dodd and 

Blanche Lincoln to Congressmen Barney Frank and 

Collin Peterson (June 30, 2010) (‘‘Congress 

determined that clearing is at the heart of reform— 

bringing transactions and counterparties into a 

robust, conservative, and transparent risk 

management framework.’’). 

15S. Rep. 111–176, at 33. 

derivative markets as a whole during the 

crisis. The PWG identified the need for 

an improved integrated operational 

structure supporting OTC derivatives, 

specifically highlighting the need for an 

enhanced ability to manage 

counterparty risk through ‘‘netting and 

collateral agreements by promoting 

portfolio reconciliation and accurate 

valuation of trades.’’ 8 These issues were 

exposed in part by the surge in 

collateral required between 

counterparties during 2008, when the 

International Swaps and Derivatives 

Association (ISDA) reported an 86% 

increase in the collateral in use for OTC 

derivatives, indicating not only the 

increase in risk, but also circumstances 

in which positions may not have been 

collateralized.9

With only limited checks on the 

amount of risk that a market participant 

could incur, great uncertainty was 

created among market participants. A 

market participant did not know the 

extent of its counterparty’s exposure, 

whether its counterparty was 

appropriately hedged, or if its 

counterparty was dangerously exposed 

to adverse market movements. Without 

central clearing, a market participant 

bore the risk that its counterparty would 

not fulfill its payment obligations 

pursuant to a swap’s terms 

(counterparty credit risk). As the 

financial crisis deepened, this risk made 

market participants wary of trading with 

each other. As a result, markets quickly 

became illiquid and trading volumes 

plummeted. The dramatic increase in 

‘‘TED spreads’’ evidenced this 

mistrust.10 These spreads increased 

from a long-term average of 

approximately 30 basis points to 464 

basis points.11

The failure to adequately collateralize 

the risk exposures posed by OTC 

derivatives, along with the contagion 

effects of the vast web of counterparty 

credit risk, led many to conclude that 

OTC derivatives should be centrally 

cleared. For instance, in 2008, the 

Federal Reserve Bank of New York 

(FRBNY) began encouraging market 

participants to establish a central 

counterparty to clear CDS.12 For several 

years prior, the FRBNY had led a 

targeted effort to enhance operational 

efficiency and performance in the OTC 

derivatives market by increasing 

automation in processing and by 

promoting sound back office practices, 

such as timely confirmation of trades 

and portfolio reconciliation. Beginning 

with CDS in 2008, the FRBNY and other 

primary supervisors of OTC derivatives 

dealers increasingly focused on central 

clearing as a means of mitigating 

counterparty credit risk and lowering 

systemic risk to the markets as a whole. 

Both regulators and market participants 

alike recognized that risk exposures 

would have been monitored, measured, 

and collateralized through the process 

of central clearing. 

C. Central Role of Clearing in the DoddFrank Act 

Recognizing the peril that the U.S. 

financial system faced during the 

financial crisis, Congress and the 

President came together to pass the 

Dodd-Frank Act in 2010. Title VII of the 

Dodd-Frank Act establishes a 

comprehensive new regulatory 

framework for swaps, and the 

requirement that swaps be cleared by 

DCOs is one of the cornerstones of that 

reform. The CEA, as amended by Title 

VII, now requires a swap: (1) To be 

cleared through a DCO if the 

Commission has determined that the 

swap, or group, category, type, or class 

of swap, is required to be cleared, unless 

an exception to the clearing requirement 

applies; (2) to be reported to a swap data 

repository (SDR) or the Commission; 

and (3) if the swap is subject to a 

clearing requirement, to be executed on 

a designated contract market (DCM) or 

swap execution facility (SEF), unless no 

DCM or SEF has made the swap 

available to trade.13

Clearing is at the heart of the DoddFrank financial reform. According to the 

Senate Report: 14

As a key element of reducing systemic risk 

and protecting taxpayers in the future, 

protections must include comprehensive 

regulation and rules for how the OTC 

derivatives market operates. Increasing the 

use of central clearinghouses, exchanges, 

appropriate margining, capital requirements, 

and reporting will provide safeguards for 

American taxpayers and the financial system 

as a whole. 

The Commission believes that a 

clearing requirement will reduce 

counterparty credit risk and provide an 

organized mechanism for collateralizing 

the risk exposures posed by swaps. 

According to the Senate Report: 15

With appropriate collateral and margin 

requirements, a central clearing organization 

can substantially reduce counterparty risk 

and provide an organized mechanism for 

clearing transactions. * * * While large 

losses are to be expected in derivatives 

trading, if those positions are fully margined 

there will be no loss to counterparties and 

the overall financial system and none of the 

uncertainty about potential exposures that 

contributed to the panic in 2008. 

Notably, Congress did not focus on just 

one asset class, such as CDS; rather, 

Congress determined that all swaps that 

a DCO plans to accept for clearing must 

be submitted to the Commission for a 

determination as to whether or not those 

swaps are required to be cleared 

pursuant to section 2(h)(2)(D) of the 

CEA. 

D. G–20 and International Commitments 

on Clearing 

The financial crisis generated 

international consensus on the need to 

strengthen financial regulation by 

improving transparency, mitigating 

systemic risk, and protecting against 

market abuse. As a result of the 

widespread recognition that 

transactions in the OTC derivatives 

market increased risk and uncertainty in 

the global economy and became a 

significant contributor to the financial 

crisis, a series of policy initiatives were 

undertaken to better regulate the 

financial markets. 


sroberts on DSK5SPTVN1PROD with 
74286 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

16See ‘‘Implementing OTC Derivatives Market 

Reforms,’’ Financial Stability Board, Oct. 25, 2010, 

available at http://www.financialstabilityboard.org/ 

publications/r_101025.pdf. 

17OTC Derivatives Working Group, ‘‘OTC 

Derivatives Market Reforms: Third Progress Report 

on Implementation,’’ Financial Stability Board, June 

15, 2012, available at http:// 

www.financialstabilityboard.org/publications/ 

r_120615.pdf. 

18 IOSCO’s report, published in February 2012, is 

available at https://www.iosco.org/library/pubdocs/ 

pdf/IOSCOPD374.pdf. 

19See 76 FR 44464 (July 26, 2011); 17 CFR 39.5. 

20See section 2(h) of the CEA. The Commission 

also may conduct a Commission-initiated review of 

swaps for required clearing. Section 2(h)(2)(A)(i) of 

the CEA requires the Commission on an ongoing 

basis to ‘‘review each swap, or any group, category, 

type, or class of swaps to make a determination as 

to whether the swap, category, type or class of 

swaps should be required to be cleared.’’ 

In September 2009, leaders of the 

Group of 20 (G–20)—whose 

membership includes the United States, 

the European Union, and 18 other 

countries—agreed that: (1) OTC 

derivatives contracts should be reported 

to trade repositories; (2) all standardized 

OTC derivatives contracts should be 

cleared through central counterparties 

and traded on exchanges or electronic 

trading platforms, where appropriate, by 

the end of 2012; and (3) non-centrally 

cleared contracts should be subject to 

higher capital requirements. 

In June 2010, the G–20 leaders 

reaffirmed their commitment to achieve 

these goals. In its October 2010 report 

on Implementing OTC Derivatives 

Market Reforms (the October 2010 

Report), the Financial Stability Board 

(FSB) made 21 recommendations 

addressing practical issues that 

authorities may encounter in 

implementing the G–20 leaders’ 

commitments.16 The G–20 leaders again 

reaffirmed their commitments at the 

November 2011 Summit, including the 

end-2012 deadline. The FSB has issued 

three implementation progress reports. 

The most recent report urged 

jurisdictions to push forward 

aggressively to meet the G–20 end-2012 

deadline in as many reform areas as 

possible. On mandatory clearing, the 

report observed that ‘‘[j]urisdictions 

now have much of the information they 

requested in order to make informed 

decisions on the appropriate legislation 

and regulations to achieve the end-2012 

commitment to centrally clear all 

standardised OTC derivatives.’’ 17

Specifically with regard to required 

clearing, the Technical Committee of the 

International Organization of Securities 

Commissions (IOSCO) has published a 

final report, Requirements for 

Mandatory Clearing, outlining 

recommendations that regulators should 

follow to carry out the G–20’s goal of 

requiring standardized swaps to be 

cleared.18

Nations around the world have been 

preparing for the move to mandatory 

clearing. For example, the Japanese 

Financial Services Authority (JFSA) has 

proposed requiring certain financial 

institutions to clear yen-denominated 

interest rate swaps that reference LIBOR 

and CDS that reference the Japanese 

iTraxx indices by the end of 2012. After 

that, the requirement will be expanded 

to other entities engaging in these 

swaps. In addition, the JFSA is 

considering expanding its mandatory 

clearing coverage to include U.S. dollarand euro-denominated interest rate 

swaps, as well as yen-denominated 

interest rate swaps referencing TIBOR. 

The JFSA also will consider mandating 

single-name CDS referencing Japanese 

reference entities, and index and singlename CDS on North American and 

European reference entities. 

The Monetary Authority of Singapore 

(MAS) released a consultation paper 

addressing mandatory clearing on 

February 13, 2012. Based on a 

preliminary review MAS expects 

Singapore dollar interest rate swaps, 

U.S. dollar interest rate swaps, and 

Asian currency non-deliverable 

forwards to meet its proposed 

mandatory clearing criteria. Additional 

swaps will be considered for mandatory 

clearing via clearinghouse submission 

or upon the review of MAS. 

The Securities and Futures 

Commission and Hong Kong Monetary 

Authority jointly released a consultation 

paper addressing mandatory clearing on 

October 17, 2011. This consultation 

plan described a phased 

implementation approach where 

clearing requirements will initially 

cover standardized interest rate swaps 

and non-deliverable forwards. Hong 

Kong regulators have said they will 

consider extending the mandatory 

clearing requirements in subsequent 

phases. In July, the Hong Kong 

regulators published consultation 

conclusions and stated that the precise 

mandatory clearing obligations would 

be set out in subsidiary legislation 

which they will be consulting on in the 

fourth quarter of 2012. 

On April 18, 2012, the Australian 

Council of Financial Regulators 

published a consultation on a number of 

OTC derivatives, including mandatory 

clearing. The Council of Financial 

Regulators is developing advice for the 

government which is expected to adopt 

legislation by end-2012. 

Finally, in the European Union, 

specific clearing determinations have 

yet to be made. However, the European 

Markets Infrastructure Regulation 

(EMIR) provides that contracts become 

subject to the clearing obligation 

through either a ‘‘bottom up’’ approach 

or a ‘‘top down’’ approach. The ‘‘bottom 

up’’ approach is where a national 

authority authorizes a central 

counterparty (CCP) to clear certain 

classes of OTC derivatives. The ‘‘top 

down’’ approach is where the European 

Securities and Markets Authority 

(ESMA) identifies classes of OTC 

derivatives which should be subject to 

the clearing obligation but for which no 

CCP is authorized to clear. Based on this 

framework, ESMA has the authority to 

make clearing determinations for classes 

of OTC derivative contracts. 

With the adoption of these final rules, 

the Commission is taking a critical step 

toward meeting the G–20 commitment 

and fulfilling the requirements of the 

Dodd-Frank Act. The Commission has 

consulted with authorities from around 

the globe to ensure that our efforts are 

as coordinated as possible. 

E. Overview of Section 2(h) and § 39.5 

The Commission promulgated § 39.5 

of its regulations to implement 

procedural aspects of section 2(h) of the 

CEA.19 Regulation 39.5 establishes 

procedures for: (1) Determining the 

eligibility of a DCO to clear swaps; (2) 

the submission of swaps by a DCO to 

the Commission for a clearing 

requirement determination; (3) 

Commission initiated reviews of swaps; 

and (4) the staying of a clearing 

requirement. 

The determinations and rules adopted 

in this release implement the clearing 

requirement under section 2(h) of the 

CEA for certain swaps and require that 

those swaps must be submitted for 

clearing to Commission-registered 

DCOs. Under section 2(h)(1)(A), ‘‘it shall 

be unlawful for any person to engage in 

a swap unless that person submits such 

swap for clearing to a [DCO] that is 

registered under [the CEA] or a [DCO] 

that is exempt from registration under 

[the CEA] if the swap is required to be 

cleared.’’ 20

A clearing requirement determination 

may be initiated by a swap submission. 

Section 2(h)(2)(B)(i) of the CEA requires 

a DCO to ‘‘submit to the Commission 

each swap, or any group, category, type 

or class of swaps that it plans to accept 

for clearing, and provide notice to its 

members of the submission.’’ In 

addition under section 2(h)(2)(B)(ii) of 

the CEA, ‘‘[a]ny swap or group, 

category, type, or class of swaps listed 

for clearing by a [DCO] as of the date of 

enactment shall be considered 

submitted to the Commission.’’ 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74287 

21The letter made it clear that DCOs should 

submit both pre-enactment swaps and swaps for 

which DCOs have initiated clearing since 

enactment of the Dodd-Frank Act. Pre-enactment 

swaps refer to those swaps that DCOs were 

accepting for clearing as of July 21, 2010, the date 

of enactment of the Dodd-Frank Act. 

22As discussed in detail below, IDCH has been 

purchased by LCH.Clearnet Group. 

23Other swaps submissions were received from 

Kansas City Board of Trade (KCBT) and the Natural 

Gas Exchange (NGX). KCBT and NGX do not accept 

any CDS or interest rate swaps for clearing. 

24The Commission will consider all other swaps 

submitted under § 39.5(b) as soon as possible after 

this determination is published. These other swaps 

include certain CDS that were submitted to the 

Commission after the initial February 2012 

submissions discussed above. If the Commission 

determines that additional swaps should be 

required to be cleared, such determination likely 

will be proposed as a new class under § 50.4. 

25See, e.g., letters from the CME Group (CME), 

the Futures Industry Association (FIA), the 

Managed Funds Association (MFA), and Americans 

for Financial Reform (AFR). 

26Bank of International Settlements (BIS) data, 

December 2011, available at http://www.bis.org/ 

statistics/otcder/dt1920a.pdf. 

27 Id.; LCH data. 

28BIS data, December 2011, available at http:// 

www.bis.org/statistics/otcder/dt1920a.pdf. 

29 Id. 

30 ICE Clear Credit data, as of the April 26, 2012 

clearing cycle. 

31Comment letters received in response to the 

NPRM may be found on the Commission’s Web site 

at http://comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=1252. 

32An unsigned comment submitted on September 

4, 2012, questioned the need for additional 

regulation as a general matter. 

33See letters from Futures Industry Association 

Principle Traders Group (FIA PTG), Arbor Research 

and Trading, LLC, R.J. O’Brien & Associates, 

Svenokur, LLC, Chris Barnard, CRT Capital Group 

(Robert Gorham), LLC, DRW Trading Group, 

Javelin, The Swaps and Derivatives Market 

Association (SDMA), Knight Capital Americas LLC, 

Bart Sokol (CRT Capital Group), Jefferies & 

Company, Inc., MarketAxess, Eris Exchange, 

Coherence Capital Partners LLC, Citadel, Americans 

for Financial Reform (AFR), D.E. Shaw Group, 

AllianceBernstein, LCH.Clearnet Group Limited 

(LCH), CME Group Inc. (CME), and 

IntercontinentalExchange, Inc. (ICE). 

34See, e.g., letter from Citadel (reviewing each of 

the five statutory factors and supporting the 

Commission’s analysis). 

35CME applauded the Commission’s decision to 

require classes of swaps be cleared rather than take 

a product-by-product approach. CME also 

commended the decision not to propose classes of 

swaps on a DCO-by-DCO basis. 

F. Submissions from DCOs 

On February 1, 2012, Commission 

staff sent a letter requesting that DCOs 

submit all swaps that they were 

accepting for clearing as of that date, 

pursuant to § 39.5 of the Commission’s 

regulations.21 The Commission received 

submissions relating to CDS and interest 

rate swaps from: The International 

Derivatives Clearinghouse Group 

(IDCH) 22 on February 17, 2012; the CME 

Group (CME), ICE Clear Credit, and ICE 

Clear Europe, each dated February 22, 

2012; and a submission from 

LCH.Clearnet Limited (LCH) on 

February 24, 2012.23

The clearing requirement 

determinations and rules adopted in 

this release cover certain CDS and 

interest rate swaps currently being 

cleared by a DCO. The Commission 

intends subsequently to consider other 

swaps submitted by DCOs, such as 

agricultural, energy, and equity indices. 

As stated in the NPRM, the decision 

to focus on CDS and interest rate swaps 

in the initial clearing requirement 

determinations is a function of both the 

market importance of these swaps and 

the fact that they already are widely 

cleared. In order to move the largest 

number of swaps to required clearing in 

its initial determinations, the 

Commission believes that it is prudent 

to focus on those swaps that have the 

highest market shares and, accordingly, 

the biggest market impact. Further, for 

these swaps there is already a blueprint 

for clearing and appropriate risk 

management. CDS and interest rate 

swaps fit these considerations and 

therefore are well suited for required 

clearing consideration.24

Notably, market participants 

recommended that the Commission take 

this approach, and comments received 

on the NPRM supported this approach 

as well.25 In addition, interest rate 

swaps account for about $500 trillion of 

the $650 trillion global OTC swaps 

market, in notional dollars—the highest 

market share of any class of swaps.26

LCH claims to clear about $302 trillion 

of those—meaning that, in notional 

terms, LCH clears approximately 60% of 

the interest rate swap market.27 While 

CDS indices do not have as prominent 

a market share as interest rate swaps, 

CDS indices are capable of having a 

sizeable market impact, as they did 

during the 2008 financial crisis. Overall, 

the CDS marketplace has almost $29 

trillion in notional outstanding across 

both single and multi-name products.28

CDS on standardized indices accounts 

for about $10 trillion of the global OTC 

market in notional dollar amount 

outstanding.29 Since March 2009, the 

ICE Clear Credit and ICE Clear Europe 

have combined to clear over $30 trillion 

in gross notional for all CDS.30 Because 

of the market shares and market impacts 

of these swaps, and because these swaps 

are currently being cleared, the 

Commission decided to review CDS and 

interest rate swaps in its initial clearing 

requirement determinations. The 

Commission recognizes that while this 

is an appropriate basis for the initial 

determinations, swap clearing is likely 

to evolve and clearing requirement 

determinations made at later times may 

be based on a variety of other factors 

beyond the extent to which the swaps 

in question are already being cleared. 

II. Comments on the Notice of Proposed 

Rulemaking 

The Commission received 29 

comments during the 30-day public 

comment period following publication 

of the NPRM, and four additional 

comments after the comment period 

closed. The Commission considered 

each of these 33 comments in 

formulating the final regulations.31

The Chairman and Commissioners, as 

well as Commission staff, participated 

in numerous meetings with 

clearinghouses, market participants, 

trade associations, public interest 

groups, and other interested parties. In 

addition, the Commission has consulted 

with other U.S. financial regulators 

including: (i) The Securities and 

Exchange Commission (SEC); (ii) the 

Board of Governors of the Federal 

Reserve System; (iii) the Office of the 

Comptroller of the Currency; and (iv) 

the Federal Deposit Insurance 

Corporation (FDIC). Staff from each of 

these agencies has had the opportunity 

to provide oral and/or written 

comments to this adopting release, and 

the final regulations incorporate 

elements of the comments provided. 

The Commission is mindful of the 

benefits of harmonizing its regulatory 

framework with that of its counterparts 

in foreign countries. The Commission 

has therefore monitored global advisory, 

legislative, and regulatory proposals, 

and has consulted with foreign 

regulators in developing the final 

regulations. 

A. Overview of Comments Received 

None of the 33 comments received 

expressed outright opposition to the 

Commission’s clearing requirement 

proposal.32 Indeed, 22 of the comment 

letters strongly supported the 

Commission’s proposal and urged the 

Commission to finalize its proposal 

promptly.33 These comments also 

supported the Commission’s analysis 

under the five-factor statutory test, and 

agreed with the Commission’s 

conclusion that swaps within the four 

proposed classes of interest rate swaps 

and the two proposed classes of CDS 

were appropriate for required clearing.34

All three DCOs clearing the swaps 

subject to the final rules expressed 

strong support for the proposal and 

agreed with the overall approach taken 

by the Commission.35

However, a number of commenters 

requested that the Commission make 

specific modifications to the proposed 


sroberts on DSK5SPTVN1PROD with 
74288 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

36See, e.g., letter from ISDA (requesting changes 

to the delegation provisions of proposed § 50.6). 

37See, e.g., letter from The Financial Services 

Roundtable (FSR) (requesting that the Commission 

clarify the meaning of ‘‘conditional notional 

amount’’). 

38See, e.g., letter from ISDA (requesting that no 

determination take effect until there is ‘‘a further 

determination that a product has an adequate 

clearing history to support a finding of operational 

readiness to clear by DCOs and market 

participants’’), and letter from Vanguard (requesting 

that the Commission delay mandatory clearing until 

new rules for segregation of customer funds and 

swap positions are fully operational and capable of 

being tested for three months). 

39FIA specifically mentioned its inability to 

respond to questions asked in the NPRM with 

regard to competitiveness, which it viewed as 

important to the Commission’s analysis of 

competitiveness under one of the five statutory 

factions. See Sections II.D and II.F below. 

40See letters from AFR and Chris Barnard. 

41See Section II.D for a discussion of iTraxx and 

the availability of client clearing. 

42The rule text of § 50.2(a) has been modified to 

clarify this two-step process. 

43 It is the Commission’s understanding that 

clearing failures generally arise under two 

circumstances: (1) Failure of the swap to meet the 

product specifications required by the DCO; or (2) 

a credit issue with one or both of the counterparties 

to the swap. Generally speaking, identification of a 

product specification problem can be identified 

extremely quickly. 

44See Section II.D for a discussion of iTraxx and 

the availability of client clearing. 

rules,36 and, in several instances, 

commenters requested clarification of 

various points.37 A number of 

commenters requested that the 

Commission delay implementation of 

the clearing requirement until certain 

milestones are met.38 Each of these 

comments is discussed in detail below. 

The Futures Industry Association 

(FIA) expressed concern about the 30- 

day comment period providing 

sufficient time to comment on the 

proposal, and recommended that the 

Commission provide a longer comment 

period for future proposals.39 The 

Commission is cognizant of the 

importance of affording the public 

sufficient time to comment on important 

proposals. However, given the CEA’s 

requirement that the Commission make 

its clearing requirement determinations 

within 90 days, in most instances, 

providing a 30-day comment period will 

be appropriate. In fact, some 

commenters stressed the importance of 

completing the determination process in 

an efficient manner. As R.J. O’Brien 

noted in its comment letter, 

implementing the clearing mandate as 

soon as possible ‘‘will improve the 

financial industry’s credibility and 

show the rest of the world we are 

serious about improving the financial 

safety of our markets.’’ Providing for a 

longer comment period likely would 

impede the Commission’s ability to 

meet the 90-day statutory deadline for 

completing the determination process. 

Lastly, two commenters encouraged 

the Commission to issue proposed 

determinations for energy, agricultural, 

and equity swaps as soon as possible.40

As required under the CEA, the 

Commission will continue to review 

swap submissions received from DCOs 

for purposes of the clearing requirement 

in as timely a manner as possible. 

B. Generally Applicable Comments 

A number of comments are equally 

applicable to both the CDS and interest 

rate swap proposals. While most of 

these issues are discussed in Section III 

below, certain threshold comments are 

addressed at the outset. 

i. Submission of Swaps Required To Be 

Cleared and Failures to Clear 

CME sought clarification that market 

participants do not have to clear those 

swaps that fall within a class of swaps 

under § 50.4, but for which no DCO 

provides clearing or for which the DCO 

provides clearing to only a limited 

number of market participants. Other 

commenters expressed similar concerns 

about not requiring clearing where no 

DCO offers customer clearing.41 Freddie 

Mac requested clarification regarding 

the legal status of a swap that is 

submitted for clearing to a DCO, but 

fails to clear. 

The Commission confirms that if no 

DCO clears a swap that falls within a 

class of swaps under § 50.4, then the 

clearing requirement does not apply to 

that swap. In essence, it is a two-step 

process to determine whether the 

clearing requirement applies to a 

particular swap. First, a market 

participant must determine whether its 

swap falls within one of the classes 

under § 50.4. Then, if the swap falls 

within one of the classes, the market 

participant must determine if any of the 

eligible DCOs clear that swap. The 

second step requires market participants 

to determine if all the product 

specifications required under the DCO’s 

rules are met. If no eligible DCO will 

accept the swap for clearing because 

there is a different product 

specification, then the swap is not 

required to be cleared. Market 

participants need not submit swaps to a 

DCO if they know that the DCO does not 

clear that particular swap.42

In response to Freddie Mac’s request 

for clarification, if counterparties submit 

their swap to a DCO for clearing and the 

swap fails to clear because it contains a 

term or terms that prevent any eligible 

DCO from clearing the swap, then the 

swap is not subject to the Commission’s 

clearing requirement. On the other 

hand, if the swap fails to clear because 

one or both of the counterparties have 

not met the DCO’s or their clearing 

members’ credit requirements,43 then 

the swap remains subject to the clearing 

requirement and must be cleared as 

soon as technologically practicable after 

the counterparties learn of the credit 

issue. The Commission notes that 

section 739 of the Dodd-Frank Act 

amended section 22(a)(4)(B) of the CEA 

to provide that, regarding contract 

enforcement between two eligible 

counterparties, ‘‘[n]o agreement, 

contract, or transaction between eligible 

contract participants or persons 

reasonably believed to be eligible 

contract participants shall be void, 

voidable, or unenforceable * * * under 

this section or any other provision of 

Federal or State law, based solely on the 

failure of the agreement, contract, or 

transaction * * * to be cleared in 

accordance with section 2(h)(1).’’ 

Accordingly, a swap that fails to clear 

because of credit issues may not be 

voided by either eligible counterparty 

solely for the failure of the swap to be 

cleared in accordance with section 

2(h)(1), but the basis for the failure to 

clear must be addressed by the 

counterparties and they must promptly 

resubmit the swap for clearing. 

With regard to clearing that is not 

available to all market participants, the 

Commission will not require a swap to 

be cleared unless clearing is generally 

available to all types of market 

participants.44

ii. Adequacy of DCO Clearing History 

and Commission Review 

ISDA raised a general issue regarding 

whether the clearing requirement 

determination for CDS and interest rate 

swaps properly differentiates between 

swaps that a DCO currently clears and 

those that are not currently cleared by 

a DCO. ISDA expressed concern about 

delegating to the Director of the Division 

of Clearing and Risk the authority to 

determine whether newly-cleared swaps 

fall within a previously-established 

class. ISDA’s specific comments and 

recommendations are discussed, and in 

part adopted, in Section III below. 

However, ISDA’s general 

recommendation is that the Commission 

not impose a clearing requirement until 

there is ‘‘a further determination that a 

product has an adequate clearing history 

to support a finding of operational 

readiness to clear by DCOs and market 

participants.’’ Specifically, ISDA 

requests that each product have been 

actually cleared by a DCO and exhibit 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74289 

45Many other commenters also agreed with this 

approach. See, e.g., TriOptima and Citadel. 

46See discussion of the Commission’s DCO 

examination and risk surveillance programs in the 

NPRM, 77 FR at 47173–74. 

47 In its comment letter, Freddie Mac questioned 

how the Commission would review a proposal from 

a DCO to clear swaps that are required to be cleared 

under § 50.4. In addition to its general authority to 

ensure compliance with the core principles, the 

Commission has authority to review a DCO’s 

eligibility to clear swaps subject to a clearing 

requirement at any time under § 39.5(a). 

48This factor is discussed further in Sections II.D 

and II.F below. 

49The Commission notes that under § 22.13 a 

DCO may, subject to certain conditions contained 

therein, accept cleared swaps customer collateral in 

excess of the amount required by the DCO. 

Acceptance of this excess collateral is entirely at the 

election of the DCO. Thus, the timing of resolution 

of any issues that may arise as a result of the 

optional acceptance of such collateral is separate 

and apart from the November 13th compliance date 

for implementation of the regulatory requirements 

set forth in the Part 22 rules. 

50See Section IV for a complete discussion of 

compliance dates. 

51Under the compliance schedule for required 

clearing, § 50.25, Category 1 Entities are swap 

dealers, security-based swap dealers, major swap 

participants, major security-based swap 

participants, and active funds. This category must 

come in compliance with the clearing requirement 

by March 11, 2013. 

52Category 2 Entities are commodity pools, 

private funds, and persons predominantly engaged 

in activities that are in the business of banking, or 

in activities that are financial in nature according 

to section 4(k) of the Bank Holding Company Act, 

provided that such participants are not third-party 

subaccounts. Category 2 Entities must comply with 

the clearing requirement by June 10, 2013, for all 

swaps entered into on or after that date. Category 

3 Entities are all other counterparties not electing 

an exception for a swap under section 2(h)(7), 

including third-party subaccounts and ERISA plans. 

Category 3 Entities must comply with the clearing 

requirement by September 9, 2013, for all swaps 

entered into on or after that date. 

non-zero open interest (for both interdealer and customer clearing) on each 

day during a six-month period prior to 

the effective date of the clearing 

requirement determination. 

In contrast with ISDA’s comments, 

the three DCOs eligible to clear swaps 

within the classes under proposed 

§ 50.4 praised the Commission for 

taking the class-based approach rather 

than a product-by-product approach.45

In addition, CME and ICE both endorsed 

the Commission’s decision not to limit 

applicability of the clearing requirement 

to individual DCOs. 

The Commission observes that ISDA’s 

recommendation that each DCO 

demonstrate non-zero open interest for 

six months may be inconsistent with 

section 2(h)(2) of the CEA, which 

requires each DCO to submit to the 

Commission all swaps that ‘‘it plans to 

accept for clearing.’’ The use of the 

phrase ‘‘plans to accept’’ indicates that 

Congress intended for the Commission 

to review swap submissions prior to a 

DCO’s commencing clearing operations 

for those swaps. Under these 

circumstances, the DCO would not be 

able to demonstrate open interest. In 

addition, adopting ISDA’s suggestion 

could pose a significant deterrent to 

competition among DCOs insofar as 

DCOs seeking to offer swaps for 

required clearing would have to wait 

until they attract open interest and 

retain it for six months before they 

would be on a level playing field with 

incumbent DCOs. 

The Commission believes that it can 

address ISDA’s concerns about DCO 

product expansion and risk 

management through its ongoing 

supervision and risk surveillance 

programs.46 In addition, under 

§ 39.5(a)(1) the Commission can review 

the presumption of eligibility for any 

DCO offering new swaps falling into a 

class that it is already clearing, and 

under § 39.5(a)(2), the Commission must 

review the eligibility of any DCO that 

wishes to clear a swap that is not within 

a class already being cleared by that 

DCO.47 The many benefits of a classbased approach are discussed with 

regard to both CDS and interest rate 

swaps below. 

iii. Customer Segregation for Swaps 

Under section 2(h)(2)(D)(ii)(V) of the 

CEA, in making a clearing requirement 

determination, the Commission must 

take into account the existence of 

reasonable legal certainty in the event of 

the insolvency of the relevant DCO or 

one or more of its clearing members 

with regard to the treatment of customer 

and swap counterparty positions, funds, 

and property.48 Several commenters 

raised general concerns about customer 

segregation for cleared swaps. 

Vanguard recommended that the 

Commission should not implement 

mandatory clearing for any swaps until 

the Commission’s final swap customer 

segregation rules under the legally 

segregated, operationally commingled 

(LSOC) model are fully operational and 

capable of being tested for at least three 

months prior to mandatory clearing. 

The Securities Industry and Financial 

Markets Association’s Asset 

Management Group (SIFMA AMG) 

expressed similar concerns about 

unresolved issues concerning LSOC 

rules and the operational readiness of 

futures commission merchants (FCMs) 

and DCOs to comply with those rules. 

SIFMA AMG requested clarification of 

certain matters related to the LSOC 

model and requests that the 

Commission issue new rules to require 

FCMs to issue reports as frequently as 

technologically feasible, require DCOs 

to take all steps necessary to ensure 

reported information is accurate, and 

require DCOs to complete margin 

calculations as frequently as 

technologically feasible. SIFMA AMG 

recommended that the Commission 

implement a three-month testing period 

for LSOC rule implementation after the 

Commission and the market have 

completed their ongoing rule 

clarification efforts. 

Both Vanguard and SIFMA AMG 

requested that all customer margin, 

including excess margin above the 

amount required by the DCO, be 

protected from fellow-customer risk. 

ISDA noted that the commodity 

broker liquidation provisions under the 

U.S. bankruptcy code and the 

Commission’s Part 190 regulations have 

never been applied to a DCO. In 

addition, ISDA stated that the Orderly 

Liquidation Authority under Title II of 

the Dodd-Frank Act has never been 

applied to any entity. For 

clearinghouses located in the United 

Kingdom, ISDA observed that the 

Commission is relying on legal 

opinions, noting the lack of practical 

experience with DCO insolvency in the 

United Kingdom. In light of the absence 

of practical experience with DCO 

insolvency, ISDA recommended that the 

Commission study the issue with the 

goal of documenting uncertainties and 

proposing solutions. 

In response to these comments, the 

Commission observes that the 

compliance date for LSOC was 

November 13, 2012. The Commission 

worked with market participants to 

ensure that compliance by that date was 

accomplished 49 For reasons discussed 

below, the compliance schedule for this 

first clearing requirement will 

commence on March 11, 2013.50

Accordingly, as requested by SIFMA 

AMG, parties in the first compliance 

category 51 will have more than 3 

months of experience under the LSOC 

rules prior to required clearing taking 

effect. Those parties in the second and 

third categories will have over 6 and 9 

months of testing prior to required 

clearing, respectively.52 During this 

time, the Commission will continue to 

work with market participants to resolve 

matters that require clarification 

regarding LSOC. 

Moreover, in response to requests for 

enhanced LSOC protections, the 

Commission understands that the 

industry is working toward a February 

implementation date for DCO rules 

regarding acceptance of excess 

collateral. The Commission recognizes 


sroberts on DSK5SPTVN1PROD with 
74290 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

53See, e.g., ‘‘Survey of Regimes for the Protection, 

Distribution, and/or Transfer of Client Assets’’ 

(Technical Committee of the International 

Organization of Securities Commissions, March, 

2011); ‘‘Consultative Report on the Recovery and 

Resolution of Financial Market Infrastructures’’ 

(Committee on Payment and Settlement Systems 

and the International Organization of Securities 

Commissions, July, 2012). Staff are also actively 

participating in further efforts in these contexts by 

the International Organization of Securities 

Commissions and the Resolution Steering Group of 

the Financial Stability Board. 

54 In the case of CME and ICE Clear Europe, the 

submissions also included other swaps beyond 

those in the CDS and interest rate swap categories. 

These submissions, including a description of the 

specific swaps covered, are available on the 

Commission’s Web site at: http://sirt.cftc.gov/sirt/ 

sirt.aspx?Topic=ClearingOrganizationProducts. 

55The Commission has received subsequent 

submissions from CME and ICE Clear Credit 

relating to CDS. In particular, CME submitted a 

filing with regard to the current series of each of 

the CDX.NA.IG and CDX.NA.HY (Series 19). ICE 

Clear Credit made filings with regard to the clearing 

of the 3-year tenor of the CDX.HY Series 15 and the 

clearing of the CDX.EM indices. With the exception 

of the CDX.EM submission, upon which the 

Commission has not yet begun the determination 

process, the substance of each of the other 

submissions was addressed in both the proposed 

clearing determination and the final clearing 

determination set forth herein. 

56Available at http://www.cmegroup.com/ 

market-regulation/rule-filings.html and https:// 

www.theice.com/publicdocs/regulatory_filings/ 

ICEClearCredit_022212.pdf. ICE Clear Europe did 

not provide a link to its relevant Web page. 

57See http://sirt.cftc.gov/sirt/ 

sirt.aspx?Topic=ClearingOrganizationProducts. 

58As administrator of these indices, Markit 

reviews the composition of underlying reference 

entities in the indices every six months. Once 

Markit establishes the constituents to be included 

within the indices, a new series of the respective 

index is created. The most recent series is identified 

as the ‘‘on-the-run’’ series, with all older series 

being identified as ‘‘off-the-run.’’ Additionally, each 

time one of the reference entities within an index 

suffers a credit event, a new version of an existing 

series of the index is created. In addition to the 

series and version variations that may exist on the 

index, the parties can choose the tenor of the CDS 

on a given index. While the 5-year tenor is the most 

common, and therefore most liquid, other standard 

tenors may include the 1-, 2-, 3-, 7-, and 10-year. 

59 ICE Clear Credit began clearing the 3- and 7- 

year tenors on the CDX.NA.IG after its initial § 39.5 

submission of February 22, 2012. 

60 ICE Clear Credit also made a § 39.5 submission 

with regard to the 3-year tenor of CDX.NA.HY, 

Series 15. The Commission is not including this 

contract within the clearing determination at this 

time. 

that this issue is of particular concern to 

third-party subaccounts that will be 

required to begin clearing swaps 

executed on or after September 9, 2013. 

Given the industry’s February goal, the 

Commission believes that issues 

regarding the acceptance of excess 

collateral will be resolved before the 

beginning of September. 

In response to ISDA’s request that the 

Commission conduct a study regarding 

insolvencies of DCOs and clearing 

members, the Commission observes that 

its staff have actively participated in, 

and taken leading roles in, a number of 

international efforts related to 

clearinghouse and clearing member 

insolvency, including an important 

cross-border study regarding insolvency 

regimes.53 In addition, the Commission 

and other U.S. authorities, including the 

FDIC, have been engaged, and continue 

to engage, in regulatory coordination 

and cooperation, related to insolvencies 

under Title II. 

C. Credit Default Swaps 

i. DCO Submissions 

Pursuant to § 39.5, the Commission 

received filings with respect to CDS 

cleared by CME, ICE Clear Credit, and 

ICE Clear Europe, each a registered 

DCO.54 The CME and ICE Clear Credit 

submissions included the CDS that each 

clears on North American corporate 

indices, covering various tenors and 

series.55 The ICE Clear Europe 

submission included, among other 

swaps, the CDS contracts on European 

corporate indices that they clear, with 

information on each of the different 

tenors and series. Each of the 

submissions contained information 

relating to the five statutory factors set 

forth in section 2(h)(2)(D) of the CEA 

and other information required under 

§ 39.5. 

CME, ICE Clear Credit, and ICE Clear 

Europe provided notice of their § 39.5 

swap submissions to their members by 

posting their submissions on their 

respective Web sites.56 The submissions 

also are published on the Commission’s 

Web site.57

Regulation 39.5(b)(3)(viii) also directs 

a DCO’s submission to include a 

summary of any views on the 

submission expressed by members. 

CME’s submission did not address this. 

In their submissions, ICE Clear Credit 

and ICE Clear Europe stated that neither 

has solicited nor received any 

comments to date and will notify the 

Commission of any such comments. The 

Commission did not receive any 

additional feedback from DCOs beyond 

the information included in comment 

letters posted on the Commission’s Web 

site. 

The CDS cleared by CME, ICE Clear 

Credit, and ICE Clear Europe that were 

submitted to the Commission are 

standardized contracts providing credit 

protection on an untranched basis, 

meaning that settlement is not limited to 

a specific range of losses upon the 

occurrence of credit events among the 

reference entities included within an 

index. Besides single-name CDS, 

untranched CDS on indices are the only 

type of CDS being cleared by these 

DCOs. Other swaps, such as credit index 

tranches, options, and first- or Nth-todefault baskets on these indices, are not 

currently cleared. 

CME and ICE Clear Credit each clear 

CDS on indices administered by Markit. 

The Markit CDX family of indices is the 

standard North American credit default 

swap family of indices, with the 

primary corporate indices being the 

CDX North American Investment Grade 

(consisting of 125 investment grade 

corporate reference entities) 

(CDX.NA.IG) and the CDX North 

American High Yield (consisting of 100 

high yield corporate reference entities) 

(CDX.NA.HY). The standard currency 

for CDS on these indices is the U.S. 

dollar. 

CME offers the CDX.NA.IG at the 3-, 

5-, 7- and 10-year tenors for Series 9 and 

each subsequent series, to the extent 

that those contracts that have not 

reached their termination date.58 CME 

also offers the CDX.NA.HY at the 5-year 

tenor for Series 11, and each subsequent 

series. ICE Clear Credit offers the 

CDX.NA.IG Series 8, and each 

subsequent series of that index that is 

still outstanding, at the 3-, 5-, 7- and 10- 

year tenors.59 ICE Clear Credit also 

offers the CDX.NA.IG. Series 8 to Series 

10, at the 7-year tenor. For the high 

yield index, ICE Clear Credit clears all 

series from the current series through 

the CDX.NA.HY Series 9 at the 5-year 

tenor.60 Each of these cleared CDX.NA 

contracts is denominated in U.S. 

dollars. 

ICE Clear Europe made a submission 

covering the index CDS that it clears. As 

with CME’s and ICE Clear Credit’s 

submissions, the contracts that ICE 

Clear Europe clears are based on Markit 

indices with corporate reference 

entities, though in this case, the entities 

are based in Europe. ICE Clear Europe 

clears euro-denominated contracts 

referencing the three primary indices: 

iTraxx Europe (covering 125 European 

investment grade corporate reference 

entities); the iTraxx Europe Crossover 

(covering 50 European high yield 

reference entities); and the iTraxx 

Europe High Volatility (a 30-entity 

subset of the European investment grade 

index). 

For the iTraxx Europe and Crossover, 

ICE Clear Europe clears outstanding 

contracts in the Series 7 and 8, 

respectively, through the current series. 

For the High Volatility index, ICE Clear 

Europe clears outstanding contracts in 

the Series 9 through the current series. 

In terms of tenors, ICE Clear Europe 

clears the 5-year tenor for all swaps, as 

well as the 10-year tenor for the iTraxx 

Europe index. 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74291 

61To the extent other vendors successfully 

develop similar indices, the Commission would 

conduct the analysis required by § 39.5, either on 

its own initiative or based on a DCO submission. 

If based on that analysis the Commission issued a 

clearing requirement determination, it is likely that 

such indices would be considered to be part of an 

existing class of CDS that are required to be cleared. 

62As discussed in further detail below, the 

clearing requirement does not require existing 

Continued 

Based upon those portions of the 

CME, ICE Clear Credit, and ICE Clear 

Europe swap submissions relating to the 

CDS contracts discussed above, as well 

as the analysis conducted by the 

Commission pursuant to § 39.5(b) and 

set forth below, the Commission has 

reviewed the following classes of swaps 

for purposes of the clearing requirement 

determination. 

ii. Identification of CDS Specifications 

Under § 39.5, the decision of the 

Commission to require that a group, 

category, type, or class of swaps be 

required to be cleared is informed by a 

number of factors. As an initial matter, 

the Commission has looked to the 

DCOs’ submissions with regard to the 

swaps they currently clear. After 

analyzing the key attributes of the swaps 

submitted, the Commission proposed 

establishing two classes of CDS to be 

subject to the clearing requirement and, 

pursuant to this final rulemaking, is 

finalizing those classes as proposed. The 

first class is based on the untranched 

indices covering North American 

corporate credits, the CDX.NA.IG and 

the CDX.NA.HY. The second class is 

based on the untranched indices 

covering European corporate credits, the 

iTraxx Europe, the iTraxx Europe 

Crossover, and the iTraxx Europe High 

Volatility. Given the different markets 

that the CDS indices cover, the different 

standard currencies, and other logistical 

differences in how the CDS markets and 

documentation work, the Commission 

believes this is an appropriate basis for 

creating these two classes. 

The following table sets forth the 

specific specifications of each class: 

TABLE 1 

Specification North American Untranched CDS Indices Class 

1. Reference Entities ...................... Corporate. 

2. Region ......................................... North America. 

3. Indices ......................................... CDX.NA.IG. 

CDX.NA.HY. 

4. Tenor ........................................... CDX.NA.IG: 3Y, 5Y, 7Y, 10Y. 

CDX.NA.HY: 5Y. 

5. Applicable Series ........................ CDX.NA.IG 3Y: Series 15 and all subsequent Series, up to and including the current Series. 

CDX.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. 

6. Tranched ..................................... No. 

Specification European Untranched CDS Indices Class 

1. Reference Entities ...................... Corporate. 

2. Region ......................................... Europe. 

3. Indices ......................................... iTraxx Europe. 

iTraxx Europe Crossover. 

iTraxx Europe HiVol. 

4. Tenor ........................................... iTraxx Europe: 5Y, 10Y. 

iTraxx Europe Crossover: 5Y. 

iTraxx Europe HiVol: 5Y. 

5. Applicable Series ........................ iTraxx Europe 5Y: Series 10 and all subsequent Series, up to and including the current Series. 

iTraxx 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. 

6. Tranched ..................................... No. 

The Commission believes that indices 

based on other types of entities would 

be viewed as a separate class and would 

be subject to a separate determination 

by the Commission. For example, given 

the differences that exist with regard to 

volumes and risk management of 

indices based on sovereign issuers, as 

opposed to corporate issuers, it is likely 

that such CDS would represent their 

own class of swaps. Similarly, to the 

extent indices from other regions were 

submitted by a DCO, it is likely that the 

Commission would take the view that 

they are part of their own class of swaps 

as well. 

The Commission believes it 

appropriate to define the classes of 

swaps as untranched CDS contracts 

referencing Markit’s broad-based 

corporate indices. These corporate 

indices have the most net notional 

outstanding, the most trading volumes, 

and the best available pricing. The risk 

management frameworks for the 

corporate index swaps are the most 

well-established, and have the most 

available data in terms of CDS spreads 

and corporate default studies for 

analysis of the underlying constituents 

of the indices. Agreements based on 

these indices also are widely accepted 

and use standardized terms.61

Both of the CDS classes presented 

herein assume that the relevant CDS 

agreement will use the standardized 

terms established by Markit/ISDA with 

regard to the specific index and be 

denominated in a currency that is 

accepted for clearing by DCOs. To the 

extent that a CDS agreement on an index 

listed within the classification is not 

accepted for clearing by any DCO 

because it uses non-standard terms or is 

denominated in a currency that makes 

it ineligible for clearing, that CDS is not 

subject to the requirement that it be 

cleared, notwithstanding that the CDS is 

based on such index. 

Also as proposed, this clearing 

determination is limited to only those 

series of the referenced indices that are 

currently being cleared.62 Further, to the 


sroberts on DSK5SPTVN1PROD with 
74292 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

swaps in the older series to be cleared. The 

requirement is prospective, only requiring newly 

executed swaps in these older series to be cleared. 

63The timing of announcement of index 

constituents would make it impossible for the 

Commission to analyze the index and issue a 

clearing determination on the roll date, given the 

timeframes imposed on the Commission by § 39.5. 

64See Financial Times, ‘‘CDS Market—Markit’s 

Weird Selection,’’ September 27, 2012, discussing 

the inclusion of constituents (CIT, Calpine, and 

Charter Communications) in the latest series of the 

CDX.NA.HY that do not have actively traded CDS 

contracts. 

65 ISDA highlighted the possibility that a CDS 

index subject to a clearing requirement 

determination could undergo such significant 

changes to its underlying constituents during its 

lifecycle that such an index would no longer be 

considered a broad-based index, subject to the 

Commission’s jurisdiction. The Commission notes 

that the indices subject to the clearing requirement 

determinations discussed herein contain a 

minimum of 30 constituents of equal weighting, 

limiting the likelihood of such scenario. 

Nonetheless, in the event of such a scenario, the 

Commission could review the determination, and if 

appropriate, stay the determination under § 39.5(d) 

with regard to the index and/or series so impacted. 

extent that any swap on a CDS index is 

of a tenor such that it is scheduled to 

terminate prior to July 1, 2013, such a 

swap is not part of this clearing 

determination. Given the 

implementation periods provided for 

under § 50.25, discussed below in 

Section IV, the Commission does not 

want to create a situation where certain 

market participants will be required to 

clear a contract based upon their status 

under the implementation provisions, 

but other parties will never be required 

to clear that same contract before its 

scheduled termination. 

Similarly, the classes only include 

those tenors of contracts which are 

currently being cleared. AFR 

commented that both the 1- and 2-year 

tenors of the CDX.NA.IG should be 

included in the clearing requirement 

determination, citing concerns that if 

market participants shift to these shorter 

tenors, that shift would undermine a 

clearing requirement that included only 

longer tenors. Because no DCO clears 

the 1- or 2-year tenor of CDX.NA.IG, the 

Commission has decided to include 

within today’s clearing determination 

only those tenors of the CDX.NA.IG that 

were proposed. The Commission will 

monitor the market’s use of shorter 

tenors. To the extent that the market 

generates significant volumes of such 

shorter tenors of CDX.NA.IG, the 

Commission would expect that one or 

more DCOs will begin offering those 

tenors for clearing. 

If no DCO were to offer these swaps 

for clearing, the Commission has the 

authority to commence a Commissioninitiated review under section 

2(h)(2)(A)(i) of the CEA to determine 

whether the swaps should be required 

to be cleared. Under section 2(h)(4), to 

the extent that the Commission finds 

that a particular swap or group, 

category, type, or class of swaps would 

otherwise be subject to mandatory 

clearing but no DCO has listed the swap, 

group, category, type, or class of swaps 

for clearing, the Commission shall (i) 

investigate the relevant facts and 

circumstances; (ii) issue a public report 

containing the results of the 

investigation within 30 days; and (iii) 

take such actions as the Commissions 

determines to be necessary and in the 

public interest, which may include 

requiring the retaining of adequate 

margin or capital by parties to the swap. 

The clearing requirement 

determination will also cover each new 

series of these indices that is created 

every six months. The Commission 

believes this will provide certainty to 

the market, as opposed to awaiting a 

new determination for each new 

series.63 Recognizing that there may be 

changes to indices and their 

constituents,64 the Commission will 

analyze each new series to ensure that 

the indices should continue to be 

included within the existing class of 

swaps subject to a clearing 

determination. To the extent that the 

new series raises issues, such as a DCO’s 

ability to risk manage the contracts, the 

Commission can issue a stay of the 

clearing requirement for that series 

under § 39.5(d). No commenter raised 

any questions regarding new series. 

As proposed, the Commission has 

decided that the classes be limited to 

untranched CDS on the aforementioned 

indices. With these untranched CDS, the 

contract covers the entire index loss 

distribution of the index, and settlement 

is not linked to a specified number of 

defaults. Tranched swaps, first- or 

‘‘Nth’’ to-default, options, or any other 

product variations on these indices are 

excluded from these classes. These 

other swaps based on the indices, such 

as tranches, have very different profiles 

in terms of the § 39.5 analysis. Besides 

very different notional and trading 

volumes, the risk management processes 

and operations may be significantly 

different. The Commission believes it 

appropriate to exclude tranched swaps, 

and other variations on the indices, 

from the classes of swaps set forth 

herein. Such swaps, if accepted by 

DCOs and submitted for Commission 

review, likely would be viewed as a 

separate class or as separate classes. 

AFR notes that market participants 

can use tranched CDS on the indices to 

replicate contracts and portfolios that 

would otherwise be subject to a clearing 

requirement. The Commission 

recognizes this concern and will 

continue to monitor activity in tranched 

CDS indices, as well as how the 

development of risk management 

processes at DCOs could allow for the 

clearing of those products. Today’s 

clearing determination does not 

foreclose the possibility that tranched 

products may be subject to another 

clearing determination in the future. 

D. Determination Analysis for Credit 

Default Swaps 

Section 2(h)(2)(D)(i) of the CEA 

requires the Commission to review 

whether a swap submission under 

section 2(h)(2)(B) is consistent with 

section 5b(c)(2) of the CEA (DCO core 

principles). Section 2(h)(2)(D)(ii) of the 

CEA also requires the Commission to 

consider five factors in a determination 

based on swap submission: (1) The 

existence of significant outstanding 

notional exposures, trading liquidity, 

and adequate pricing data; (2) the 

availability of rule framework, capacity, 

operational expertise and resources, and 

credit support infrastructure to clear the 

contract on terms that are consistent 

with the material terms and trading 

conventions on which the contract is 

then traded; (3) the effect on the 

mitigation of systemic risk, taking into 

account the size of the market for such 

contract and the resources of the DCO 

available to clear the contract; (4) the 

effect on competition, including 

appropriate fees and charges applied to 

clearing; and (5) the existence of 

reasonable legal certainty in the event of 

the insolvency of the relevant DCO or 

one or more of its clearing members 

with regard to the treatment of customer 

and swap counterparty positions, funds, 

and property.65

i. Consistency With Core Principles for 

Derivatives Clearing Organizations 

Section 2(h)(2)(D)(i) of the CEA 

requires the Commission to review 

whether a submission is consistent with 

the core principles for DCOs. Each of 

the DCO submissions relating to CDS 

provided data to support the 

Commission’s analysis of the five factors 

under section 2(h)(2)(D) of the CEA. The 

Commission also was able to call upon 

independent analysis conducted with 

regard to the CDS market, as well as its 

knowledge and reviews of the registered 

DCOs’ operations and risk management 

processes, covering topics such as 

product selection criteria, pricing 

sources, participant eligibility, and 

other relevant rules. The discussion of 

all of these factors is set forth below. 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74293 

66Such single-name CDS are defined as ‘‘securitybased swaps’’ under section 721(a) of the DoddFrank Act. 

67See ICE Clear Credit’s petitions to the 

Commission and SEC, dated October 4, 2011. The 

petition to the Commission is available at http:// 

www.cftc.gov/stellent/groups/public/

@rulesandproducts/documents/ifdocs/ice

clearcredit100411public.pdf. See also ICE Clear 

Europe’s petition available at http://www.cftc.gov/ 

stellent/groups/public/@requestsandactions/ 

documents/ifdocs/icecleareurope4dfrequest.pdf. 

68See ICE Clear Credit’s certification to the 

Commission, dated as of November 25, 2011. The 

certification is available at http://www.cftc.gov/ 

stellent/groups/public/@rulesandproducts/ 

documents/ifdocs/rul112511icecc001.pdf. 

69A discussion of comments concerning portfolio 

margining is included below. 

The swaps submitted by CME, ICE 

Clear Credit, and ICE Clear Europe 

pursuant to § 39.5(b) are currently being 

cleared by those organizations. As 

discussed above, the risk management, 

rules, and operations used by each DCO 

to clear these swaps are subject to 

review by the Commission’s risk 

management, legal, and examinations 

staff on an on-going basis. 

Additionally, each of the DCOs has 

established procedures to review any 

new swaps it may consider offering for 

clearing. Before the indices referenced 

herein were accepted for clearing by any 

of the DCOs, they were subject to review 

by the risk management functions of 

those organizations. Such analysis 

generally focuses on the DCO’s ability to 

risk manage positions in the prospective 

swaps and on any specific operational 

issues that may arise from the clearing 

of such swaps. In the case of the former, 

this involves ensuring that adequate 

pricing data is available, both 

historically and on a ‘‘going forward’’ 

basis, such that a margining 

methodology could be established, backtested, and used on an on-going basis. 

Operational issues may include analysis 

of additional contract terms for new 

swaps that may require different 

settlement procedures. Each of the 

contracts submitted by CME, ICE Clear 

Credit, and ICE Clear Europe and 

discussed herein has undergone an 

internal review process by the 

respective DCO and found to be within 

their product eligibility standards. 

In their submissions, CME and ICE 

Clear Credit enclosed their risk 

management procedures. In its 

submission, ICE Clear Europe references 

its risk management procedures, which 

it had previously submitted to the 

Commission in connection with its 

application to register as a DCO. As part 

of its risk management and examination 

functions, the Commission reviews each 

DCO’s risk management procedures, 

including its margining methodologies. 

ICE Clear Credit uses a multi-factor 

model to margin the CDX.NA.IG and 

CDX.NA.HY indices, as well as the 

single-name CDS it clears. The 

margining methodology is designed to 

capture the risk of movements in credit 

spreads, liquidation costs, jump-todefault risk for those names on which 

credit protection has been sold, large 

position concentration risks, interest 

rate sensitivity, and basis risk associated 

with offsetting index derived single 

names and opposite ‘‘outright’’ single 

names. These factors are similarly used 

by ICE Clear Europe to calculate the 

margining requirements for their iTraxx 

swap listings and the underlying singlename constituents. 

CME’s CDS model also weighs a 

number of factors to calculate the initial 

margin for a portfolio of CDS positions. 

These include macro-economic risk 

factors, such as movements associated 

with systematic risk resulting in large 

shifts in credit spreads across a 

portfolio, shifts in credit spreads based 

on tenors, and changes in relative 

spreads between investment grade and 

high yield spreads. Additional factors 

include specific sector risks, the 

idiosyncratic risk of extreme moves in 

particular reference entities, and the 

liquidity risk associated with 

unwinding the portfolio. In all cases, the 

methodologies are designed to protect 

against any 5-day move in the value of 

the given CDS portfolio, with a 99% 

confidence level. 

In addition to initial margin, each of 

the DCOs collects variation margin on a 

daily basis to capture changes in the 

mark-to-market value of the positions. 

To do this, the DCOs calculate end-ofday settlement prices using clearing 

members’ price submissions for cleared 

swaps. Each of the DCOs maintains 

processes for ensuring the quality of 

clearing member price submissions, 

including the ability to compel trades at 

quoted prices on a random basis and to 

enforce fines on incomplete or incorrect 

submissions. ICE Clear Credit and ICE 

Clear Europe also use Markit services 

for CDX and iTraxx price submissions. 

CME uses other third-party data 

providers for pricing support as 

necessary on its cleared CDS products. 

As part of their rule frameworks, each 

of these three DCOs also maintains 

participant eligibility requirements. On 

April 20, 2012, CME filed its amended 

rule concerning CDS Clearing Member 

Obligations and Qualifications (Rule 

8H04). Pursuant to the amended rule, 

published to comply with Commission 

Regulation 39.12(a)(2), a CDS clearing 

member would have to maintain at least 

$50 million of capital. The amended 

rule would also require a CDS clearing 

member’s minimum capital requirement 

to be ‘‘scalable’’ to the risks it poses. 

Furthermore, CME already has client 

clearing available for its CDS index 

contracts. 

Similarly, on March 23, 2012, ICE 

Clear Credit filed its amended Rule 

201(b) to incorporate the $50 million 

minimum capital requirement for 

clearing members. ICE Clear Europe has 

adopted similar rules to comply with 

§ 39.12(a)(2). ICE Clear Credit also has 

client clearing available for its CDX 

index contracts. 

In addition to the CDS indices 

discussed above, ICE Clear Credit and 

ICE Clear Europe offer single-name CDS 

for clearing.66 As part of their margining 

methodology, they are seeking approval 

to offer portfolio margining for the 

single-name CDS and the CDS indices 

co-mingled as a single portfolio.67 Given 

that the single-name reference entities 

will likely also be constituents of a 

given index within a portfolio, the 

Commission generally believes that 

such portfolio margining initiatives are 

consistent with the sound risk 

management policies for DCOs that are 

required under § 39.13(g)(4). Moreover, 

DCOs such as ICE Clear Credit already 

use margining methodologies that 

provide for appropriate portfolio 

margining treatment with regard to 

clearing members’ proprietary 

positions.68 The Commission is 

committed to working toward 

establishing similar portfolio margining 

programs for DCOs clearing customer 

positions in CDS indices and singlename CDS.69 Specifically, the 

Commission anticipates addressing 

ICE’s portfolio margining petitions for 

CDS in the near term. 

Based upon the Commission’s ongoing reviews of DCOs’ risk 

management frameworks and clearing 

rules, and its annual examinations of 

the DCOs, the Commission believes that 

the submissions of CME, ICE Clear 

Credit, and ICE Clear Europe are 

consistent with section 5b(c)(2) of the 

CEA and the related Commission 

regulations. In analyzing the CDS 

products submissions discussed herein, 

the Commission does not believe that a 

clearing determination with regard to 

the specified CDS products would be 

inconsistent with CME, ICE Clear 

Credit, or ICE Clear Europe’s continued 

ability to maintain such compliance 

with the DCO core principles set forth 

in Part 39 of the Commission’s 

regulations. 


sroberts on DSK5SPTVN1PROD with 
74294 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

70See BIS data, available at http://www.bis.org/ 

statistics/otcder/dt1920a.pdf. 

71Based on data published on www.markit.com 

as of September 27, 2012. 72The term ‘‘on-the-run’’ refers to current series 

of an index, while older series are referred to ‘‘offthe-run.’’ Each six months when a new series is 

created (or ‘‘rolls’’ using market terminology), the 

new series is considered the ‘‘on-the-run’’ index, 

and all others are considered ‘‘off-the-run.’’ 

73The current ‘‘on-the-run’’ series tend to have 

the most liquidity, while the older ‘‘off-the-run’’ 

series tend to have less liquidity, as many investors 

exit positions in an existing series and enter new 

positions in the new series when it becomes 

available (i.e., they ‘‘roll’’ their positions to the new 

series) thereby increasing liquidity in the ‘‘on-therun’’ series. 

74 Data from November 7, 2012, available at 

www.dtcc.com. In 2006, DTCC began providing 

warehouse services for confirmed CDS trades 

through its Trade Information Warehouse (TIW). 

With the commitment of global market participants 

in 2009 to ensure that all OTC derivatives trades are 

recorded by a central repository, TIW has become 

a global repository for all CDS trades. With all major 

market participants submitting their trades to the 

TIW, it is estimated that 98% of all CDS trades are 

included within the warehouse, making it the 

primary source of CDS transaction data. 

ii. Consideration of the Five Statutory 

Factors for Clearing Requirement 

Determinations 

a. Outstanding Notional Exposures, 

Trading Liquidity, and Adequate Pricing 

Data 

Section 2(h)(2)(D)(ii)(I) of the CEA 

requires the Commission to take into 

account the existence of outstanding 

notional exposures, trading liquidity, 

and adequate pricing data. 

The most recent BIS study 70 found 

that, as of December 2011, the size of 

the overall CDS marketplace exceeded 

$28.6 trillion in notional amount 

outstanding. Of that amount, $11.8 

trillion was in multi-name CDS 

agreements. Within this sub-category of 

CDS, CDS on indices accounted for 

more than 89% of the total notional 

amount outstanding, with over $10 

trillion in notional outstanding. Overall, 

CDS on index products account for 37% 

of all notional amounts of CDS contracts 

outstanding. 

The predominant provider of CDS 

indices is Markit. Markit offers indices 

covering corporate and sovereign 

entities, among others, in the United 

States, Europe, and Asia. Recent Markit 

data shows daily transaction volumes of 

1,559 transactions using its licensed 

family of CDX indices, and 1,828 daily 

transactions in its European iTraxx 

indices.71 Further, it shows a rolling 

month gross notional amount of $745 

billion in gross notional amount for the 

CDX family of indices and Ö680 billion 

for the iTraxx family. Nearly all of the 

CDX contracts and volumes come from 

indices that are subject to the clearing 

requirement determination. With regard 

to the European iTraxx, more than 80% 

of those daily contract volumes and 

84% of the daily gross notional volumes 

come from the iTraxx investment grade 

and high yield indices contemplated by 

the clearing requirement determination. 

One point highlighted by this data, 

however, is the declining trading 

liquidity in the off-the-run series that 

can occur. Of the volumes noted by 

Markit, nearly 60% was in the current 

on-the-run series, as compared to all 

other outstanding series combined.72

The submissions of ICE Clear Credit, 

ICE Clear Europe, and CME also note 

the decline in average weekly gross 

notional amounts and contracts for 

benchmark tenors for off-the-run 

indices. The decline however can be 

more precipitous among older off-therun indices. While many market factors 

can contribute to the actual volumes for 

a specific off-the-run contract, subject to 

certain exceptions, the trend is generally 

toward lower volumes.73

Set forth below is a table of data taken 

from DTCC as of November 7, 2012, 

highlighting the net notional amounts 

and outstanding CDS index contracts, 

across all tenors, for each index and 

series included in this clearing 

determination.74


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74295 

75The Commission is monitoring volumes in the 

on-the-run iTraxx Europe HiVol. With the newest 

roll of the indices occurring on September 20, 2012, 

this index has yet to show significant volumes in 

the latest series based on DTCC data. The 

Commission will continue to monitor these 

volumes and take action as appropriate. 

Notwithstanding the declining 

volumes that occur when an index is no 

longer on-the-run, the Commission does 

not believe that is sufficient reason to 

exclude the older series from the classes 

of CDS that are subject to the clearing 

requirement. As the DTCC data 

indicates, there are still significant 

volumes and outstanding notional 

amounts in each of these series.75 From 

the perspective of the DCO, the risk 

management of the older series of swaps 

should not provide significant 

additional challenges. With the 

significant notional and contract 

volumes still outstanding according to 

DTCC, many clearing members already 

have these positions on their books and 

are meeting their risk management 

requirements, even in the face of 

declining trading volumes. While the 

volumes may decline, the data included 

in the submissions indicates that 

volume still does exist, and parties 

should be able to trade these CDS 

indices as necessary. Additionally, as 

discussed further below, the clearing 

requirement would apply only to new 

swaps executed in the off-the-run 

indices. 

Both AFR and ISDA specifically 

supported the inclusion of ‘‘off-the-run’’ 

CDS indices in the clearing 

determination. AFR noted that without 

including those indices, the market 

might enter into such swaps so as to 

avoid the clearing requirement. In 

addition, ISDA expressed concern about 

the potential negative impact on the 

relative liquidity between cleared and 

uncleared CDS swaps should a clearing 

requirement cease to apply during the 

lifecycle of the CDS. 

Given the contract and notional 

volumes listed above, there is adequate 

data available on pricing. The pricing 

for the CDS on these indices is fairly 

consistent across clearinghouses. The 

DCOs generally require a clearing 

member with open interest in a 

particular index to provide a price on 

that index for end-of-day settlement 

purposes. After applying a process to 

remove clear outliers, a composite price 

is calculated using the remaining prices. 

To ensure the integrity of the 

submissions, clearing members’ prices 

may be ‘‘actionable,’’ meaning that they 

may form the basis of an actual trade 

that the member will be forced to enter. 

DCOs also have compliance programs 

that may result in fines for clearing 

members that fail to submit accurate 

pricing data. 

Beyond clearing member submissions, 

there are a number of third-party 

vendors that provide pricing services on 

these swaps. Third-party vendors 

typically source their data from a 

broader range of dealers. The data 

includes both direct contributions as 

well as feeds to automated trading 


sroberts on DSK5SPTVN1PROD with ER13DE12.000</GPH>
74296 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

76See the June 2, 2009 letter to The Honorable 

William C. Dudley, President of the Federal Reserve 

Bank of New York, available at http:// 

www.newyorkfed.org/newsevents/news/markets/ 

2009/060209letter.pdf. 

77 In its comment letter supporting the NPRM, 

MarketAxess Holdings Inc. (MarketAxess) noted 

that the electronic trading platform it operates 

supports the trading of CDX and iTraxx products. 

MarketAxess stated that it intends to apply for 

registration as a SEF once the Commission issues 

related final rules. 

78 ICE Clear Europe’s submission, pursuant to 

Commission Regulation 40.6, amending its rulebook 

to accommodate client clearing is available on the 

Commission’s Web site at: http://www.cftc.gov/ 

stellent/groups/public/@rulesandproducts/ 

documents/ifdocs/rul091312iclreu001.pdf. ICE 

Clear Europe is registered as a recognized clearing 

house with the United Kingdom’s Financial 

Services Authority (U.K. FSA) and requires 

approval from the U.K. FSA to offer iTraxx clearing 

to customers. ICE Clear Credit’s submission with 

regard to iTraxx clearing for both proprietary and 

customer accounts is available on the Commission’s 

Web site at http://www.cftc.gov/stellent/groups/ 

public/@rulesandproducts/documents/ifdocs/ 

rul092812icc001.pdf. To the extent that ICE Clear 

Credit successfully launches iTraxx clearing, it 

would address ISDA’s concern with regard to the 

Commission issuing a clearing determination for 

swaps that cannot be cleared at a U.S.-based DCO. 

It should be noted, however, that the Commission 

does not believe a DCO clearing a particular swap 

needs to be based in the U.S. for the Commission 

to find a swap subject to a clearing determination, 

to the extent that swap satisfies the factors required 

systems. This data is reviewed for 

outliers and aggregated for distribution. 

b. Availability of Rule Framework, 

Capacity, Operational Expertise and 

Resources, and Credit Support 

Infrastructure 

Section 2(h)(2)(D)(ii)(II) of the CEA 

requires the Commission to take into 

account the availability of rule 

framework, capacity, operational 

expertise and resources, and credit 

support infrastructure to clear the 

contract on terms that are consistent 

with the material terms and trading 

conventions on which the contract is 

then traded. The Commission has 

determined that this factor is satisfied 

by each of CME, ICE Clear Credit, and 

ICE Clear Europe. 

CME, ICE Clear Credit, and ICE Clear 

Europe, respectively, currently are 

clearing the swaps each submitted 

under § 39.5. They have developed 

respective rule frameworks, capacity, 

operational expertise and resources, and 

credit support infrastructure to clear the 

contracts on terms that are consistent 

with the material terms and trading 

conventions on which the contracts 

currently are trading. The Commission 

believes that these are scalable and that 

CME, ICE Clear Credit, and ICE Clear 

Europe would be able to risk manage the 

additional swaps that might be 

submitted due to the clearing 

requirement determination. 

Following the financial crisis, the 

major market participants committed in 

2009 to the substantial reforms to the 

OTC derivatives markets.76 Among the 

commitments from CDS dealers and buy 

side participants was to actively engage 

with central counterparties to broaden 

the range of cleared swaps and market 

participants. These changes were in 

addition to those generated through 

organizations like ISDA and their 

protocols standardizing CDS. For 

broadly traded swaps like the CDS 

indices, the ultimate impact of these 

initiatives was operational platforms,77

rule frameworks, and other 

infrastructure initiatives that replicated 

the uncleared market and supported the 

move of these CDS to a centrally cleared 

environment. In this way, the CDS 

clearing services offered by DCOs, 

including CME, ICE Clear Credit, and 

ICE Clear Europe, were designed to be 

cleared in a manner that is consistent 

with the material terms and trading 

conventions of a bilateral, uncleared 

market. 

In addition, CME, ICE Clear Credit, 

and ICE Clear Europe are registered 

DCOs. To be registered as such, CME, 

ICE Clear Credit, and ICE Clear Europe 

have, on an on-going basis, 

demonstrated to the Commission that 

they are each in compliance with the 

DCO core principles set forth in the CEA 

and Commission regulations, as 

discussed above. As a general matter, 

any DCO that does not have the rule 

framework, capacity, operational 

expertise and resources, and credit 

support infrastructure to clear the swaps 

that are subject to required clearing is 

not in compliance with the core 

principles or the Commission 

regulations promulgating these 

principles. 

Commenters raised issues with regard 

to the operational capabilities of 

clearinghouses to manage the clearing of 

iTraxx for customers. Commenters such 

as ISDA, FIA, MFA, and D.E. Shaw all 

highlighted the fact that no registered 

DCO currently offers customer clearing 

for iTraxx. Besides the lack of approved 

customer clearing of the iTraxx indices 

at any DCO, the commenters noted 

substantive concerns about the ability of 

clearinghouses to manage the 

‘‘restructuring’’ credit event applicable 

to iTraxx (and certain other CDS 

indices) in the context of customer 

clearing. For the CDX.NA.IG and 

CDX.NA.HY indices, credit events are 

limited to a ‘‘failure to pay’’ or the 

bankruptcy of the companies included 

in the index. A credit event results in 

the removal of the defaulted constitute 

from the index, with the protection 

seller settling the amounts owed to the 

protection buyer with regard to that 

individual constituent. The 

standardized terms of the iTraxx, 

however, also include ‘‘restructuring’’ as 

a credit event. When a restructuring 

event occurs with regard to an index 

constituent, the impacted company is 

removed from the index by the creation 

of a single-name CDS referencing that 

entity. The protection buyer and seller 

have the option to continue that singlename CDS or to settle the contract with 

regard to the restructured credit. 

ISDA, MFA, and FIA note that this 

process raises issues for DCOs. 

Specifically highlighted were those 

situations where a DCO does not, in 

fact, already offer clearing of the singlename CDS that is subject to the 

restructuring event. To the extent that 

the SEC or foreign regulator prohibits 

the DCO from clearing a particular 

single-name CDS, a process would need 

to be developed to address such 

circumstances. Similarly, the customer 

account in which the new single-name 

CDS would be held, in the absence of 

portfolio margining, would need to be 

addressed. MFA comments that the 

approval of portfolio margining 

petitions would remove much of the 

complexity of the ‘‘spin-off’’ of the 

single-name CDS from the iTraxx 

indices. Given the inclusion of the 

iTraxx within the clearing 

determination, MFA states that the 

petitions need to be approved so that 

the new single-name CDS can be held 

within the cleared swap account and 

margined with the iTraxx index CDS. 

Finally, the commenters believe that 

DCOs need to demonstrate that their 

customer clearing platforms are 

technologically viable and sufficiently 

tested before a clearing determination 

with regard to the iTraxx indices is 

finalized. For these reasons, these 

commenters believe a delay in the 

implementation of a clearing 

requirement for the iTraxx indices 

would be appropriate until such time as 

customer clearing platforms have been 

established, the necessary regulatory 

approvals have been granted and 

operational testing has been conducted 

for an appropriate period of time. In 

MFA’s view the delay should be 60 to 

90 days, and in ISDA’s view, the testing 

period should consist of voluntary 

client clearing for at least 90 days. 

On the other hand, ICE supports the 

Commission’s inclusion of iTraxx CDS 

indices within its clearing requirement 

determination. ICE states that ICE Clear 

Europe has already begun the process of 

pursuing regulatory approval for client 

clearing of iTraxx, and indicates that 

ICE Clear Credit will do the same.78


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74297 

by statute and regulation to be included in the 

Commission’s analysis. 

79 It is not clear, however, the extent to which 

clearing members are in fact offering customer 

clearing of the CDX.EM indices cleared by ICE Clear 

Credit. 

80 It should be noted that the Commission 

strongly supports the petitions for the portfolio 

margining of single-name CDS and CDS indices. 

The Commission believes that all customers should 

be able to benefit from the reasonable application 

of portfolio margining, and that the benefits thereof 

should not just be available to the proprietary 

positions in the house accounts of clearing 

members. 

81The Commission agrees with the comments of 

MFA that the availability of client clearing should 

be considered when making clearing 

determinations. Consequently, DCOs accepting, or 

planning to accept, swaps for clearing should make 

client clearing available in compliance with 

Commission regulations. In the absence of such 

client clearing, the Commission will delay 

compliance with required clearing of iTraxx 

indices. 

82Available at http://occ.treas.gov/topics/capitalmarkets/financial-markets/trading/derivatives/ 

dq212.pdf. 

While recognizing that the standard 

credit events under the iTraxx add some 

complexity relative to the CDX indices, 

ICE notes that it has worked with 

market participants and DTCC to 

develop industry-wide solutions to the 

‘‘restructuring’’ event. Further, ICE 

states that ICE Clear Credit has already 

implemented applicable parts of this 

solution with regard to the clearing of 

the CDX.EM CDS index of emerging 

market sovereign constituents.79 ICE 

claims that any additional processes 

necessary with regard to clearing iTraxx 

index CDS are being addressed 

currently by the industry, and will not 

present any insurmountable challenges. 

Citadel also commented that they did 

not believe that there were any 

substantive reasons why the iTraxx 

index CDS should not be required to be 

cleared. The ‘‘restructuring’’ credit 

event and the spinning out of a newly 

cleared single-name CDS do not, in 

Citadel’s view, present any new issues 

to market participants. Further, because 

DCOs already offer clearing on the 

iTraxx on a dealer-to-dealer basis, they 

have the necessary processes upon 

which to build out the client clearing 

platform. Citadel also states that even if 

the ICE Clear Credit’s and ICE Clear 

Europe’s petitions to the SEC for 

portfolio margining were not approved 

generally,80 limited exemptions may be 

available for the single names associated 

with the spun-off single name. Citadel 

does agree with other commenters that 

to the extent that client clearing cannot 

be offered with sufficient lead time to 

allow for proper operational testing, a 

delay may be appropriate in 

implementing a clearing requirement for 

the iTraxx indices. Citadel believes 60 

days voluntary customer clearing 

should be sufficient for such testing. 

The Commission believes that the 

introduction of client clearing must 

occur before any clearing determination 

could become effective with regard to 

the iTraxx indices, or any other CDS 

indices that the Commission may 

consider.81 The Commission agrees with 

all commenters that subject to 

resolution of all operational issues 

surrounding client clearing of the iTraxx 

indices, specifically the iTraxx Europe, 

Crossover, and High Volatility, these 

indices are appropriate for inclusion in 

a clearing requirement. The Commission 

is encouraged by the work currently 

being done by the DCOs, by other 

regulators, and by the market as a 

whole, to establish client clearing in the 

near term. The Commission recognizes 

that additional time may be necessary to 

allow for the DCOs to obtain the 

necessary regulatory approvals and 

design a workable framework for 

dealing with the issues presented by the 

client clearing of the iTraxx indices, 

before the clearing of this class of 

indices can be required of market 

participants. 

As part of this clearing requirement 

determination, the Commission is 

including the iTraxx class of CDS, as 

proposed. The Commission believes that 

the compliance schedule outlined in 

Section IV below should provide 

adequate time for market participants to 

resolve the outstanding issues with 

regard to client clearing of the iTraxx 

indices. Under this schedule, the 

requirement for market participants to 

begin clearing would commence on 

March 11, 2013, for swaps entered into 

on or after that date between Category 

1 Entities. Category 2 Entities would be 

required to clear swaps beginning on 

June 10, 2013, for swaps entered into on 

or after that date, and Category 3 

Entities would be required to clear 

swaps beginning on September 9, 2013, 

for swaps entered into on or after that 

date. However, if no DCO has begun 

offering client clearing for iTraxx by 

February 11, 2013, then compliance 

with the required clearing of iTraxx will 

commence sixty days after the date on 

which iTraxx is first offered for client 

clearing by an eligible DCO. 

If an eligible DCO offers client 

clearing for iTraxx on or before 

September 9, 2013, the following 

phased implementation schedule will 

apply: Category 1 Entities would be 

required to clear iTraxx indices entered 

into on or after the date 60 days after the 

date on which iTraxx is first offered for 

client clearing by an eligible DCO; 

Category 2 Entities would be required to 

clear iTraxx entered into on or after the 

date 150 days after the date on which 

iTraxx is first offered for client clearing 

by an eligible DCO; and Category 3 

Entities would be required to clear 

iTraxx entered into on or after the date 

240 days after the date on which iTraxx 

is first offered for client clearing by an 

eligible DCO. There will be no phasing 

of compliance if an eligible DCO offers 

client clearing for iTraxx after 

September 9, 2013. Rather, all three 

categories of market participants will be 

expected to come into compliance by 60 

days after the date on which iTraxx is 

first offered for client clearing by an 

eligible DCO. 

c. Effect on the Mitigation of Systemic 

Risk 

Section 2(h)(2)(D)(ii)(III) of the CEA 

requires the Commission to take into 

account a clearing requirement’s effect 

on the mitigation of systemic risk, 

taking into account the size of the 

market for the contract subject to the 

clearing requirement and the resources 

of the DCOs clearing the contract. The 

Commission agrees with the § 39.5 swap 

submissions of CME, ICE Clear Credit, 

and ICE Clear Europe that requiring 

certain classes of CDS to be cleared 

would reduce systemic risk in this 

sector of the swaps market. As CME 

noted, the 2008 financial crisis 

demonstrated the potential for systemic 

risk arising from the interconnectedness 

of OTC derivatives market participants 

and the limited transparency of 

bilateral, i.e., uncleared, counterparty 

relationships. According to the 

Quarterly Report (Second Quarter 2012) 

on Bank Trading and Derivatives 

Activities of the Office of the 

Comptroller of the Currency (OCC 

Report),82 CDS index products account 

for a significant percentage of the 

notional value of swaps positions held 

by financial institutions. According to 

ICE Clear Credit, the CDS indices it 

offers for clearing are among the most 

actively traded swaps with the largest 

pre-clearing outstanding positions, and 

ICE Clear Credit’s clearing members are 

among the most active market 

participants. ICE Clear Credit also noted 

that its clearing members clear a 

significant portion of their clearingeligible portfolio. 

Clearing the CDS indices subject to 

this determination will reduce systemic 

risk in the following ways: mitigating 

counterparty credit risk because the 

DCO would become the buyer to every 

seller of CDS indices subject to this 

determination and vice-versa; providing 

counterparties with daily mark-tomarket valuations and exchange of 


sroberts on DSK5SPTVN1PROD with 
74298 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

83Other commenters such as Citadel generally 

agreed with the Commission’s analysis of the 

reduction of systemic risk for both the interest rates 

and CDS determinations. 

84See Section II.F for further discussion of this 

comment. 

85See U.S. Department of Justice and the Federal 

Trade Commission, Horizontal Merger Guidelines 

[hereinafter ‘‘Horizontal Merger Guidelines’’] at § 1 

(Aug. 19, 2010), available at http://www.justice.gov/ 

atr/public/guidelines/hmg-2010.pdf. 

86 Id.; see also U.S. Department of Justice (DOJ) 

and the Federal Trade Commission (FTC), Antitrust 

Guidelines for Collaborations Among Competitors 

at § 1.2 (April 2000), available at http:// 

www.ftc.gov/os/2000/04/ftcdojguidelines.pdf (‘‘The 

central question is whether the relevant agreement 

likely harms competition by increasing the ability 

or incentive profitably to raise price above or 

reduce output, quality, service, or innovation below 

what likely would prevail in the absence of the 

relevant agreement’’). 

87 Included among these could be a separate 

product market for CDS indices licensing. AFR 

stated that this factor should not focus on Markit 

as an index provider, but rather on clearing entities. 

For purposes of its consideration of this factor, the 

Commission believes its analysis appropriately 

covers competition as it relates to clearinghouses, 

as well as to other market participants. 

88The federal antitrust agencies, the DOJ and 

FTC, use the ‘‘hypothetical monopolist test’’ as a 

tool for defining antitrust markets for competition 

analysis purposes. The test ‘‘identif[ies] a set of 

products that are reasonably interchangeable with 

a product,’’ and thus deemed to reside in the same 

relevant antitrust product or service market. ‘‘[T]he 

test requires that a hypothetical profit-maximizing 

firm, not subject to price regulation, that was the 

only present and future seller of those products 

(‘hypothetical monopolist’) likely would impose at 

least a small but significant and non-transitory 

increase in price (‘SSNIP’) on at least one product 

in the market.’’ In most cases, a SSNIP of five 

percent is posited. If consumers would respond to 

the hypothesized SSNIP by substituting alternatives 

to a significant degree to render it unprofitable, 

those alternative products/services are included 

within the relevant market. This methodological 

exercise is repeated until it has been determined 

that consumers have no further interchangeable 

products/services available to them. Horizontal 

Merger Guidelines at § 4.1. 

variation margin pursuant to a risk 

management framework set by the DCO 

and reviewed by the Commission’s 

Division of Clearing and Risk; posting 

initial margin with the DCO in order to 

cover potential future exposures in the 

event of a default; achieving multilateral 

netting, which substantially reduces the 

number and notional amount of 

outstanding bilateral positions; reducing 

swap counterparties’ operational burden 

by consolidating collateral management 

and cash flows; and eliminating the 

need for novations or tear-ups because 

clearing members may offset opposing 

positions. 

As discussed in the NPRM, the DCOs 

collect substantial amounts of collateral 

in the form of initial margin and 

guaranty fund contributions to cover 

potential losses on CDS portfolios. The 

methodologies for calculating these 

amounts are based on covering 5-day 

price movements on a portfolio with a 

99% confidence level for initial margin, 

and longer liquidation periods and 

higher confidence levels under 

‘‘extreme but plausible’’ conditions in 

the case of guaranty fund requirements. 

Beyond these financial resources, the 

clearinghouses have in place established 

risk monitoring processes, system 

safeguards, and default management 

procedures, which are subject to testing 

and review, to address potential 

systemic shocks to the financial 

markets. 

AFR specifically supported the 

Commission’s analysis on the mitigation 

of systemic risk with regard to the CDS 

clearing determination.83 ISDA 

commented generally that the 

Commission’s analysis of this factor 

should have addressed the 

centralization of risk at DCOs as a result 

of the determinations, and the new 

capital, collateral, and disclosure 

requirements that have decreased risk in 

uncleared swaps.84 The Commission 

believes its analysis of other factors did 

in fact focus on the management of risk 

at DCOs and their ability to manage the 

risks associated with the untranched 

CDS indices included within the 

determination. In connection with 

future determinations, the Commission 

will continue to take those issues raised 

by ISDA into consideration. 

d. Effect on Competition 

Section 2(h)(2)(D)(ii)(IV) of the CEA 

requires the Commission to take into 

account the effect on competition, 

including appropriate fees and charges 

applied to clearing. Of particular 

concern to the Commission is whether 

this determination would harm 

competition by creating, enhancing, or 

entrenching market power in an affected 

product or service market, or facilitating 

the exercise of market power.85 Under 

U.S. Department of Justice guidelines, 

market power is viewed as the ability 

‘‘to raise price [including clearing fees 

and charges], reduce output, diminish 

innovation, or otherwise harm 

customers as a result of diminished 

competitive constraints or 

incentives.’’ 86

In the NPRM, the Commission 

identified the following putative 

product and service markets as 

potentially affected by this clearing 

determination: a DCO service market 

encompassing those clearinghouses that 

currently (or with relative ease in the 

future could) clear the CDS subject to 

this determination, and a CDS product 

market or markets encompassing the 

CDS that are subject to this 

determination.87 Without defining the 

precise contours of these markets at this 

time,88 the Commission recognizes that, 

depending on the interplay of several 

factors, this clearing determination 

potentially could impact competition 

within the affected markets. Of 

particular importance to whether any 

impact is, overall, positive or negative, 

is: (1) Whether the demand for these 

clearing services and swaps is 

sufficiently elastic that a small but 

significant increase above competitive 

levels would prove unprofitable because 

users of the CDS products and DCO 

clearing services would substitute other 

products/clearing services co-existing in 

the same market(s), and (2) the potential 

for new entry into these markets. The 

availability of substitute products/ 

clearing services to compete with those 

encompassed by this determination, and 

the likelihood of timely, sufficient new 

entry in the event prices do increase 

above competitive levels, each operate 

independently to constrain 

anticompetitive behavior. 

The Commission recognized in the 

NPRM that, depending on the interplay 

of several factors, the clearing 

requirement potentially could impact 

competition within the affected market 

and discussed various factors that could 

impact that market. 

In response to the Commission’s 

recognition of the fact that currently no 

DCO clears CDS indices licensed by any 

provider other than Markit, Markit 

commented that it did not believe the 

determination would foreclose or 

materially impact competition in the 

CDS products, including licensing. 

Markit noted that its open licensing 

policy encourages competition among 

DCOs, SEFs, market makers, and others. 

Markit further commented that, given 

the costs associated with clearing, CDS 

indices that are not subject to a 

determination may be at a competitive 

advantage, including those that may be 

established by other index providers. 

In support of the NPRM, Citadel 

stated that the clearing requirement will 

have a strong positive impact on 

competition in the swap market and the 

market for clearing services. Citadel 

noted that central clearing will remove 

a significant barrier to entry for 

alternative swap market liquidity 

providers and will enable smaller 

entities to compete on more equal terms 

because central clearing eliminates the 

consideration of counterparty credit risk 

from the selection of execution 

counterparties. Citadel further 

commented that buy-side market 

participants will benefit from a wider 

range of potential execution 

counterparties and asserted that this 

increased competition yields benefits to 

market participants including narrower 

bid-ask spreads, improved access to best 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74299 

89The Commission observes that issues regarding 

the bundling of clearing services and execution are 

beyond the scope of this rulemaking. See generally 

Swap Dealer and Major Swap Participant 

Recordkeeping, Reporting, and Duties Rules; 

Futures Commission Merchant and Introducing 

Broker Conflicts of Interest Rules; and Chief 

Compliance Officer Rules for Swap Dealers, Major 

Swap Participants, and Futures Commission 

Merchants, 77 FR 20128, 20154–55 (Apr. 3, 2012) 

(discussing the application of § 1.71(d)(2)). 

90The Commission observes that an FCM or DCO 

also may be subject to resolution under Title II of 

the Dodd-Frank Act to the extent it would qualify 

as covered financial company (as defined in section 

201(a)(8) of the Dodd-Frank Act). 

91 If an FCM is also registered as a broker-dealer, 

certain issues related to its insolvency proceeding 

would also be governed by the Securities Investor 

Protection Act. 

92See 11 U.S.C. 556 (‘‘The contractual right of a 

commodity broker [which term would include a 

DCO or FCM] * * * to cause the liquidation, 

termination or acceleration of a commodity contract 

* * * shall not be stayed, avoided, or otherwise 

limited by operation of any provision of [the 

Bankruptcy Code] or by order of a court in any 

proceeding under [the Bankruptcy Code].’’). 

93See 11 U.S.C. 766(h). 

execution, and increased market depth 

and liquidity, all of which facilitate the 

emergence of an all-to-all market with 

electronic and/or anonymous execution. 

Citadel also commented that 

substitution of the DCO for the bilateral 

counterparty decouples execution from 

post-trade processing and settlement.89

Finally, Citadel commented that the 

certainty as to when the first clearing 

requirement will begin gives DCOs and 

FCMs the confidence to invest in their 

client clearing offerings, and to compete 

actively for buy-side business both on 

the quality and efficiency of their 

services as well as on price. 

While FIA commented that the NPRM 

included a full discussion of the 

potential competitive impact of the 

clearing proposal, as discussed above, 

FIA indicated that it was unable to 

conduct the analysis it believes would 

be necessary to respond to the 

Commission’s questions in the NPRM 

within the 30-day comment period 

provided. 

In response to FIA’s comment, as 

discussed above, the Commission notes 

that the 30-day public comment period 

was necessary for the Commission to 

adhere to the CEA’s 90-day 

determination process. Moreover, while 

FIA indicated that it would like more 

time to conduct further analysis of 

competitive issues for future 

determinations, FIA did not identify any 

specific concerns about the 

competitiveness issue analysis that 

could materially change the 

Commission’s determination if such 

additional information were made 

available to the Commission. The 

comments provided by Markit and 

Citadel are consistent with the NPRM’s 

conclusion that the clearing requirement 

potentially could impact competition 

within the affected market, but both 

commenters go on to assert that such an 

impact would not be negative. 

Accordingly, the Commission believes 

that its consideration of competitiveness 

as described in the NPRM is sufficient 

for purposes of finalizing the clearing 

requirement rule. 

e. Legal Certainty in the Event of the 

Insolvency 

Section 2(h)(2)(D)(ii)(V) of the CEA 

requires the Commission to take into 

account the existence of reasonable legal 

certainty in the event of the insolvency 

of the relevant DCO or one or more of 

its clearing members with regard to the 

treatment of customer and swap 

counterparty positions, funds, and 

property. The Commission proposed 

this clearing requirement based on its 

view that there is reasonable legal 

certainty with regard to the treatment of 

customer and swap counterparty 

positions, funds, and property in 

connection with cleared swaps, namely 

the CDS indices subject to this 

determination, in the event of the 

insolvency of the relevant DCO (CME, 

ICE Clear Credit, or ICE Clear Europe) or 

one or more of the DCO’s clearing 

members. 

In the case of a clearing member 

insolvency at CME or ICE Clear Credit, 

subchapter IV of Chapter 7 of the U.S. 

Bankruptcy Code (11 U.S.C. 761–767) 

and Part 190 of the Commission’s 

regulations would govern the treatment 

of customer positions.90 Pursuant to 

section 4d(f) of the CEA, a clearing 

member accepting funds from a 

customer to margin a cleared swap, 

must be a registered FCM. Pursuant to 

11 U.S.C. 761–767 and Part 190 of the 

Commission’s regulations, the 

customer’s CDS positions, carried by the 

insolvent FCM, would be deemed 

‘‘commodity contracts.’’ 91 As a result, 

neither a clearing member’s bankruptcy 

nor any order of a bankruptcy court 

could prevent either CME or ICE Clear 

Credit from closing out/liquidating such 

positions.92 However, customers of 

clearing members would have priority 

over all other claimants with respect to 

customer funds that had been held by 

the defaulting clearing member to 

margin swaps, such as the customers’ 

positions in CDS indices subject to this 

determination.93 Customer funds would 

be distributed to swaps customers, 

including CDS customers, in accordance 

with Commission regulations and 

section 766(h) of the Bankruptcy Code. 

Moreover, the Bankruptcy Code and the 

Commission’s rules thereunder (in 

particular 11 U.S.C. 764(b) and 17 CFR 

190.06) permit the transfer of customer 

positions and collateral to solvent 

clearing members. 

Similarly, 11 U.S.C. 761–767 and Part 

190 would govern the bankruptcy of a 

DCO, in conjunction with DCO rules 

providing for the termination of 

outstanding contracts and/or return of 

remaining clearing member and 

customer property to clearing members. 

With regard to ICE Clear Europe, the 

Commission understands that the 

default of a clearing member of ICE 

Clear Europe would be governed by the 

rules of that DCO. ICE Clear Europe, a 

DCO based in the United Kingdom, has 

represented that under English law its 

rules would supersede English 

insolvency laws. Under its rules, ICE 

Clear Europe would be permitted to 

close out and/or transfer positions of a 

defaulting clearing member that is an 

FCM pursuant to the U.S. Bankruptcy 

Code and Part 190 of the Commission’s 

regulations. According to ICE Clear 

Europe’s submission, the insolvency of 

ICE Clear Europe itself would be 

governed by both English insolvency 

law and Part 190. 

ICE Clear Europe has obtained legal 

opinions that support the existence of 

such legal certainty in relation to the 

protection of customer and swap 

counterparty positions, funds, and 

property in the event of the insolvency 

of one or more of its clearing members. 

In addition, ICE Clear Europe has 

obtained a legal opinion from U.S. 

counsel regarding compliance with the 

protections afforded to FCM customers 

under New York law. 

In response to the NPRM, Citadel 

commented that it agreed with the 

Commission’s analysis that reasonable 

certainty exists in the event of an 

insolvency of a DCO or one or more 

DCO members. As discussed above, the 

Commission received three comments 

related to customer segregation. In 

essence, Vanguard and SIFMA AMG 

recommend that the Commission delay 

implementation of the clearing 

requirement until three months after the 

LSOC model is implemented, clarified, 

and perhaps supplemented with 

additional rulemaking. ISDA requests 

that the Commission further study the 

issue of insolvency for DCOs. 

As stated above, the Commission 

believes that the concerns of Vanguard 

and SIFMA AMG are largely addressed 

by the delayed implementation 

timeframe for this determination. With 

regard to ISDA’s request, as discussed 

above, the Commission is actively 

engaging in efforts to study and prepare 

for potential scenarios involving 


sroberts on DSK5SPTVN1PROD with 
74300 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

94BIS, OTC Derivatives Market Activity as of 

December 2011, Table 1, available at http:// 

www.bis.org/statistics/otcder/dt1920a.pdf. The BIS 

data provides the broadest market-wide estimates of 

interest rate swap activity available to the 

Commission. 

95The IRS submissions received by the 

Commission are available at http://www.cftc.gov/ 

IndustryOversight/IndustryFilings/index.htm. 

Submission materials marked by the submitting 

DCO for confidential treatment pursuant to 

§§ 39.5(b)(5) and 145.9(d) are not available for 

public review. 

96 IDCH was eligible under § 39.5 to clear interest 

rate swaps. When LCH.LLC assumed IDCH’s DCO 

license, LCH.LLC was deemed eligible to clear 

interest rate swaps as well. 

97LCH.LLC (formerly IDCH) has applied to the 

Commission for DCO rule change approvals that 

would effectively implement clearing of the same 

interest rate swaps that LCH now clears. LCH.LLC 

is not accepting interest rate swaps for clearing 

until such time as it launches under its new 

clearing rules. Accordingly, IDCH’s product list that 

was included in the NPRM has been removed from 

the summary. 

98Subsequent to its original submission, CME has 

added clearing of OIS for USD, EUR, GBP, and JPY. 

99 In this final rule, currencies are identified 

either by their full name or by the three letter ISO 

currency designation for the currency. 

clearinghouse and clearing member 

insolvency. 

iii. Conclusions Regarding the Five 

Statutory Factors and Clearing 

Requirement Determination 

Based on the foregoing discussion and 

analysis, the Commission has taken into 

account each of the five factors provided 

for under section 2(h)(2)(D)(ii) of the 

CEA. Based on these considerations, 

and having reviewed the relevant DCOs’ 

submissions for consistency with 

section 5b(c)(2) of the CEA, the 

Commission is determining that the two 

classes of CDS identified in § 50.4(b) are 

required to be cleared. 

E. Interest Rate Swaps 

i. Introduction 

Interest rate swaps are agreements 

wherein counterparties agree to 

exchange payments based on a series of 

cash flows over a specified period of 

time typically calculated using two 

different rates multiplied by a notional 

amount. The BIS estimated that, as of 

December 2011, over $500 trillion in 

notional amount of single currency 

interest rate swaps were outstanding 

representing 75% to 80% of the total 

estimated notional amount of 

derivatives outstanding.94 Based on 

these factors and on the swap 

submissions received under § 39.5(b), 

the Commission believes that interest 

rate swaps represent a substantial 

portion of the swaps market and warrant 

consideration by the Commission for 

required clearing. 

The Commission’s proposal for 

interest rate swaps was presented in two 

parts. The first part, Section II.E of the 

NPRM, discussed the Commission’s 

rationale for determining how to classify 

and define the interest rate swaps 

identified in the DCO submissions (IRS 

submissions) to be considered for the 

clearing requirement. The second part, 

Section II.F, presented the 

Commission’s consideration of the IRS 

submissions in accordance with section 

2(h)(2)(D) of the CEA. This final release 

follows the same basic two-part 

structure. In each part, the discussion in 

the NPRM preamble for the 

corresponding part is summarized. 

Comments received from the public are 

summarized where appropriate together 

with the Commission’s consideration of 

the comments. 

ii. DCO Submissions 

The Commission received 

submissions from three registered DCOs 

eligible to clear interest rate swaps: 

LCH.Clearnet Limited (LCH), the 

clearing division of the Chicago 

Mercantile Exchange Inc. (CME), and 

International Derivatives Clearinghouse, 

LLC (IDCH).95 On August 14, 2012, LCH 

acquired IDCH and changed the name of 

IDCH to LCH.Clearnet LLC (LCH.LLC). 

LCH.LLC has submitted a request to the 

CFTC for approval of changes to its DCO 

rules that would result in LCH.LLC 

clearing the same interest rate swaps 

that LCH clears. As noted in the NPRM, 

IDCH had no cleared swap positions. 

Accordingly, the change in ownership 

of IDCH would not change the 

Commission’s proposal in terms of swap 

class assessments or volume and 

liquidity considerations. The proposed 

clearing requirement rule is not DCO 

specific. Upon approval of LCH.LLC’s 

application for its DCO rule changes, 

LCH.LLC would become a U.S.- 

domiciled DCO capable of accepting the 

full range of interest rate swap products 

contemplated in the proposal.96

The following table summarizes the 

interest rate swap classes and relevant 

specifications that each DCO identified 

in its IRS submission. 

TABLE 3—INTEREST RATE SWAP SUBMISSIONS SUMMARY 97

LCH CME 

Swap Classes ..... Fixed-to-floating, basis, forward rate agreements (FRAs), overnight index swaps (OIS). Fixed-to-floating.98

Currencies 99 ....... USD, EUR, GBP, JPY, AUD, CAD, CHF, SEK, CZK, DKK, HKD, HUF, NOK, NZD, 

PLN, SGD, ZAR.

USD, EUR, GBP, JPY, CAD, and 

CHF. 

Rate Indexes ....... For Fixed-to-floating, basis, FRAs: LIBOR in seven currencies, BBR–BBSW, BA– 

CDOR, PRIBOR, CIBOR–DKNA13, CIBOR2–DKNA13, EURIBOR-Telerate, 

EURIBOR-Reuters, HIBOR–HIBOR, HIBOR–HKAB, HIBOR–ISDC, BUBOR-Reuters, 

NIBOR, BBR–FRA, BBR-Telerate, PLN–WIBOR, PLZ–WIBOR, STIBOR, SOR-Reuters, JIBAR.

USD–LIBOR, CAD–BA, CHF– 

LIBOR, GBP–LIBOR, JPY– 

LIBOR, and EURIBOR. 

For OIS: FEDFUNDS, SONIA, EONIA, TOIS. 

Maximum Stated 

Termination 

Dates.

For Fixed-to-floating and basis: USD, EUR, and GBP out to 50 years, AUD, CAD, 

CHF, SEK and JPY out to 30 years and the remaining nine currencies out to 10 

years..

For OIS and FRAs: USD, EUR, GBP, and CHF out to two years ....................................

USD, EUR, and GBP out to 50 

years, and CAD, JPY, and CHF 

out to 30 years. 

iii. Interest Rate Swap Market 

Conventions and Risk Management 

The NPRM described how interest 

rate swaps present a wide range of 

variable product classes and product 

specifications within each class. 

Notwithstanding the large variety of 

contracts, there are commonalities that 

make it possible to categorize interest 

rate swaps for clearing, pricing, and risk 

purposes. Firstly, the vast majority of 

interest rate swaps use the ISDA 

definitions and contract conventions 

that allow market participants to agree 

quickly on common terms for each 

transaction. In fact, the DCOs clearing 

interest rate swaps all use ISDA 

definitions in their product 

specifications. 

Secondly, counterparties enter into 

swaps to achieve particular economic 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74301 

100These are sometimes also referred to as 

‘‘types,’’ ‘‘categories,’’ or ‘‘groups.’’ For purposes of 

the clearing requirement determination, the 

Commission uses the term ‘‘class,’’ in order to be 

consistent with the approach taken by the European 

Securities and Markets Authority (ESMA) in its 

Discussion Paper, ‘‘Draft Technical Standards for 

the Regulation on OTC Derivatives, CCPs, and 

Trade Repositories,’’ (Feb. 16, 2012), available at 

http://www.esma.europa.eu/system/files/2012- 

95.pdf. It is also noted that other categorizations are 

sometimes used for certain purposes. However, 

these four classes are common terms used by the 

DCOs and are common terms used in industry 

taxonomies. 101See, e.g., ISDA Swap Taxonomies, available at 

http://www2.isda.org/identifiers-and-otctaxonomies/; Financial Products Markup Language, 

available at http://www.fpml.org/; and Federal 

Reserve Bank of New York Staff Reports, ‘‘An 

Analysis of OTC Interest Rate Derivatives 

Transactions: Implications for Public Reporting’’ 

(March 2012) at 3, available at http:// 

www.newyorkfed.org/research/staff_reports/ 

sr557.pdf. 

102After putting on these hedging positions, the 

DCO has the time needed to address any residual 

risk of the defaulted portfolio through auctioning 

off the defaulted portfolio together with the hedging 

transactions. 

103See 77 FR at 47188 and LCH IRS submission, 

at 4 (discussing LCH’s management of the Lehman 

Brothers’ bankruptcy in September 2008, where 

upon Lehman’s default, LCH needed to risk manage 

a portfolio of approximately 66,000 interest rate 

swaps, which it hedged with approximately 100 

new swap trades in less than five days and only 

used approximately 35% of the initial margin 

Lehman had posted). 

results. While the results desired may 

differ in small ways depending on each 

counterparty’s specific circumstances 

and goals, there are certain common 

swap conventions that are used to 

identify and achieve commonly desired 

economic results when entering into 

interest rate swaps. For example, a party 

that is trying to hedge variable interest 

rate risk may enter into a fixed rate to 

floating rate swap, or a party that is 

seeking to fix interest rates for periods 

in the future may enter into a forward 

rate agreement. 

The IRS submissions identified 

commonly known classes of swaps that 

they clear including: fixed rate to 

floating rate swaps, that are sometimes 

referred to as plain vanilla swaps (fixedto-floating swaps); floating rate to 

floating rate swaps, also referred to as 

basis swaps (basis swaps); overnight 

index swaps (OIS); and forward rate 

agreements (FRAs).100 These class terms 

are also being used in industry efforts to 

develop a taxonomy for interest rate 

swaps.101

Furthermore, within these general 

classes, certain specifications are 

essential for defining the economic 

result and the value of the swap. Each 

of the IRS submissions naturally used 

these common specifications when 

identifying the swaps that the DCO 

clears. Within each of those 

specifications, there are common terms 

used by the DCOs and markets, which 

allows for further classification of the 

full range of interest rate swaps that are 

executed. Accordingly, as described in 

the NPRM, while there are a wide 

variety of interest rate swaps when 

taking into account all possible contract 

specifications, certain specifications are 

commonly used by the DCOs and 

market participants. This allows for the 

identification of classes of swaps and 

primary specifications within each 

class. 

The DCOs also risk manage and set 

margins for interest rate swaps on a 

portfolio basis rather than on a 

transaction- or product-specific basis. In 

other words, the DCOs analyze the 

cumulative risk of a party’s portfolio. By 

looking at risk on a portfolio basis, the 

DCOs effectively take into account how 

swaps with different attributes, such as 

underlying currency, stated termination 

dates, underlying floating rate indexes, 

swap classes, etc., are correlated and 

thus can offset risk across attributes. 

This is possible because, although 

individual transactions may have 

unique contract terms, given the 

commonalities of transactions as 

discussed above, swap portfolios can be 

risk managed on a cumulative value 

basis taking into account correlations 

among the cleared swaps. Consequently, 

DCOs can be expected to fairly rapidly, 

and efficiently manage the risk of 

portfolios of interest rate swaps within 

and across classes in a default scenario 

through a small number of large hedging 

transactions that hedge large numbers of 

similarly correlated positions held by 

the defaulting party.102 As such, 

liquidity for specific, individual swaps 

is not the focus of DCOs from a risk 

management perspective. Rather, 

liquidity is viewed as a function of 

whether a portfolio of swaps has 

common specifications that are 

determinative of the economics of the 

swaps in the portfolio such that a DCO 

can price and risk manage the portfolio 

through block hedging and auctions in 

a default situation.103

iv. Interest Rate Swap Classification for 

Clearing Requirement Determinations 

Section 2(h)(2)(A) of the CEA 

provides that the Commission ‘‘shall 

review each swap, or any group, 

category, type, or class of swaps to make 

a determination as to whether’’ any 

thereof shall be required to be cleared. 

In reviewing the IRS submissions, the 

Commission considered in the NPRM 

whether its clearing requirement 

determination should address 

individual swaps, or categories, types, 

classes, or other groups of swaps. 

Based on the market conventions as 

discussed above, and the DCO 

recommendations in the IRS 

submissions, the Commission proposed 

a clearing requirement for four classes of 

interest rate swaps: Fixed-to-floating 

swaps, basis swaps, OIS, and FRAs. At 

the time the IRS submissions were 

submitted to the Commission, LCH 

offered all four classes for clearing, as 

did IDCH, and CME offered one of them 

for clearing. Subsequent to the 

publication of the NPRM, CME has 

added clearing of OIS, and has stated 

publicly that it intends to add clearing 

of basis swaps and FRAs in the near 

future. In addition, upon launch of 

LCH.LLC, it is expected that LCH.LLC 

will begin clearing the same swaps 

cleared by LCH that are included in the 

swap classes designated by the 

Commission. 

These four classes represent a 

substantial portion of the interest rate 

swap market. The following table 

provides an indication of the 

outstanding positions in each class. 

TABLE 4—INTEREST RATE SWAPS NOTIONAL AND TRADE COUNT BY CLASS 104

Swap class Notional amount 

(USD BNs) 

Gross notional 

percent of total Total trade count Total trade count percent of total 

Fixed-to-Floating ...................................................................... 299,818 60 3,239,092 75 

FRA .......................................................................................... 67,145 13 202,888 5 

OIS ........................................................................................... 43,634 9 109,704 3 

Basis ........................................................................................ 27,593 5 119,683 3 

Other 105 ................................................................................... 65,689 13 617,637 14 


sroberts on DSK5SPTVN1PROD with 
74302 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

106LCH IRS submission, at 6. 

107 In addition, as noted by LCH, in its IRS 

submission, a product-by-product requirement may 

be evaded more easily because the specifications of 

a particular swap contract would need to match the 

specifications of each product subject to a clearing 

requirement. The clearing requirement could be 

evaded by adding, deleting, or modifying one or 

more of the contract’s specifications, including 

minor specifications that have little or no impact on 

the economics of the swap. By using a class-based 

approach that allows for ranges of contract 

specifications established by the DCOs within each 

class, the Commission is reducing the potential for 

evasion in accordance with section 2(h)(4)(A) of the 

CEA, which directs the Commission to prescribe 

rules necessary to prevent evasion of the clearing 

requirements. 

108The term ‘‘conditional notional amount’’ refers 

to notional amounts that can change over the term 

of a swap based on a condition established by the 

parties upon execution such that the notional 

amount of the swap is not a known number or 

schedule of numbers, but may change based on the 

occurrence of some future event. This term does not 

include what are commonly referred to as 

‘‘amortizing’’ or ‘‘roller coaster’’ notional amounts 

for which the notional amount changes over the 

term of the swap based on a schedule of notional 

amounts known at the time the swap is executed. 

Furthermore, it would not include a swap 

containing early termination events or other terms 

that could result in an early termination of the swap 

if a DCO clears the swap with those terms. The 

Commission discusses this definition and 

comments received on it below. 

TABLE 4—INTEREST RATE SWAPS NOTIONAL AND TRADE COUNT BY CLASS 104—Continued 

Swap class Notional amount 

(USD BNs) 

Gross notional 

percent of total Total trade count Total trade count percent of total 

Total .................................................................................. 503,879 100 4,289,004 100 

104TriOptima data, as of March 16, 2012. See Section II.F below for a description of the TriOptima data. The TriOptima data provided information on nine other classes of swaps, none of which is included in the IRS submissions. 105 In the NPRM, the total notional amount for the ‘‘Other’’ category was incorrectly listed as $132,162 billion as a result of inadvertently including the FRA amounts in the ‘‘Other’’ category. Correcting this error also resulted in changes to the ‘‘Gross Notional Percent of Total’’ column. 

These corrections do not change the Commission’s analysis in the NPRM. The fact that the four classes of interest rate swaps included in the 

clearing requirement represent a larger proportion of the total notional amount of interest rate swaps outstanding is consistent with Congressional 

intent to mitigate systemic risk by implementing clearing of swaps as discussed in the NPRM. See 77 FR 47171. 

For purposes of the clearing 

requirement determination, the 

Commission developed the following 

class definitions based on information 

provided by the submitting DCOs and 

market conventions. 

1. ‘‘Fixed-to-floating swap’’: A swap 

in which the payment or payments 

owed for one leg of the swap is 

calculated using a fixed rate and the 

payment or payments owed for the other 

leg are calculated using a floating rate. 

2. ‘‘Floating-to-floating swap’’ or 

‘‘basis swap’’: A swap in which the 

payments for both legs are calculated 

using floating rates. 

3. ‘‘Forward Rate Agreement’’ or 

‘‘FRA’’: A swap in which payments are 

exchanged on a pre-determined date for 

a single specified period and one leg of 

the swap is calculated using a fixed rate 

and the other leg is calculated using a 

floating rate that is set on a predetermined date. 

4. ‘‘Overnight indexed swap’’ or 

‘‘OIS’’: A swap for which one leg of the 

swap is calculated using a fixed rate and 

the other leg is calculated using a 

floating rate based on a daily overnight 

rate. 

As described in the NPRM, the LCH 

and CME IRS submissions addressed 

issues of classification for purposes of 

the interest rate swap clearing 

requirement. In its submission, LCH 

discussed the classification of interest 

rate swaps and recommended 

establishing clearing requirements for 

classes of interest rate swaps. In effect, 

LCH recommended the use of a set of 

basic product specifications to identify 

and describe each class of swaps subject 

to the clearing requirement. CME 

recommended a clearing determination 

for all non-option interest rate swaps 

denominated in a currency cleared by 

any qualified DCO. 

As an alternative, the Commission 

considered whether to establish clearing 

requirements on a product-by-product 

basis. The Commission noted in the 

NPRM that such a determination would 

need to identify the multitude of 

specifications of each product that 

would be subject to the clearing 

requirement. In this regard, LCH stated 

in its IRS submission that the clearing 

requirement ‘‘would be sub-optimal for 

the overall market if participants are 

forced to read pages of rules to decipher 

whether or not a swap is required to be 

cleared, or to have to make complex and 

time consuming decisions at the point 

of execution.’’ 106 A class-based 

approach would allow market 

participants to determine quickly as a 

threshold matter whether they might 

need to submit a swap to a DCO for 

clearing by checking initially whether 

the swap has the basic specifications 

that define each class subject to the 

clearing requirement.107

A product-by-product designation 

also would be difficult to administer 

because the Commission would be 

required to consider each and every 

product submitted. On the other hand, 

designating classes of interest rate 

swaps for the clearing requirement 

provides a cost effective, workable 

method for the Commission to review 

variations in new swap products that 

DCOs will submit for clearing 

determinations on a going forward basis 

without undertaking a full Commission 

review of each and every swap to 

determine if those variations are 

consistent with the five factors the 

Commission is directed to consider 

under section 2(h)(2)(D) of the CEA. For 

such swaps, as described in greater 

detail below in Section III.F, the 

Commission proposed delegating to the 

Director of the Division of Clearing and 

Risk, with the consultation of the 

General Counsel, the authority to 

confirm whether the swap fits within 

the identified class and is therefore 

subject to the clearing requirement. 

After consideration of the issues 

summarized above, the Commission 

proposed in the NPRM to follow the 

general approach recommended by LCH 

and CME of establishing the clearing 

requirement for classes of interest rate 

swaps, rather than for individual swap 

products. 

v. Interest Rate Swap Specifications 

In the NPRM, after consideration of 

the appropriateness of classifying 

interest rate swaps, the Commission 

analyzed the IRS submissions and 

proposed to set out the parameters of 

the four classes of interest rate swaps 

submitted by using the following 

affirmative specifications for each class: 

(i) Currency in which the notional and 

payment amounts are specified; (ii) rates 

referenced for each leg of the swap; and 

(iii) stated termination date of the swap. 

The Commission further proposed three 

‘‘negative’’ or ‘‘limiting’’ specifications 

for each class: (i) No optionality (as 

specified by the DCOs); (ii) no dual 

currencies; and (iii) no conditional 

notional amounts.108

The Commission proposed the three 

affirmative specifications because they 

are fundamental specifications used in 

the swap market to determine the 

economic result of a swap transaction. 

Counterparties enter into swaps to 

achieve particular economic results. For 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74303 

109For example, parties seeking to hedge interest 

rate risk in connection with bonds or to invest 

funds using swaps are more likely to enter into 

swaps that designate the same currency in which 

the bonds are payable or that the funds to be 

invested are held. 

110Although hedging an economic risk expected 

to remain outstanding for, say, ten years with a 

matching ten year swap may generally be the most 

efficient and precise approach, the Commission 

recognizes that parties may achieve a similar result 

by using swaps with different stated termination 

dates. However, such substitution generally 

provides a less precise hedge. 

111Each DCO identifies the standard term or 

range of terms it will accept for each specification. 

Accordingly, swap counterparties can review the 

DCO’s product specifications to determine whether 

a swap will satisfy the DCO’s requirements for these 

specifications. Additionally, CME has developed, 

and LCH has committed to developing by the time 

the clearing requirement must be complied with in 

accordance with the Commission’s implementation 

schedule, product screening mechanisms by which 

parties can determine whether the DCO will clear 

a particular swap. As discussed in greater detail 

throughout this release, if counterparties want to 

enter into a swap that is in a class subject to 

required clearing and no DCO will clear the swap 

because it has other specifications that no DCO will 

accept, then the parties can still enter into that 

transaction on an uncleared basis. 

example, counterparties may enter into 

interest rate swaps to hedge an 

economic risk, to facilitate a purchase, 

or to take a view on the future direction 

of an interest rate. The counterparties 

enter into a swap that they believe will 

best achieve their desired economic 

result at a reasonable cost. 

As noted in the NPRM, the IRS 

submissions identified four different 

classes of swap contracts that are being 

cleared at this time: fixed-to-floating 

swaps, basis swaps, OIS, and FRAs. 

These classes of interest rate swaps 

reflect industry categorization and allow 

counterparties to achieve a particular 

economic result. For example, a fixedto-floating swap may be used by a 

counterparty to hedge interest rate risk 

related to bonds it has issued or which 

it owns. 

All three DCO submitters identified 

currency as a specification for 

distinguishing swaps that are subject to 

clearing. A swap that requires 

calculation or payment in a currency 

different than the currency of the related 

underlying purposes of the swap would 

introduce currency risk.109 Thus, the 

currency designated for the swap is a 

basic factor in pricing the swap and 

achieving the economic results of the 

swap desired by each party. 

Furthermore, the swaps listed by all 

three DCOs in their IRS submissions all 

identified the interest rates used for 

each leg of the swap as a basic term that 

defines the swap. The rates are basic 

determinants of the economic value of 

each stream of payments of an interest 

rate swap. 

Finally, the stated termination date, or 

maturity, of a swap is a basic 

specification for establishing the value 

of a swap transaction because interest 

rate swaps are based on an exchange of 

payments over a specified period of 

time ending on the stated termination 

date. The value of a swap at any one 

point in time depends in part on the 

value of each payment stream over the 

remaining life of the swap. For example, 

if a party wants to hedge variable 

interest rate risk for bonds it has issued 

that mature in ten years, it will 

generally enter into a swap with a stated 

termination date that matches the final 

maturity date of the bonds being 

hedged.110 To terminate the swap prior 

to such date would result in only a 

partial hedge and to execute a swap 

with a stated termination date that is 

later than the final bond maturity date 

would simply create exposed rate risk 

during the extended period beyond the 

final maturity date of the bonds. 

As noted above, the Commission also 

considered in the NPRM whether there 

are product specifications that the 

Commission should explicitly exclude 

from the initial clearing requirement 

determination. In this regard, the 

Commission considered swaps with 

optionality, multiple currency swaps, 

and swaps with conditional notional 

amounts. The Commission proposed 

that these three specifications should be 

included as so-called ‘‘negative’’ or 

‘‘limiting’’ specifications. 

By using the three affirmative 

specifications and three limiting 

specifications to further identify the 

swaps within each class that are subject 

to the clearing requirement, 

counterparties contemplating entering 

into a swap can determine quickly as a 

threshold matter whether the particular 

swap may be subject to a clearing 

requirement. If the swap is in a 

specified class and has the six 

specifications, the parties will know 

that they need to verify whether a DCO 

will clear that particular swap. This will 

reduce the burden on swap 

counterparties related to determining 

whether a particular swap may be 

subject to the clearing requirement. 

The Commission also considered in 

the NPRM whether to define classes of 

swaps on the basis of other product 

specifications. Other potential 

specifications are numerous because of 

the nearly limitless alternative interest 

rate swaps that are theoretically 

possible. In the NPRM, the Commission 

summarized its consideration by 

breaking down alternative specifications 

into two general categories: 

Specifications that are commonly used 

to address mechanical issues for most 

swaps, and specifications that are less 

common and address idiosyncratic 

issues related to the particular needs of 

a counterparty. The Commission noted 

that certain specifications are 

specifically identified for most swap 

transactions, but asserted that many 

such specifications are not, generally 

speaking, fundamental to determining 

the economic result the parties are 

trying to achieve. For example, the day 

count fraction selected affects 

calculation periods and therefore the 

amounts payable for each payment 

period. The parties, and the DCOs, can 

make mechanical adjustments to period 

pricing at the time a swap is cleared 

based on the day count fraction 

alternative selected by the parties and 

the day count fraction does not drive the 

overall economic result the parties are 

trying to achieve or substantially 

differentiate the pricing and risk 

management of the swap relative to 

other swaps in the same class and 

having the same basic class defining 

specifications. 

Furthermore, as noted in the NPRM, 

DCOs can provide clearing for the 

standard alternatives of each of these 

specifications without affecting risk 

management. Using the same day count 

fraction example, LCH will accept U.S. 

dollar-LIBOR trades for clearing with 

nine alternative day count fractions 

based on the common day count 

fractions used in the market.111 While 

this specification, and other 

specifications of this kind, may affect 

the amounts owed on a swap, they can 

be accounted for mechanically in the 

payment amount calculations and do 

not change the basic substantive 

economic result the parties want to 

achieve. 

Regarding the latter, idiosyncratic 

specifications, examples include special 

representations added to address 

particular legal issues, unique 

termination events, special fees, and 

conditions tied to events specific to the 

parties. None of the DCOs clear interest 

rate swaps with terms in the second 

group. Accordingly, such specifications 

are not included in the classes of swaps 

subject to the clearing requirement 

proposed by this rule, and the 

Commission considered only the first 

group of more common specifications 

that are identified by the submitting 

DCOs in their product specifications. 

In short, the Commission recognizes 

that these other specifications may have 

an effect on the economic result to be 


sroberts on DSK5SPTVN1PROD with 
74304 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

112LCH recommended in its submission that 

floating rate tenor (also known as frequency) also 

be a class level specification and the Commission 

acknowledges that floating rate tenor can, in some 

cases, be a fundamental specification for achieving 

the economic benefits of an interest rate swap. 

However, it is the Commission’s view that floating 

rate tenor is more akin to the other non-class 

specifications in that it is not fundamental to all 

economic results that may be considered by parties 

when contemplating a swap and it is a specification 

for which the DCOs can fairly easily offer all of the 

standard tenors that parties may consider. 

113AllianceBernstein, R.J. O’Brien, Citadel, Eris 

Exchange, CME, FIA, D.E. Shaw, Arbor Research, 

LCH, Knight Capital, Jefferies, Coherence Capital, 

CRT Capital, Javelin Capital, SDMA, Chris Barnard, 

and Svenokur. 

achieved with the swap.112 However, 

counterparties and DCOs may account 

for the effects of such specifications 

with adjustments to other specifications 

or in the price of the swap. Furthermore, 

DCOs account for various alternatives or 

range of alternatives for these terms 

without impairing risk management. 

Finally, as described above in more 

detail, including these specifications in 

the description of the swaps subject to 

a clearing requirement could increase 

the burden on counterparties when 

checking whether a swap may be subject 

to required clearing. Accordingly, the 

Commission has determined not to 

include other, non-class defining 

specifications in the swap class 

definition. 

vi. General Comments Received 

Regarding the Specifications 

Determination 

Numerous commenters expressed 

support for including the Commission’s 

four interest rate swap classes and six 

class specifications in the clearing 

requirement and were of the view that 

the classes satisfy the five statutory 

factors the Commission is required to 

consider for the clearing requirement 

determination.113 CME expressed 

support for the class-based approach in 

the rulemaking rather than swap-byswap and stated that the Commission 

‘‘struck an appropriate balance for the 

initial slate of classes subject to the 

requirement.’’ LCH commented that the 

six swap specifications selected are 

consistent with its recommendation in 

its IRS submission and reaffirmed the 

reasons cited in the NPRM for using 

these specifications. 

Citadel agreed with the Commission’s 

class-based approach rather than a 

product-by-product based approach. 

Citadel stated that the class designation 

approach ‘‘reflects the risk management 

approach utilized across the industry, 

and most importantly by DCOs’’ to 

determine margin levels and other 

safeguards and is therefore the starting 

point for the approved classes. Citadel 

further noted that different tenors or 

series of the same instruments, while 

displaying different characteristics, can 

be priced both based on market activity 

and by reference to more liquid 

contracts of the same instruments and 

are risk managed with the same risk 

management frameworks. Finally, 

Citadel expressed concern that not 

including products that otherwise share 

essential characteristics as swaps that 

are otherwise required to be cleared and 

that can be priced with reference to 

cleared swaps could risk the 

development of separate markets that 

avoid the clearing requirement. 

AFR noted that the interest rate swap 

classes selected properly reflect the risk 

profile of the interest rate swap market 

and will avoid uncertainty and 

complexity for the Commission and 

market participants. AFR also noted that 

details of product specifications such as 

slightly different tenors, are largely 

irrelevant, especially in the interest rate 

market and stated that any suggestion of 

a product-by-product approach should 

be interpreted as a tactic to delay 

implementation. Furthermore, AFR 

encouraged the Commission to 

designate swap classes to include low 

volume swaps that can be risk managed 

in ways that high-volume swaps in the 

class are risk managed. AFR’s concern is 

that if the low-volume swaps are not 

included, they could be used to avoid 

the clearing requirement by replicating 

the swaps that are required to be cleared 

with the low-volume swaps. Citadel’s 

and AFR’s comments are consistent 

with the Commission’s rationale for 

establishing the four classes of swaps 

and the six specifications for each class 

on which the Commission based its 

consideration of the five factors set forth 

in section 2(h)(2)(D)(ii) of the CEA. As 

noted in the NPRM, the Commission is 

directed under the CEA to make its 

determination for ‘‘each swap, or any 

group, category, type, or class of 

swaps.’’ The Commission first needed to 

establish the classes and class-defining 

specifications to which would then 

consider using the five statutory factors. 

ISDA commented that the 

Commission should not use what ISDA 

characterized as a newly-articulated 

standard for choosing the swap classdefining specifications based on 

whether they are ‘‘fundamental to 

determining the economic result that 

parties are trying to achieve.’’ ISDA 

expressed concern with what it 

characterized as a standard that it is not 

grounded in the five statutory factors of 

section 2(h)(2)(D)(ii) of the CEA and will 

fail to discriminate between swaps that 

may differ in terms of the five factors. 

Furthermore, in ISDA’s view, the 

fundamental economic result depends 

on facts and circumstances of each 

transaction and the parties. 

The phrase ‘‘fundamental to 

determining the economic result that 

parties are trying to achieve’’ used by 

the Commission in the NPRM does not 

establish a new standard or replace the 

statutory five factor determination 

required by the CEA. Rather, the 

Commission used this phrase to 

describe one of several reasons for 

establishing which product 

specifications to use in defining each 

class to which the statutory five factor 

analysis was then applied. The phrase 

was used in the context of identifying 

the primary product specifications the 

submitting DCOs and the market use to 

value or price swaps within a class. As 

described at length in Section II.D of the 

NPRM, in establishing the swap classes 

to be considered, the Commission 

looked at how DCOs grouped the 

cleared interest rate swaps by certain 

defining types and specifications, how 

markets trade and view the products as 

classes, and how swaps that share 

certain common specifications can be 

priced and risk managed together as a 

class. The Commission’s analysis for 

establishing the classes to be considered 

was not based on any new standard. 

Rather, the aforementioned phrase 

summarizes one element of the 

Commission’s analysis of how to define 

the classes to be considered under the 

five factors established in the CEA. 

Furthermore, the five factor statutory 

analysis was separately undertaken for 

each class. For the reasons stated in 

defining the classes and class 

specifications, the Commission believes 

that the swaps within each class are 

sufficiently similar to apply the 

statutory analysis to each class. As 

noted above, many commenters agreed 

with this conclusion. 

Finally, regarding ISDA’s view that 

the fundamental economic result 

depends on facts and circumstances of 

each transaction and the parties, the 

Commission recognizes that individual 

swap counterparties may have highly 

specific economic results they are trying 

to achieve with a swap and accordingly 

set the terms of the swap to achieve 

those specific results. However, the 

Commission’s use of the phrase in the 

NPRM can be more clearly understood 

in context. The Commission was 

addressing whether certain 

specifications, other than the six 

specifications used to define each class, 

should be considered to be classdefining specifications. The 

Commission noted that certain 

specifications ‘‘affect the value of the 

swap in a mechanical way, they are not, 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74305 

114See Section III.B for a discussion of the 

reasonable efforts standard in this context. 

115See, e.g., http://www.swapclear.com/why/ 

(stating that since 1999, LCH has cleared more than 

2.2 million OTC interest rate swaps, $329 trillion 

notional, and compressed more than $145 trillion 

(as of September 2012)). 

116See Sections II and III for further discussion 

of this issue. 

generally speaking, fundamental to 

determining the economic result.’’ The 

Commission provided an example of 

how other specifications may affect the 

amounts payable on a swap on each 

payment date, but when valuing a swap 

for pricing and risk management 

purposes, together with other swaps 

within a class, these other specifications 

can be accounted for by making price 

adjustments off a standard price curve 

and therefore do not change the basic 

pricing economics of the swap to an 

extent that would necessitate classifying 

the swap separately from other swaps 

defined by the six specifications 

identified by the Commission. 

ISDA further commented that, 

although an overly intricate set of 

product specifications would impose 

burdens on the market, broad class 

designations impose greater burdens by 

creating the need for filtering products 

that a DCO will accept for clearing from 

the designated class. In ISDA’s view, the 

Commission’s statement in the NPRM 

that DCOs and vendors are ‘‘likely’’ to 

develop screening tools acknowledges 

the issue, but does not provide a 

solution. ISDA recommended that 

limiting clearing to swaps with prior 

clearing history supplemented by an 

advance DCO notice process would 

strike a reasonable balance. 

In response, the Commission notes 

that the identification of the four 

interest rate swap classes and the 

parameters for the six specifications 

within each class provides a fairly 

detailed and easy to use initial 

screening mechanism for market 

participants to determine whether a 

particular swap needs to be submitted 

for clearing. If a market participant 

determines that a swap falls into a class 

under § 50.4, then the party will need to 

take reasonable efforts to determine 

whether any eligible DCO will accept 

the swap for clearing.114 The 

Commission noted in the NPRM that the 

DCOs or other vendors would likely 

develop screening tools for this purpose. 

The Commission further notes that each 

DCO and its members and the FCMs 

who clear through the DCO, in effect, 

already have the capability through 

their own onboarding processes and 

transaction affirmation platforms to 

screen swap transactions nearly 

instantaneously to determine whether 

the transactions will be accepted by the 

DCO. While those systems alone should 

be able to serve as a screening 

mechanism sufficient to allow for 

compliance with the clearing 

requirement, the Commission 

encourages the DCOs to create a tool to 

provide all market participants with the 

ability to independently screen 

potential swap transactions quickly and 

easily. CME commented that it already 

has a tool to screen particular swaps for 

eligibility. LCH stated in its comments 

that while the current information on its 

Web site is designed for dealer use, LCH 

is committed to revising the information 

to be easily understandable by all 

counterparties. 

Furthermore, the Commission does 

not agree that ISDA’s proposal to limit 

the determination to swaps with prior 

clearing history would ease the 

screening process. DCOs, particularly 

LCH, already have prior clearing history 

for swaps with tens of thousands of 

different product specification 

combinations.115 Accordingly, even if 

the Commission adopted such an 

approach, the result would have the 

problems that a product-by-product 

approach would have, as acknowledged 

by ISDA. Also, the Commission agrees 

that an appropriate DCO notice 

framework will facilitate product 

screening and addresses this comment 

in Section III below. 

In addition, ISDA expressed concern 

that the discussion of specifications that 

are not included in the six class-specific 

specifications identified by the 

Commission could be read as a directive 

to abandon such other specifications to 

the extent they are not included in the 

swaps DCOs will accept for clearing. 

ISDA requested confirmation that 

footnote 97 of the NPRM (revised as 

footnote 111 in this final release) 

establishes that if a DCO does not accept 

a swap because the swap contains terms 

that the DCO does not clear, then 

entering into the swap as an uncleared 

transaction is permissible. ISDA further 

requested that the Commission state that 

entering into a swap that is not accepted 

for clearing does not raise a 

presumption of evasion. 

Similarly, Freddie Mac also expressed 

concern that the discussion of 

fundamental specifications and 

‘‘mechanical specifications’’ may signal 

the Commission’s judgment that parties 

are required to clear swaps that have 

sufficiently close substitutes. Freddie 

Mac requested that the Commission 

clarify the treatment of swaps that no 

DCO will clear and that parties may 

enter into uncleared swaps within a 

designated class if a DCO will not 

accept the swap provided that the 

variation in specifications is for a 

legitimate business purpose. Freddie 

Mac noted that section 2(h)(1)(A) of the 

CEA refers to an obligation to ‘‘submit’’ 

the swap for clearing rather than 

requiring that a swap must be 

successfully cleared. Freddie Mac 

expressed concern that failure to clarify 

this issue would lead to uncertainty as 

to the legality of uncleared swaps and 

that executing swap dealers or other 

market participants could use that 

uncertainty to insist on contractual 

rights to have the option to terminate a 

swap that fails to clear. 

The Commission confirms that the 

discussion of the class-defining swap 

specifications and other specifications 

served only to explain the Commission’s 

differentiation between the class 

specifications and other specifications 

market participants use. The 

Commission is not requiring parties to 

take affirmative steps to substitute a 

clearable swap for an unclearable swap 

within a designated class.116

Regarding issues of what constitutes 

evasion of the clearing requirement 

when using a close substitute swap that 

is not cleared by a DCO and ISDA’s 

request regarding a presumption 

regarding evasion of the clearing 

requirement, this issue, along with other 

evasion and abuse issues, are addressed 

in Section III.G of this release. 

With respect to the ‘‘negative 

specifications,’’ AFR commented that 

some of these specifications, such as 

dual currency and optionality, are 

composites of two derivatives including 

a basic interest rate swap that may be 

subject to the clearing requirement and 

that market participants should be 

required to clear components of such 

swaps that can be cleared to prevent 

evasion. 

This initial determination is based on 

the IRS submissions and because none 

of them include swaps that have the 

negative specifications, the Commission 

believes it is beneficial for swap market 

participants to expressly exclude those 

specifications so that parties that 

execute swaps with those specifications 

will know definitively that they are not 

subject to the clearing requirement. 

While the Commission is sensitive to 

concerns that the clearing requirement 

could be evaded by adding negative 

specifications to a swap to make it nonclearable, no data or other information 

is available at this time to indicate that 

compound swaps are being used for 

evasion. If the Commission observes 

such behavior or otherwise becomes 

aware that is occurring, it will consider 


sroberts on DSK5SPTVN1PROD with 
74306 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

117 In a similar vein, ISDA commented that 

exclusions from the clearing requirements should 

be available if a party enters into one swap to hedge 

another swap and the hedge would no longer be 

functional if one trade of the pair would be cleared 

and the other not. Section 2(h)(7) of the CEA is clear 

with respect to this issue, and provides that only 

certain non-financial entities may elect not to clear 

certain swaps that hedge or mitigate commercial 

risk of the entity. The CEA does not extend this 

election to financial entities. 

taking appropriate action under its 

authority provided in the CEA. 

The FSR requested clarification 

regarding the conditional notional 

amount specification. The FSR 

interpreted footnote 93 of the NPRM 

(footnote 108 of this adopting release) to 

mean that interest rate swaps entered 

into in connection with loans to hedge 

interest rate risk (the notional amounts 

of which are tied at all times to the 

outstanding principal amount of the 

loan) would not be subject to the 

clearing requirement if the principal 

amount of the loan would foreseeably 

vary over its term in an unscheduled or 

unpredictable manner.117 The FSR used 

the examples of a swap used to hedge 

a construction loan, where the loan 

would be drawn over time based on the 

needs of the construction project, and 

without a fixed draw schedule, or a 

swap entered into in connection with a 

revolving credit agreement or a credit 

agreement that permits voluntary 

prepayments. The FSR noted that such 

adjustment may be implemented 

through a partial termination event, 

permitting or requiring the lender/swap 

provider to reduce the outstanding 

notional amount of the swap so as to 

protect both the customer and the 

lender/swap provider from overhedging. 

In response to the FSR, the 

Commission clarifies that a ‘‘conditional 

notional amount’’ is a specification 

included in the swap at the time of 

execution that provides that the 

notional amount will change during the 

stated term of the swap in an 

unscheduled manner upon the 

occurrence of defined events or 

conditions. There are two elements to 

such a specification: First, the change in 

notional amount must be triggered by a 

defined event or condition, and second, 

the change must not be clearly 

predictable at the time the swap is 

executed. Accordingly, the two 

examples provided by the FSR might be 

swaps that have a conditional notional 

amount if the swaps include 

specifications or terms that provide for 

a change in notional amount triggered 

by an event tied to the hedged loan or 

credit line and the specific timing of 

that event is not sufficiently foreseeable 

or predictable when the swap is entered 

into such that the swap notional amount 

change could have been scheduled in 

advance. For example, a swap in which 

the parties agree that the notional 

amount will automatically be reduced 

upon a draw on a related construction 

loan identified in the swap or a 

prepayment of a loan identified in the 

swap would qualify as a swap with a 

conditional notional amount. 

However, the Commission notes that 

such a specification would not qualify 

if the reduction in the notional amount 

is voluntary. In this regard, a voluntary 

partial or full termination right is not an 

indication of a conditional notional 

amount. A party to a cleared swap can 

affect the same result as exercising a 

voluntary termination right at any time 

by entering into an equal and offsetting 

cleared swap. Clearing eliminates 

bilateral counterparty credit risk and 

therefore entering into an offsetting 

swap that is cleared with any party has 

the same effect as terminating the 

original swap. Accordingly, including a 

voluntary termination right in a swap 

that otherwise would be clearable and is 

subject to the clearing requirement 

serves no economic purpose that would 

distinguish the swap from other swaps 

in the class that are required to be 

cleared. 

As noted in the beginning of this 

Section II.E, the preceding analysis 

identified the classes of interest rate 

swaps and specifications within the 

classes to be considered by the 

Commission in the clearing requirement 

determination. In the following section 

in the NPRM, as summarized in this 

final release, the Commission took into 

account the statutory provisions under 

section 2(h)(2)(D) of the CEA with 

respect to the four classes of interest rate 

swaps and, within each class, the six 

identified product specifications. 

F. Proposed Determination Analysis for 

Interest Rate Swaps 

i. Consistency With Core Principles for 

Derivatives Clearing Organizations 

As noted above, section 2(h)(2)(D)(i) 

of the CEA requires the Commission to 

review whether a swap submission is 

consistent with the core principles for 

DCOs in making a clearing 

determination. As discussed in the 

NPRM, LCH and CME already clear all 

swaps identified in their respective IRS 

submissions and therefore each is 

subject to the Commission’s review and 

surveillance procedures summarized in 

the NPRM. Accordingly, LCH and CME 

already are required to comply with the 

core principles set forth in section 

5b(c)(2) of the CEA with respect to the 

swaps being considered by the 

Commission for the clearing 

requirement. The Commission further 

described in the NPRM its activities as 

a regulator to monitor and effect 

ongoing compliance with the core 

principles applicable to DCOs including 

periodic examinations and daily risk 

surveillance. Further, the Commission 

stated that the Commission does not 

believe that subjecting any of the 

interest rate swaps identified in the IRS 

submissions to a clearing requirement 

would alter compliance by the 

respective DCOs with the core 

principles. 

Based upon the Commission’s 

ongoing reviews of DCOs’ risk 

management frameworks and clearing 

rules, and its annual examinations of 

the DCOs, the Commission believes that 

the submissions of LCH and CME are 

consistent with section 5b(c)(2) if the 

CEA and the related Commission 

regulations. In analyzing the IRS 

submissions discussed herein, the 

Commission does not believe that a 

clearing requirement with regard to the 

specified interest rate swap classes 

would be inconsistent with LCH or 

CME’s continued ability to maintain 

such compliance with the DCO core 

principles set forth in part 39 of the 

Commission’s regulations. 

ii. Consideration of the Five Statutory 

Factors for Clearing Requirement 

Determinations 

Section 2(h)(2)(D)(ii) of the CEA 

identifies five factors the Commission 

shall consider in making a clearing 

requirement determination. The process 

for submission and review of swaps for 

a clearing requirement determination is 

further detailed in § 39.5 of the 

Commission’s regulations. This section 

summarizes the Commission’s 

consideration the four classes of swaps 

identified in the preceding section 

under the statutory five factors in the 

context of the process established by 

regulation. 

a. Outstanding Notional Exposures, 

Trading Liquidity, and Adequate Pricing 

Data 

Section 2(h)(2)(D)(ii)(I) of the CEA 

requires the Commission to take into 

account the existence of outstanding 

notional exposures, trading liquidity, 

and adequate pricing data. In the NPRM, 

the Commission considered available 

market data and LCH cleared swap 

information. Unlike CDS for which 

substantially all of the trading data has 

been collected in one place, there is no 

single data source for notional 

exposures and trading liquidity for the 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74307 

118See Bank of England, ‘‘Thoughts on 

Determining Central Clearing Eligibility of OTC 

Derivatives,’’ Financial Stability Paper No. 14, 

March 2012, at 11, available at http:// 

www.bankofengland.co.uk/publications/ 

Documents/fsr/fs_paper14.pdf. 

119All DCOs were required to begin providing 

daily position data to the Commission as of 

November 8, 2012. CME’s available data was 

considered too limited to provide any indication of 

the complete interest rate swap market. Because 

LCH clears a large portion of the swap products it 

offers clearing for (based on available information, 

LCH claims to have cleared approximately 50 to 90 

percent of the dealer open interest in the different 

interest rate swap products that it clears), its data 

provides some indication of the possible notional 

exposures and liquidity in the products submitted 

by LCH that the Commission considered. Given the 

limitations on other available data, the Commission 

believes it is useful to consider the LCH data along 

with the market-wide BIS data, ODSG data, and 

TriOptima data. 

120The ODSG data has not been updated since 

2010. The BIS data that was available when the 

NPRM was published was from the second half of 

2011 and the TriOptima and LCH data used was 

from the first quarter of 2012. The BIS has not 

published updated data as of this writing. 

TriOptima stopped publishing the interest rate 

swap data in April, 2012. DTCC began collecting 

similar data at that time and is now provisionally 

registered by the Commission as a SDR. The 

Commission has reviewed data from DTCC and 

LCH and confirmed that the recent data available 

is consistent with the data used in the NPRM to 

develop the interest rate swap clearing requirement 

rule, taking into consideration normal changes in 

market activity. 

121Percentages are calculated based on total 

notional amount cleared by LCH divided by total 

notional outstanding as reported by TriOptima. The 

TriOptima data is used because it is the most 

current data set that provides data broken out 

according to the classes being cleared. 

122LCH started clearing FRAs in December 2011 

and cleared volumes have increased significantly 

each month since the start date. As of March 31, 

2012, the date for which the data was presented in 

the NPRM, LCH had a total notional amount 

outstanding of cleared FRAs of $27.7 trillion. As of 

October 15, 2012, that amount had increased to 

$58.6 trillion. 

entire interest rate swap market.118

However, the Commission considered 

several sources of data on the interest 

rate swap market that collectively 

provides the information the 

Commission needs to make a clearing 

requirement determination. As 

described in the NPRM, the data sources 

that the Commission considered 

include: general estimates published by 

the Bank for International Settlements 

(BIS data); market data published 

weekly by TriOptima (TriOptima data) 

covering swap trade information 

submitted voluntarily by 14 large 

derivatives dealers (G14 Dealers); tradeby-trade data provided voluntarily by 

the G14 Dealers to the OTC Derivatives 

Supervisors Group for a three month 

period between June and August 2010 

(ODSG data); and trade-by-trade data for 

swaps cleared by LCH for the first 

calendar quarter of 2012 (LCH data).119

The NPRM explained in detail that 

each data source used has a number of 

limitations that are important to 

understand when considering the data. 

The Commission incorporates the 

discussion of those limitations found in 

the NPRM into this final release. 

For this determination, the 

Commission only considered the swaps 

identified in the IRS submissions. 

Accordingly, where possible, the 

Commission presented and discussed 

only the data for swaps identified in the 

submissions. The analysis of interest 

rate swap data in the NPRM was 

presented based on the four swap 

classes and the class specifications. This 

information was used by the 

Commission to determine whether there 

exists significant outstanding notional 

amounts, trading liquidity, and pricing 

data to include each class and 

specification identified in the IRS 

submissions. 

For purposes of this final release, the 

Commission is incorporating the data 

tables in the NPRM by reference and the 

considerations and conclusions drawn 

by the Commission following review of 

the data is summarized below.120

Readers are encouraged to refer to the 

NPRM to review the data presented. 

None of the comments received in 

response to the NPRM raised issues 

with the data analyzed in the NPRM. 

1. Interest Rate Swap Class 

In the NPRM, the Commission 

considered data relevant to the different 

interest rate swap classes included in 

the IRS submissions. The BIS data 

provided certain big picture 

information. It indicated that interest 

rate swaps in total constituted nearly 

80% of the derivatives market and 

interest rate swap notional amounts 

generally increased for all three kinds of 

swaps between 2008 and 2011 with total 

interest rate swap notional amounts 

reported growing by about 15% during 

that period. Additionally, all three 

classes of swaps identified by the BIS 

data have substantial notional amounts 

outstanding. As of December 2011, 

FRAs had about $50.5 trillion 

outstanding, optional swaps had about 

$51 trillion outstanding, and other 

interest rate swaps had about $403 

trillion outstanding. Given this 

information, the Commission concluded 

that none of the kinds of swaps 

identified by the BIS should be 

eliminated from consideration by the 

Commission for a clearing requirement 

based on the BIS data alone. However, 

the BIS data did not provide enough 

detail to reach further conclusions 

regarding the swaps identified in the 

IRS submissions. 

The TriOptima data and the ODSG 

data sets were used to identify notional 

amounts and trade counts for all four 

classes of swaps identified in the IRS 

submissions. Trading liquidity as an 

indication of how effectively DCOs can 

risk manage a portfolio of swaps can be 

evidenced in several ways. The data 

available for this purpose included total 

notional amount outstanding, total 

number of swaps outstanding, and the 

average number of transactions over a 

given period of time. 

The TriOptima data showed that all 

four classes have significant outstanding 

notional amounts with basis swaps 

being the lowest at about $27.6 trillion 

and the highest being fixed-to-floating 

swaps at $288.8 trillion. Total trade 

counts for each type were also 

significant with the lowest being 

109,704 for OIS and the highest being 

fixed-to-floating swaps at 3,239,092. 

The average number of swap trades 

per week for each class of swaps was 

evidenced by the ODSG data. According 

to the ODSG data set, basis swaps were 

traded at the lowest frequency 

compared to the other three classes at 

240 times on average each week during 

the ODSG data period. Because the 

ODSG data is from the summer of 2010 

and gross notional amounts and trading 

activity in interest rate swaps have both 

increased generally, the Commission 

believes that trading activity has likely 

increased for all classes since the ODSG 

data was collected. 

The LCH data generally confirmed the 

assessment of market-wide data. There 

is substantial outstanding notional 

volumes and trade liquidity for each of 

the four classes already being cleared at 

LCH. 

LCH cleared the following percentage 

of each class of swap as reported by 

TriOptima: 121

• 75% of the Fixed-to-Floating swaps, 

• 41% of FRAs,122

• 84% of OIS, and 

• 41% of Basis Swaps. 

Accordingly, a substantial portion of 

each class is already being cleared 

voluntarily. 

Swap Class Conclusion 

The Commission concluded in the 

NPRM that the four classes of swaps 

currently being cleared have significant 

outstanding notional amounts and 

trading liquidity. The Commission 

further noted that a substantial 

percentage of each of the four classes 

was already being cleared. 

A number of commenters commented 

that the four interest rate swap classes 

are cleared in material volumes at this 


sroberts on DSK5SPTVN1PROD with 
74308 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

123See letters from FIA PTG, Arbor Research and 

Trading, LLC, R.J. O’Brien, Svenokur, LLC, Chris 

Barnard, CRT Capital Group (Robert Gorham), LLC, 

DRW Trading Group, Javelin, SDMA, Knight Capital 

Americas LLC, Bart Sokol (CRT Capital Group), 

Jefferies & Company, Inc., MarketAxess, Eris 

Exchange, Coherence Capital Partners LLC, Citadel, 

AFR, D.E. Shaw Group, AllianceBernstein, LCH, 

CME, and ICE. 124TriOptima data, as of March 16, 2012. 

125The TriOptima data is used for this calculation 

because it is the most current data set that provides 

data broken out according to the classes currently 

being cleared. 

time and expressed support for 

including the four interest rate swap 

classes in the clearing requirement 

designation based on the data 

available.123 Citadel agreed with the 

Commission’s conclusion that the data 

presented in the NPRM demonstrate 

substantial outstanding notional 

exposures and a high level of trading 

liquidity in the relevant classes of 

swaps. Citadel commented that 

liquidity, for purposes of the clearing 

requirement, should be determined on 

grounds other than trading activity 

alone. Specifically, market depth can be 

evidenced by the number of dealers 

quoting two-way markets in a product, 

and the notional sizes of the quoted bids 

and offers, is also a liquidity indicator. 

Citadel noted that multiple dealers 

regularly quote two-way markets in the 

swaps covered by the proposed rule in 

meaningful sizes through a variety of 

mediums, including in periods of 

market stress, and therefore it believes 

there is ample trading liquidity to 

support a clearing requirement for the 

classes designated. For the reasons 

described above, the Commission 

reaffirms the aforementioned 

conclusions provided in the NRPM 

regarding the classes of interest rate 

swaps proposed in the NPRM for 

required clearing. 

2. Currency 

As discussed above in Section II.E, 

the currency in which the notional and 

payment amounts are specified is a 

primary product specification and all 

four data sources provide interest rate 

swap data by currency. 

The BIS data addressed seven of the 

seventeen currencies identified in the 

submissions individually. All seven 

currencies had substantial outstanding 

notional amounts as of December 2011, 

ranging from nearly $5.4 trillion for the 

Swiss franc to about $185 trillion in 

euro. For all currencies, the outstanding 

notional amounts were higher at the end 

of the most recent three-year period as 

compared to the beginning of the 

period. 

The Commission believes that the BIS 

data supports the conclusion that there 

exists significant outstanding notional 

amounts in each currency identified in 

the BIS data and that there is no 

indication that notional amounts in 

those currencies are decreasing at a rate 

that would warrant elimination of those 

currencies from consideration for a 

clearing requirement. 

The TriOptima data showed that total 

outstanding notional amounts as of 

March 16, 2012, ranged from $400 

billion for Czech koruna to over $176 

trillion notional amount for euro.124

While there may be sufficient 

outstanding notional amounts in all 

seventeen currencies, the Commission 

noted in the NPRM that there is a clear 

demarcation between the four 

currencies with the highest outstanding 

notional amounts: euro, U.S. dollar, 

British pound, and yen, and all other 

currencies. The four top currencies 

ranged from about 9% to 36% of the 

total notional amount of all interest rate 

swaps outstanding and 11% to 33% of 

the total number of swap trades. The 

remaining currencies ranged from about 

2% down to 0.1% of the total notional 

amount traded and 3% down to 0.2% of 

total number of trades. In fact, the four 

major currencies accounted for about 

93% of the total notional amount 

outstanding in the TriOptima data set. 

The ODSG data provided an 

indication of trading liquidity in terms 

of average weekly notional amount 

traded and number of new trades 

completed during the period covered by 

the data set. Of the four major 

currencies, Japanese yen had the lowest 

weekly average notional at $323 billion 

and the British pound had the lowest 

average number of trades each week at 

1,233. 

The TriOptima data provided an 

overall, more current view of trades 

outstanding, which provides a broader 

picture of the trading potential for each 

currency for purposes of DCO risk 

management. As of March 16, 2012, all 

but one of the seventeen currencies had 

outstanding trade counts in excess of 

14,000 with the exception being the 

Danish krone at 6,849. Again, the four 

highest currencies by trade count: euro, 

U.S. dollar, British pound, and yen, 

accounted for about 85% of the total 

number of trades recorded and 

outstanding at the time the data was 

collected. 

The LCH data showed that the relative 

notional amount and number of swaps 

in each currency cleared is generally 

correlated with the notional amount and 

number of swaps of each currency 

reported by the more general market 

data sets. As a percentage of the total 

notional amount outstanding as 

reported by TriOptima, LCH cleared the 

following percentages: 125

• 66% of euro, 

• 61% of U.S. dollars, 

• 58% of British pounds, 

• 59% of Japanese yen, and 

• 42% of other currencies. 

Of the interest rate swaps identifying 

U.S. dollars, euro, British pounds or yen 

as the applicable currency, significantly 

more than half were already being 

cleared by LCH. While the level of 

clearing of other currencies was, on a 

combined basis reasonably high at 42%, 

the Commission noted the level is 

noticeably lower than the percentage of 

swaps being cleared for the top four 

currencies. 

Currency Specification Conclusion 

The Commission concluded in the 

NPRM that all of the data sets 

demonstrate the existence of significant 

outstanding notional amounts and 

trading liquidity in the seventeen 

currencies identified in the IRS 

submissions. However, the Commission 

noted that swaps using the four 

currencies with the highest outstanding 

notional amounts and trade frequency: 

euro, U.S. dollar, British pound, and 

yen, account for an outsized portion of 

both notional amounts outstanding and 

trading volumes. Furthermore, the 

Commission noted that these four 

currencies are already being cleared 

more than the other currencies 

generally. 

While it is important that this 

determination include a substantial 

portion of the interest rate swaps traded 

to have a substantive, beneficial impact 

on systemic risk, the Commission also 

recognized that the final rule is the 

Commission’s first swap clearing 

requirement determination. As noted in 

the phased implementation rules for the 

clearing requirement, the Commission 

believes that introducing too much 

required clearing too quickly could 

unnecessarily increase the burden of the 

clearing requirement on market 

participants. In recognition of these 

considerations, the Commission 

determined in the NPRM to focus the 

remainder of this initial clearing 

requirement determination analysis on 

swaps referencing the four most heavily 

traded currencies. The Commission 

noted that the decision not to include 

the other thirteen currencies at this time 

does not limit the Commission’s 

authority to reconsider required clearing 

of those currencies in the future. 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74309 

126The ‘‘swap curve’’ is the term generally used 

by market participants for interest rate swap pricing 

and is similar to, and is sometimes established, in 

part, based on, ‘‘yield curves’’ used for pricing 

bonds. 

127Other factors, such as convexity, may also be 

taken into account in determining the appropriate 

hedge ratio between the initial swap and the other 

swaps used to hedge its exposure. 

128For further discussion of the use of portfolio 

risk management by DCOs, see the discussion of 

interest rate swap market conventions and risk 

management in Section II.E above. 

LCH commented that it supports the 

Commission’s decision to initially limit 

the interest rate swap clearing 

determination to swaps with USD, EUR, 

GBP, and JPY as the underlying 

currency, and recommended that the 

Commission propose mandatory 

clearing of swaps in the other 13 

currencies identified in the IRS 

submission after the initial phase of the 

clearing requirement is well-established. 

LCH stated that there is ample volume 

and liquidity in swaps denominated in 

those currencies to support a clearing 

requirement determination and that it 

would be beneficial for the market if the 

Commission would clarify whether and/ 

or when it plans to make clearing of 

swaps denominated in other currencies 

mandatory. 

The Commission reaffirms the 

conclusions in its proposed 

determination to limit the interest rate 

swap clearing determination to interest 

rate swaps with USD, EUR, GBP, and 

JPY as the underlying currency, at this 

time. In response to LCH, the 

Commission reiterates that not 

including interest rate swaps in the 

other 13 currencies in this 

determination in no way forestalls the 

Commission from initiating a new 

clearing requirement determination for 

interest rate swaps in those currencies. 

The decision not to include them at this 

time was based on the fact that this is 

the initial clearing requirement 

determination and the Commission is 

mindful that market participants will be 

undertaking significant activity to 

implement compliance for the first time. 

Accordingly, the Commission has 

effectively delayed consideration of 

these currencies so that the market will 

have time to adapt to mandatory 

clearing of interest rate swaps in the 

four primary currencies, with the 

expectation that thereafter, the 

additional currencies can be added 

fairly easily. The Commission expects to 

initiate a clearing determination for 

interest rate swaps in the 13 currencies 

at some time in 2013. 

3. Floating Rate Index Referenced 

The ODSG data and LCH data 

provided an indication of the rate 

indices used on a transaction-bytransaction basis. Rate indexes are 

currency specific. The ODSG data 

showed minimal activity for the EUR– 

LIBOR index with about $1 billion of 

notional amount and five trades made 

for the three month period in 2010 that 

the ODSG data covers. EUR–LIBOR does 

not appear on the LCH data table 

because, although swaps referencing 

that index can be cleared at LCH, LCH 

had no open interest for that index as of 

March 31, 2012. Given the minimal 

notional amounts and trade liquidity for 

the EUR–LIBOR index, the Commission 

determined in the NPRM not to include 

EUR–LIBOR under the clearing 

requirement. 

The other rate indexes all showed 

significant notional amounts and 

trading liquidity. The rates with the 

least activity, the U.S. dollar Fedfund 

index and British pound–LIBOR index, 

each have over one trillion dollars in 

notional outstanding already cleared at 

LCH and $93 billion and $82 billion in 

notional amount, respectively, were 

cleared per week on average. In terms of 

number of trades cleared at LCH, swaps 

referencing Fedfunds were cleared on 

average 116 times per week and swaps 

referencing British pound–LIBOR were 

cleared 888 times per week on average. 

All of the other indices cleared have 

similar or substantially higher numbers 

of trades and notional amounts cleared. 

In the NPRM, the Commission noted 

that the rate indexes used for over-thecounter interest rate swaps reference not 

only the generic index, but a reference 

definition for the index such as the 

ISDA definition or Reuters definition. 

While the Commission recognized the 

importance of these reference 

definitions for each swap contract, the 

Commission concluded that such 

definitions are not relevant for purposes 

of the clearing requirement 

determination. Furthermore, if the 

parties to a swap identify a specific 

reference definition for an index, they 

need only confirm whether any eligible 

DCO accepts that reference definition. If 

none do, then the swap in question is 

not accepted for clearing and it is not 

subject to the clearing requirement. 

Rate Index Specification Conclusion 

The Commission concluded in the 

NPRM that with the exception of the 

EURO–LIBOR index, swaps using all of 

the rate indexes identified in the IRS 

submissions have significant 

outstanding notional amounts and 

trading liquidity and that significant 

notional amounts of swaps using these 

rate indexes are already cleared by 

DCOs. 

The Commission received no 

comments on the rate index 

specification determination, and 

confirming its conclusions regarding the 

rate index specifications identified in 

the NPRM. 

4. Stated Termination Dates 

Stated termination date (sometimes 

referred to as ‘‘maturities’’) data is often 

presented by aggregating stated 

termination dates for swaps into 

specified term periods or ‘‘buckets.’’ 

The IRS submissions showed that the 

DCOs have been clearing interest rate 

swaps with final termination dates out 

to at least ten years for all seventeen 

currencies noted above and out to 50 

years for some classes and currencies. 

Stated termination dates can fall on 

any day of the year. Given this 

continuum of termination dates, the 

DCOs have indicated that they manage 

the cleared swap portfolio risk using a 

swap curve.126 Swap curves are also 

used by market participants to price 

interest rate swaps. By pricing swaps in 

this way, the economic results of an 

interest rate swap can be fairly closely 

approximated, and therefore hedged, 

using two or more other swaps with 

different maturities principally by 

matching the weighted average duration 

of those swaps with the duration of the 

swap being hedged.127 In the same 

manner, a large portfolio of interest rate 

swaps can be hedged fairly closely with 

a small number of hedging swaps that 

have the same duration as the entire 

portfolio or subsets of related swaps 

within the portfolio. In effect, for DCO 

risk management purposes, the 

termination dates of interest rate swaps 

are assessed based on how they affect 

the overall duration aspects of the 

portfolio of swaps cleared.128

Accordingly, the primary determination 

with respect to the stated termination 

date specification is, for each class and 

currency, at what point, if any, along the 

continuum of swap maturities does the 

notional outstanding and trading 

liquidity become insufficient to 

structure the swap curve effectively for 

DCO risk management purposes. 

The TriOptima data provided 

sufficient detail to discern notional 

amounts and trade counts only for each 

swap class. The ODSG data provided 

sufficient detail to discern notional 

amounts and trade counts only for each 

currency. The LCH data provided 

enough detail for both swap class and 

currency. 

The TriOptima data and LCH data 

summarized in the NPRM showed that 

for fixed-to-floating swaps and basis 

swaps, there was significant outstanding 

notional amounts and number of trades 

for all maturity buckets being cleared. 


sroberts on DSK5SPTVN1PROD with 
74310 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

For FRAs, the TriOptima data showed 

a steep drop off after two years, 

although in the two to five year bucket, 

there is still over $1 trillion dollars of 

outstanding notional amount and 1,646 

trades. The LCH data showed 

substantial outstanding notional 

amounts of FRAs out to two years and 

none thereafter. The IRS submissions 

provide that the DCOs do not clear 

FRAs with payment dates beyond three 

years. Accordingly, the Commission 

need not consider FRAs with maturities 

beyond three years until such time as a 

DCO submits such swaps for clearing. 

For OIS, the TriOptima data showed 

notional amounts for all maturity 

buckets, but the drop off was steep 

beyond two years. After ten years, 

outstanding notional amounts drop 

below $100 billion for each maturity 

bucket. The LCH data showed no 

outstanding notional amounts cleared 

beyond two years. The IRS submissions 

provide that the DCOs do not accept for 

clearing OIS swaps beyond two years. 

Accordingly, the Commission did not 

consider OIS swaps beyond two years in 

this clearing requirement determination. 

The ODSG data and LCH data 

presented in the NPRM showed notional 

amounts traded for maturity buckets by 

currency. There were traded and cleared 

notional amounts for euro, U.S. dollars, 

and British pounds out to the 30 to 50 

year bucket and for yen out to the 

twenty to thirty year bucket. The LCH 

data confirms that substantial notional 

amounts of swaps in euro, U.S. dollars, 

and British pounds are being cleared out 

to 50 years and yen out to 30 years. 

Stated Termination Date Specification 

Conclusion 

For the classes of swaps considered 

by the Commission in the NPRM, the 

TriOptima data showed that there were 

significant outstanding notional 

amounts and number of trades out to 50 

years for fixed-to-floating swaps and 

basis swaps, out to 10 years or more for 

OIS, and out to 2 years for FRAs. With 

respect to currencies, the ODSG data 

and LCH data show significant 

outstanding notional amounts and 

number of trades in swaps out to 50 

years for U.S. dollars, euro, and British 

pounds and out to 30 years for yen. 

Citadel noted that different tenors of 

the same instruments, while displaying 

incrementally different characteristics, 

are priceable both based on market 

activity and also with reference to more 

liquid or on-the-run (or, as the case may 

be, already cleared) transactions of the 

same instruments, and are risk managed 

using the same risk management 

frameworks. Accordingly, swaps within 

a designated class with incrementally 

different tenors do not require a new 

review that would incur excessive 

delay. For the aforementioned reasons, 

the Commission confirming its 

conclusions regarding required clearing 

for interest rate swaps with the stated 

termination date specifications as 

proposed in the NPRM. 

5. Adequate Pricing Data 

In the NPRM, the Commission took 

into account the adequacy of the pricing 

data for the four classes of interest rate 

swaps. LCH stated in its IRS submission 

that there is adequate pricing data for 

risk and default management. It 

explained that its risk and default 

management is based on the following 

factors under normal and stressed 

conditions: 

• Outstanding notional, by maturity 

bucket and currency; 

• Number of participants with live 

open positions, by maturity bucket and 

currency; 

• Notional throughput of the market, 

by maturity bucket and currency; 

• Size tradable that would not adjust 

the market price, by maturity bucket; 

• Number of potential direct clearing 

members clearing the products that are 

part of the mutualized default fund and 

default management process; 

• Interplay between on-the-run and 

off-the-run contracts; and 

• Product messaging components and 

structure. 

LCH carries out a fire drill of its 

default management procedures and 

readiness twice a year. According to 

LCH, the fire drill presents an 

opportunity to further benchmark 

market liquidity and behavior and for 

models and assumptions to be 

recalibrated based on practitioner input. 

LCH also tests liquidity assumptions 

from the outset when developing 

clearing capabilities for a new product 

and thereafter, on a daily basis. This 

testing informs how LCH develops and 

modifies its risk management 

framework to provide adequate risk 

coverage in compliance with the core 

principles applicable to DCOs. Based on 

this framework, LCH contends that there 

is adequate pricing data for the swaps 

offered for clearing. 

CME represented in its IRS 

submission that its interest rate swap 

valuations are fully transparent and rely 

on pricing inputs obtained from wire 

service feeds. Further, CME uses 

conventional pricing methodologies, 

including OIS discounting, to produce 

its zero coupon curve off of which 

cleared swaps of all stated termination 

dates are priced. In addition, customers 

are provided with direct access to daily 

reports showing curve inputs, daily 

discount factors, and valuations for each 

cleared swap position. 

It is also worth noting that those 

interest rate swaps that are the subject 

of this proposal are capable of being 

priced off of deep and liquid debt 

markets. Because of the stability of 

access to pricing data from these 

markets, the pricing data for non-exotic 

interest rate swaps that are currently 

being cleared is generally viewed as 

non-controversial. 

In response to the NPRM, Citadel 

commented that its experience 

regarding trading liquidity further lead 

it to conclude that there is sufficient 

data in the market for DCOs to perform 

required pricing and risk management 

of the classes of swaps included in the 

proposed rule. Finally, Citadel 

commented that access to reliable 

pricing data will only improve over time 

as the Dodd-Frank rules promoting 

transparency are implemented. No other 

comments were received on this factor. 

Based on consideration of the 

existence of significant outstanding 

notional exposures, trading liquidity, 

and adequate pricing data, as described 

in the NPRM, the Commission is 

reaffirming in this release its decision to 

include interest rate swaps with the 

following specifications in the clearing 

requirement rule and to consider the 

other four factors identified in section 

2(h)(2)(D) of the CEA with respect to 

these swaps. 

TABLE 5—INTEREST RATE SWAP DETERMINATION

Specification Fixed-to-floating swap class 

1. Currency ..................................................... U.S. Dollar (USD) ...... Euro (EUR) ................ Sterling (GBP) ............ Yen (JPY). 

2. Floating Rate Indexes ................................ LIBOR ........................ EURIBOR ................... LIBOR ........................ LIBOR. 

3. Stated Termination Date Range ................ 28 days to 50 years ... 28 days to 50 years ... 28 days to 50 years ... 28 days to 30 years. 

4. Optionality .................................................. No .............................. No .............................. No .............................. No. 

5. Dual Currencies ......................................... No .............................. No .............................. No .............................. No. 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74311 

129 IDCH was also included in this discussion in 

the NPRM. However, as discussed above, IDCH has 

been acquired by LCH and is now LCH.LLC and its 

rules and product offering are being revised to be 

substantially the same as LCH’s. Accordingly, the 

rule frameworks, capacity, operational expertise 

and resources, and credit support infrastructure for 

IDCH is not discussed in this final release, but is 

being assessed by the Commission as part of 

LCH.LLC’s request for approval of its rulebook and 

risk management framework revisions. 130 77 FR at 44441–44456. 

TABLE 5—INTEREST RATE SWAP DETERMINATION—Continued 

6. Conditional Notional Amounts ................... No .............................. No .............................. No .............................. No. 

Specification Basis Swap Class 

1. Currency ..................................................... U.S. Dollar (USD) ...... Euro (EUR) ................ Sterling (GBP) ............ Yen (JPY). 

2. Floating Rate Indexes ................................ LIBOR ........................ EURIBOR ................... LIBOR ........................ LIBOR. 

3. Stated Termination Date Range ................ 28 days to 50 years ... 28 days to 50 years ... 28 days to 50 years ... 28 days to 30 years. 

4. Optionality .................................................. No .............................. No .............................. No .............................. No. 

5. Dual Currencies ......................................... No .............................. No .............................. No .............................. No. 

6. Conditional Notional Amounts ................... No .............................. No .............................. No .............................. No. 

Specification Forward Rate Agreement Class 

1. Currency ..................................................... U.S. Dollar (USD) ...... Euro (EUR) ................ Sterling (GBP) ............ Yen (JPY). 

2. Floating Rate Indexes ................................ LIBOR ........................ EURIBOR ................... LIBOR ........................ LIBOR. 

3. Stated Termination Date Range ................ 3 days to 3 years ....... 3 days to 3 years ....... 3 days to 3 years ....... 3 days to 3 years. 

4. Optionality .................................................. No .............................. No .............................. No .............................. No. 

5. Dual Currencies ......................................... No .............................. No .............................. No .............................. No. 

6. Conditional Notional Amounts ................... No .............................. No .............................. No .............................. No. 

Specification Overnight Index Swap Class 

1. Currency ..................................................... U.S. Dollar (USD) ...... Euro (EUR) ................ Sterling (GBP). 

2. Floating Rate Indexes ................................ FedFunds ................... EONIA ........................ SONIA. 

3. Stated Termination Date Range ................ 7 days to 2 years ....... 7 days to 2 years ....... 7 days to 2 years. 

4. Optionality .................................................. No .............................. No .............................. No. 

5. Dual Currencies ......................................... No .............................. No .............................. No. 

6. Conditional Notional Amounts ................... No .............................. No .............................. No. 

b. Availability of Rule Framework, 

Capacity, Operational Expertise and 

Resources, and Credit Support 

Infrastructure 

Section 2(h)(2)(D)(ii)(II) of the CEA 

requires the Commission to take into 

account the availability of rule 

framework, capacity, operational 

expertise and resources, and credit 

support infrastructure to clear the 

proposed classes of swaps on terms that 

are consistent with the material terms 

and trading conventions on which they 

are now traded. The Commission stated 

in the NPRM that it believed that LCH 

and CME,129 have developed rule 

frameworks, capacity, operational 

expertise and resources, and credit 

support infrastructure to clear the 

interest rate swaps they currently clear 

on terms that are consistent with the 

material terms and trading conventions 

on which those swaps are being traded. 

The Commission noted that LCH 

already clears more than half the global 

interest rate swaps in the four proposed 

classes of the clearing requirement and 

that CME also already cleared the more 

commonly traded swaps under this 

clearing requirement proposal. The 

Commission further notes that CME has 

recently added, or has stated publicly 

that it intends to add by the end of 2012, 

swaps in all four classes and at least the 

four currencies included in the final 

rule. 

The Commission also noted that the 

DCOs each developed their interest rate 

swap clearing offerings in conjunction 

with market participants and in 

response to the specific needs of the 

marketplace. In this manner, the 

clearing services of each DCO are 

designed to be consistent with the 

material terms and trading conventions 

of a bilateral, uncleared market. 

LCH submitted that it has the 

capability and expertise to manage the 

risks inherent in the current book of 

interest rate swaps cleared and the 

increased volume that the clearing 

requirement could generate for all of its 

currently clearable products. LCH has 

developed operational models, controls, 

and risk algorithms to ensure that it can 

process trades, and is capable of 

calculating the level of risk it has with 

any counterparty—both direct clearing 

members and their customers. 

CME’s IRS submission cited to its rule 

books to demonstrate the availability of 

rule framework, capacity, operational 

expertise and resources, and credit 

support infrastructure to clear qualified, 

interest rate swap contracts on terms 

that are consistent with the material 

terms and trading conventions on which 

the contracts are then traded. 

After considering the information 

provided by the DCOs in the IRS 

submissions and the nature and extent 

of clearing already undertaken by the 

DCOs of existing bilateral swaps, the 

Commission concluded in the NPRM 

that there is available rule framework, 

capacity, operations expertise and 

resources, and credit support 

infrastructure consistent with the 

material terms and trading conventions 

on which the swaps included in the four 

interest rate swap classes are 

designated. 

Citadel commented that the fact that 

all swaps included in the four interest 

rate swap classes are being cleared in 

material volumes provides clear 

evidence that there is the rule 

framework, capacity, operational 

expertise and resources, and credit 

support infrastructure necessary to clear 

each of the swaps that are included in 

the Commission’s determination. 

Further, Citadel stated that because 

registered DCOs are required to be in 

compliance on an on-going basis with 

the DCO core principles in the CEA, 

they ‘‘by definition’’ have demonstrated 

that they satisfy this factor. In addition, 

Citadel noted that the DCOs have been 

preparing for and anticipating increased 

volumes as a result of the clearing 

requirement since the enactment of the 

Dodd-Frank Act, if not earlier. Also, 

under the Commission’s 

implementation rule,130 there is a 270- 


sroberts on DSK5SPTVN1PROD with 
74312 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

131See, e.g., Policy Perspectives on OTC 

Derivatives Market Infrastructure by Duffie, Li, and 

Lubke (March 2010), available at http:// 

www.newyorkfed.org/research/staff_reports/ 

sr424.pdf. 

day period provided to allow DCOs, 

customers, FCMs, and all others 

engaged in the clearing process to test 

and ramp up customer clearing volumes 

voluntarily, and be in position to 

manage full production clearing 

volumes during the phase-in of the 

clearing requirement. Citadel stated that 

it believed the DCOs and FCMs are well 

prepared for a surge in clearing volumes 

and have the framework, capacity, 

expertise, resources and infrastructure 

to support it in a safe and sound manner 

and that Citadel’s own experience in 

commencing voluntary clearing of 

swaps confirms its observations. 

For the reasons described above, and 

as discussed in the NPRM, the 

Commission reaffirms that there is 

available rule framework, capacity, 

operations expertise and resources, and 

credit support infrastructure consistent 

with the material terms and trading 

conventions on which the swaps 

included in the four interest rate swap 

classes are designated. 

c. Effect on the Mitigation of Systemic 

Risk 

Section 2(h)(2)(D)(ii)(III) of the CEA 

requires the Commission to consider the 

effect on the mitigation of systemic risk, 

taking into account the size of the 

market for such contract and the 

resources of the DCO available to clear 

the contract. CME, LCH, and IDCH 

stated in their IRS submissions that 

subjecting interest rate swaps to central 

clearing would help mitigate systemic 

risk. As stated above in the analysis of 

interest rate swap market data, the 

Commission believes that the market for 

these swaps is significant and mitigating 

counterparty risk through clearing likely 

would reduce systemic risk in the swap 

market and the financial system as a 

whole. 

According to LCH’s IRS submission, if 

all clearable swaps are required to be 

cleared, the inevitable result will be a 

less disparate marketplace from a 

systemic risk perspective. CME submits 

that the 2008 financial crisis 

demonstrated the potential for systemic 

risk arising from the interconnectedness 

of OTC derivatives market participants 

and that centralized clearing will reduce 

systemic risk. 

IDCH stated in its IRS submission 

that, given the tremendous size of the 

interest rate derivatives market, the 

potential mitigation of systemic risk 

through centralized clearing of interest 

rate swaps is significant. IDCH asserted 

that clearing such swaps brings the risk 

mitigation and collateral and 

operational efficiency afforded to 

cleared and exchange-traded futures 

contracts to bilaterally negotiated OTC 

interest rate derivatives. The submission 

of interest rate swaps for clearing affords 

the parties the credit, risk management, 

capital, and operational benefits of 

central counterparty clearing of such 

transactions, and facilitates collateral 

efficiency. Cleared swaps allow market 

participants to free up counterparty 

credit lines that would otherwise be 

committed to open bilateral contracts. 

Additionally, according to IDCH, an 

efficient system for centralized clearing 

allows parties to mitigate the risk of a 

bilateral OTC derivative. Instead of 

holding offsetting positions with 

different counterparties and being 

exposed to the risk of each counterparty, 

a party may enter into an economically 

offsetting position that is cleared. 

Although the positions are not offset, 

the initial margin requirement will be 

reduced to close to zero. To eliminate 

risk without using centralized clearing, 

the party must enter into a tear-up 

agreement with the counterparty, or 

enter into a novation. 

While the clearing requirement would 

remove a large portion of the 

interconnectedness of current OTC 

markets that leads to systemic risk, the 

Commission noted in the NPRM that 

central clearing concentrates risk in a 

handful of entities. However, the 

Commission observed that central 

clearing was developed and designed to 

handle such concentration of risk. LCH 

has extensive experience risk managing 

very large volumes of interest rate 

swaps. Based on available data, it is 

believed that about half of all interest 

rate swaps transacted are cleared by 

LCH. CME submitted that it has the 

necessary resources available to clear 

the swaps that are the subject of its 

submission. The Commission notes that 

CME or its predecessors have cleared 

futures since 1898 and is the largest 

futures clearinghouse in the world. CME 

has not defaulted during that time. 

Accordingly, the Commission stated 

in the NPRM, and reaffirms in this 

release that it believes that LCH and 

CME have the resources needed to clear 

the interest rate swaps included in its 

determination and to manage the risk 

posed by clearing interest rate swaps 

that are required to be cleared. In 

addition, the Commission believes that 

the central clearing of the interest rate 

swaps that are the subject of this 

determination and final rule would 

serve to mitigate counterparty credit risk 

thereby having a positive effect on 

reducing systemic risk. 

In support of the Commission’s 

determination regarding systemic risk, 

Citadel commented that the transition 

from an interconnected network of 

bilateral derivatives exposures to central 

clearing in regulated clearing houses 

will mitigate systemic risk. In support of 

this assertion, Citadel cited a New York 

Federal Reserve Board staff paper 131

and noted that central clearing stands as 

a pillar of the Dodd-Frank Act. Citadel 

explained that central clearing 

eliminates the prospect of firms 

becoming too interconnected to fail by 

virtue of their bilateral swap positions 

and ensures that sufficient margin is 

reserved against each side of each swap, 

while further mitigating any default 

event through mutualization funds, 

clearing member obligations, and the 

additional financial safeguards of the 

regulated DCO. 

Citadel further asserted that the 

Commission’s determination takes the 

decisive step, long anticipated and 

prepared for by the market, of making 

mandatory central clearing of the most 

liquid and standardized swaps a reality. 

Citadel went on to express confidence 

that the transition to required clearing of 

liquid swaps will support and 

incentivize the expansion of the cleared 

product set, because it will be more 

economically efficient for market 

participants to hold as much of their 

portfolios as possible in a single 

margined basket at a DCO. Citadel 

concluded that the Commission’s 

clearing requirement rule thus provides 

the certainty needed for market 

participants to transition more of their 

swap portfolios from bilateral to cleared 

trades, thereby reducing or eliminating 

bilateral counterparty credit risk, and by 

extension, systemic risk. 

By contrast, ISDA commented on how 

mandatory clearing may centralize risk 

in DCOs and questioned the riskmitigating aspects of central clearing as 

contrasted with the new regulatory 

regime for uncleared swaps. ISDA also 

questioned the Commission’s assertion 

that central clearing was designed to 

address the concentration of risk. In 

response to ISDA’s comment, the 

Commission observes that while the 

regime for bilateral, uncleared swaps 

will be greatly improved after full 

implementation of the Dodd-Frank Act 

reforms, central clearing provides for 

certain risk management features that 

cannot be replicated on a bilateral basis. 

To name just one critical distinction, a 

clearinghouse addresses the tail risk of 

open positions through mutualization. 

Each clearing member must contribute 

to a default fund that protects the 

system as a whole. 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74313 

132See Section II.D above for a more detailed 

discussion of these issues. 

133The Commission observes that an FCM or 

DCO also may be subject to resolution under Title 

II of the Dodd-Frank Act to the extent it would 

qualify as covered financial company (as defined in 

section 201(a)(8) of the Dodd-Frank Act). 

134 If an FCM is also registered as a broker-dealer, 

certain issues related to its insolvency proceeding 

would also be governed by the Securities Investor 

Protection Act. 

135See 11 U.S.C. 556 (‘‘The contractual right of 

a commodity broker [which term would include a 

DCO or FCM] * * * to cause the liquidation, 

termination or acceleration of a commodity contract 

* * * shall not be stayed, avoided, or otherwise 

limited by operation of any provision of [the 

Bankruptcy Code] or by order of a court in any 

proceeding under [the Bankruptcy Code]’’). 

136See 11 U.S.C. 766(h). 

d. Effect on Competition 

Section 2(h)(2)(D)(ii)(IV) of the CEA 

requires the Commission to take into 

account the effect on competition, 

including appropriate fees and charges 

applied to clearing. Of particular 

concern to the Commission is whether 

the determination would harm 

competition by creating, enhancing, or 

entrenching market power in an affected 

product or service market, or facilitating 

the exercise of market power. Market 

power is viewed as the ability to raise 

price, including clearing fees and 

charges, reduce output, diminish 

innovation, or otherwise harm 

customers as a result of diminished 

competitive constraints or incentives.132

In the NPRM, the Commission 

identified one putative service market as 

potentially affected by this proposed 

clearing determination: a DCO service 

market encompassing those 

clearinghouses that currently (or with 

relative ease in the future could) clear 

the interest rate swaps subject to this 

proposal. The Commission recognized 

that, depending on the interplay of 

several factors, the clearing requirement 

potentially could impact competition 

within the affected market and 

discussed various factors that could 

impact that market. 

As discussed above, in support of the 

NPRM, Citadel stated that the clearing 

requirement will have a strong positive 

impact on competition in the swap 

market and the market for clearing 

services. Citadel noted that central 

clearing will remove a significant barrier 

to entry for alternative swap market 

liquidity providers and will enable 

smaller entities to compete on more 

equal terms because central clearing 

eliminates the consideration of 

counterparty credit risk from the 

selection of execution counterparties. 

Citadel further commented that buy-side 

market participants will benefit from a 

wider range of potential execution 

counterparties and asserted that this 

increased competition yields benefits to 

market participants including narrower 

bid-ask spreads, improved access to best 

execution, and increased market depth 

and liquidity, all of which establish a 

prerequisite for the emergence of an allto-all market with electronic and/or 

anonymous execution. Citadel also 

commented that substitution of the DCO 

for the bilateral counterparty decouples 

execution from post-trade processing 

and settlement. Finally, Citadel 

commented that the certainty as to 

when the first clearing requirement will 

begin gives DCOs and FCMs the 

confidence to invest in their client 

clearing offerings, and to compete 

actively for buy-side business both on 

the quality and efficiency of their 

services as well as on price. 

FIA commented that the NPRM 

included a full discussion of the 

potential competitive impact of the 

clearing proposal. However, as 

discussed above, FIA indicated that it 

was unable to conduct the analysis it 

believes would be necessary to respond 

to the Commission’s questions in the 

NPRM within the 30-day comment 

period provided. 

In response to FIA’s comment, the 

Commission notes that the 30-day 

public comment period was necessary 

for the Commission to adhere to the 

CEA’s 90-day determination process. 

Moreover, while FIA indicated that it 

would like more time to conduct further 

analysis of competitive issues for future 

determinations, FIA did not identify any 

specific concerns about the 

competitiveness issue analysis that 

could materially change the 

Commission’s determination if such 

additional information were made 

available to the Commission. The 

comments provided by Citadel are 

consistent with the NPRM’s conclusion 

that the clearing requirement potentially 

could impact competition within the 

affected market, but go on to assert that 

such an impact would not be negative. 

Accordingly, the Commission believes 

that its consideration of competitiveness 

as described in the NPRM is sufficient 

for purposes of finalizing the clearing 

requirement rule. 

e. Legal Certainty in the Event of the 

Insolvency 

Section 2(h)(2)(D)(ii)(V) of the CEA 

requires the Commission to take into 

account the existence of reasonable legal 

certainty in the event of the insolvency 

of the relevant DCO or one or more of 

its clearing members with regard to the 

treatment of customer and swap 

counterparty positions, funds, and 

property. The Commission’s proposal 

was based on its view that there is 

reasonable legal certainty with regard to 

the treatment of customer and swap 

counterparty positions, funds, and 

property in connection with cleared 

swaps, namely the interest rate swaps 

subject to the proposal, in the event of 

the insolvency of the relevant DCO or 

one or more of the DCO’s clearing 

members. 

In the case of a clearing member 

insolvency at CME or IDCH (now, 

LCH.LLC), i.e., DCOs subject to the 

bankruptcy laws of the United States, 

subchapter IV of Chapter 7 of the U.S. 

Bankruptcy Code (11 U.S.C. 761–767) 

and Part 190 of the Commission’s 

regulations would govern the treatment 

of customer positions.133 Pursuant to 

section 4d(f) of the CEA, a clearing 

member accepting funds from a 

customer to margin a cleared swap, 

must be a registered FCM. Pursuant to 

11 U.S.C. 761–767 and Part 190 of the 

Commission’s regulations, the 

customer’s interest rate swap positions, 

carried by the insolvent FCM, would be 

deemed ‘‘commodity contracts.’’ 134 As a 

result, neither a clearing member’s 

bankruptcy nor any order of a 

bankruptcy court could prevent a 

United States domiciled DCO from 

closing out/liquidating such 

positions.135 However, customers of 

clearing members would have priority 

over all other claimants with respect to 

customer funds that had been held by 

the defaulting clearing member to 

margin swaps, such as the interest rate 

swaps included in the clearing 

determination.136 Customer funds 

would be distributed to swap customers, 

including interest rate swap customers, 

in accordance with Commission 

regulations and section 766(h) of the 

Bankruptcy Code. Moreover, the 

Bankruptcy Code and the Commission’s 

rules thereunder (in particular 11 U.S.C. 

764(b) and 17 CFR 190.06) permit the 

transfer of customer positions and 

collateral to solvent clearing members. 

Similarly, 11 U.S.C. 761–767 and Part 

190 would govern the bankruptcy of a 

DCO, in conjunction with DCO rules 

providing for the termination of 

outstanding contracts and/or return of 

remaining clearing member and 

customer property to clearing members. 

With regard to LCH, the Commission 

understands that the default of a 

clearing member of LCH would be 

governed by the rules of that DCO. LCH, 

a DCO based in the United Kingdom, 

has represented that under English law 

its rules would supersede English 

insolvency laws. Under its rules, LCH 

would be permitted to close out and/or 

transfer positions of a defaulting 

clearing member that is an FCM 


sroberts on DSK5SPTVN1PROD with 
74314 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

137Section 2(h)(2)(D)(iii) of the CEA. 

138This regulation directs swap dealers and major 

swap participants to submit swaps subject to the 

clearing requirement to a DCO as soon as 

technologically practicable after execution, but no 

later than the close of business on the day of 

execution. See 17 CFR 23.506(b), 77 FR 21278, 

21307 (Apr. 9, 2012). To the extent that a swap 

dealer or major swap participant is subject to both 

§ 23.506(b) and § 50.2(a), the entity should comply 

with § 23.506(b) when its counterparty is another 

swap dealer or major swap participant, but if the 

swap is between a swap dealer and a non-swap 

dealer, then the non-swap dealer counterparty can 

elect to follow the timing requirements of § 50.2(a) 

or § 23.506(b). 

139The Commission is recodifying § 39.6 as 

§ 50.50 so that market participants are able to locate 

all rules related to the clearing requirement in one 

part of the Code of Federal Regulations. 

140 If the person submitting the swap is a 

customer, as § 1.3(k) defines that term, then only a 

pursuant to the U.S. Bankruptcy Code 

and Part 190 of the Commission’s 

regulations. According to LCH’s 

submission, the insolvency of LCH itself 

would be governed by both English 

insolvency law and Part 190. 

LCH has obtained legal opinions that 

support the existence of such legal 

certainty in relation to the protection of 

customer and swap counterparty 

positions, funds, and property in the 

event of the insolvency of one or more 

of its clearing members. In addition, 

LCH has obtained a legal opinion from 

U.S. counsel regarding compliance with 

the protections afforded to FCM 

customers under New York law. 

In response to the NPRM, Citadel 

commented that it agreed with the 

Commission’s analysis that reasonable 

certainty exists in the event of an 

insolvency of a DCO or one or more 

DCO members. As discussed above, the 

Commission received three comments 

related to customer segregation. In 

essence, Vanguard and SIFMA AMG 

recommend that the Commission delay 

implementation of the clearing 

requirement until three months after the 

LSOC model is implemented, clarified, 

and perhaps supplemented with 

additional rulemaking. ISDA requests 

that the Commission further study the 

issue of insolvency for DCOs. 

As stated above, the Commission 

believes that the concerns of Vanguard 

and SIFMA AMG are largely addressed 

by the delayed implementation 

timeframe for this determination. With 

regard to ISDA’s request, as discussed 

above, the Commission is actively 

engaging in efforts to study and prepare 

for potential scenarios involving 

clearinghouse and clearing member 

insolvency. 

iii. Conclusions Regarding the Five 

Statutory Factors and Clearing 

Requirement Determination 

In the foregoing discussion and 

analysis, the Commission has taken into 

account each of the five factors provided 

for under section 2(h)(2)(D)(ii) of the 

CEA for the interest rate swap classes 

that are the subject of this 

determination. Based on these 

considerations, and having reviewed the 

relevant DCOs’ submissions for 

consistency with section 5b(c)(2) of the 

CEA, the Commission is determining 

that the four classes of interest rate 

swaps identified in § 50.4(a) are 

required to be cleared. 

III. Final Rules 

The Commission is adopting the 

following rules under section 2(h)(2), as 

well as its authority under sections 

5b(c)(2)(L) and 8a(5) of the CEA. In 

issuing a determination regarding 

whether a swap or class of swaps is 

required to be cleared, ‘‘the Commission 

may require such terms and conditions 

to the requirement as the Commission 

determines to be appropriate.’’ 137

A. Regulation 50.1: Definitions 

As proposed, § 50.1 set forth two 

defined terms: ‘‘business day’’ and ‘‘day 

of execution.’’ The definition of 

business day excluded Saturdays, 

Sundays, and legal holidays. The 

definition of ‘‘day of execution’’ served 

as a means of addressing situations 

where executing counterparties are 

located in different time zones. It was 

intended to avoid difficulties associated 

with end-of-day trading by deeming 

swaps executed after 4:00 p.m., or on a 

day other than a business day, to have 

been executed on the immediately 

succeeding business day. The 

Commission recognized that market 

participants should not be required to 

maintain back-office operations 24 

hours a day or 7 days a week in order 

to meet the proposed deadline for 

submitting swaps that are required to be 

cleared to a DCO. The Commission also 

was attempting to be sensitive to 

possible concerns about timeframes that 

may discourage trade execution late in 

the day. To account for time-zone 

issues, the ‘‘day of execution’’ was 

defined to be the calendar day of the 

party to the swap that ends latest, giving 

the parties the maximum amount of 

time to submit their swaps to a DCO 

while still requiring such submission on 

a same-day basis. 

The Commission received two 

comments on these definitions. LCH 

commended the Commission for 

including flexibility on the timing of 

swap submission for those swaps 

executed late in the day, but requested 

that the Commission clarify that DCOs 

can continue to accept swaps for 

clearing late in the day. In response to 

this request, the Commission confirms 

that the 4:00 p.m. cut off for same-day 

submission to a DCO is intended to give 

market participants flexibility and 

respond to concerns about 

counterparties in different time zones. 

This definition should not be 

interpreted as a prohibition on late-day 

submission of swaps to DCOs or as 

impeding DCO’s ability to accept such 

swaps. 

FIA observed an apparent conflict 

between the proposed definitions of 

‘‘business day’’ and ‘‘day of execution’’ 

and regulation 23.506(b).138 As with 

LCH, FIA’s concern focused on the 

ability of DCOs to expand their business 

hours. As explained above, the 

definitions do not proscribe a DCO’s 

ability to set business hours. 

Accordingly, the Commission is 

adopting the definitions as proposed. 

B. Regulation 50.2: Treatment of Swaps 

Subject to a Clearing Requirement 

As proposed, § 50.2(a) required all 

persons, other than those who elect the 

exception in accordance with § 39.6 

(now § 50.50),139 to submit a swap that 

is part of the class described in § 50.4 

for clearing by a DCO as soon as 

technologically practicable and no later 

than the end of the day of execution. 

The objective of this provision was to 

ensure that swaps subject to a clearing 

requirement are submitted to DCOs for 

clearing in a timely manner. 

ISDA recommended that the 

Commission clarify the rule text to 

recognize that non-clearing members are 

deemed to have met the requirements of 

§ 50.2 once they submit the swap to 

their FCM clearing member. ISDA also 

requested that the Commission 

recognize that in some cross-border 

transactions clearing members will not 

necessarily be FCMs. Similarly, ISDA 

asked that there be an exclusion for 

foreign governments and governmental 

entities as set forth in the end-user 

exception final rulemaking. Lastly, 

ISDA asked that there be an exception 

in the rule for system outages and force 

majeure events. 

In response to ISDA’s first comment, 

the Commission is modifying the rule 

text by adding new paragraph (c) to 

clarify that submission of a swap to an 

FCM or a DCO clearing member is 

sufficient to meet the timeliness 

requirements of the rule. For U.S. 

customers, this will mean submission to 

a registered FCM. For cross-border 

transactions, the Commission recognizes 

that submission of the swap may be to 

a non-FCM clearing member when the 

customer is not a U.S. person.140


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74315 

registered FCM may accept that swap for clearing, 

even if the customer seeks to clear the swap on a 

DCO located outside of the U.S. 

141See End-User Exception to the Clearing 

Requirement for Swaps, 77 FR 42560, 42562 (July 

19, 2012). 

142See, e.g., Derivatives Clearing Organization 

General Provisions and Core Principles, 76 FR 

69334, 69443–69444 (Nov. 8, 2011) (adopting 

§ 39.18 relating to system safeguards). 

143See Swap Dealer and Major Swap Participant 

Recordkeeping, Reporting, and Duties Rules, 77 FR 

20128, 20208–20209 (Apr. 3, 2012) (adopting 

§ 23.603 relating to business continuity and disaster 

recovery). 

144Customer Clearing Documentation, Timing of 

Acceptance for Clearing, and Clearing Member Risk 

Management, 77 FR 21278, 21307 (Apr. 9, 2012). 

145See Section III.G for further discussion 

regarding scienter. 

146See discussion in Section II.E regarding LCH’s 

and CME’s efforts to provide such a screening 

mechanism. 

147The Commission notes that it will consider 

whether verification efforts are reasonable in light 

of all the facts and circumstances of a market 

participant’s particular situation. 

148 17 CFR 39.21 requires that DCOs provide 

market participants with ‘‘sufficient information to 

enable the market participants to identify and 

evaluate accurately the risks and costs associated 

with using the services’’ of the DCO. 

With regard to foreign governments 

and governmental entities, the 

Commission reiterates the position 

taken in the end-user exception 

rulemaking that ‘‘foreign governments, 

foreign central banks, and international 

financial institutions should not be 

subject to Section 2(h)(1) of the 

CEA.’’ 141 Finally, the Commission 

declines to include an explicit 

exception for unforeseen outages and 

other events. The Commission 

recognizes that these situations may 

occur and has adopted rules relating to 

system safeguards and disaster recovery 

for market infrastructures 142 and market 

participants.143 However, none of the 

straight-through-processing rules 

adopted by the Commission included 

carve-outs for system outages or force 

majeure events,144 and the Commission 

does not believe it is necessary to 

include such provisions in this rule. In 

the case of serious market-wide 

disruptions, the Commission would take 

this mitigating fact into account in 

reviewing compliance with § 50.2. 

Additionally, in an effort to clarify 

that a market participant does not have 

to submit a swap that falls within the 

§ 50.4 classes, but that the entity knows 

are not offered for clearing by any DCO 

because the swap contains 

specifications that are not accepted for 

clearing, the Commission is modifying 

the text of § 50.2 to include a reference 

to ‘‘eligible’’ DCOs that offer such swaps 

for clearing. 

Proposed § 50.2(b) would require 

persons subject to § 50.2(a) to undertake 

reasonable efforts to determine whether 

a swap is required to be cleared. In the 

NPRM, the Commission indicated that it 

would consider such reasonable efforts 

to include checking the Commission’s 

Web site or the DCO’s Web site for 

verification of whether a swap is 

required to be cleared, or consulting 

third-party service providers for such 

verification. 

CME commented on the 

Commission’s observation in the NPRM 

that DCOs could design and develop 

systems that will enable market 

participants and trading platforms to 

check whether or not their swap is 

subject to a clearing requirement and be 

provided with an answer within 

seconds (or faster). CME stated that its 

platform already provides market 

participants with a tool to screen a 

particular swap for eligibility for 

clearing upon submission to CME. The 

Commission recognizes that this 

technological capability will be 

beneficial to market participants, 

particularly pre-execution, and is 

necessary to ensure timely clearing of 

swaps subject to the clearing 

requirement. 

Freddie Mac observed that § 50.2(a) 

and (b) could be interpreted to require 

two different standards of care: strict 

liability for the former and a reasonable 

inquiry standard for the latter. In 

response to Freddie Mac’s comment, the 

Commission clarifies that § 50.2(a) 

establishes a requirement regarding the 

timely submission of swaps to DCOs. It 

is a bright-line standard, but it is not 

intended to introduce a new scienter 

requirement regarding submission for 

clearing beyond that provided for in the 

statute.145 With regard to § 50.2(b), the 

Commission’s objective was to afford 

market participants clarity about what 

efforts they must expend in determining 

whether their swaps are required to be 

cleared. In the absence of some central 

screening mechanism available to all 

market participants for the purpose of 

immediately determining whether any 

eligible DCO offers a particular swap for 

clearing,146 the Commission believes it 

appropriate to provide clarity regarding 

what constitutes reasonable search or 

verification efforts.147

C. Regulation 50.3: Notice to the Public 

The Commission proposed § 50.3(a) to 

require each DCO to post on its Web site 

a list of all swaps that it will accept for 

clearing and clearly indicate which of 

those swaps the Commission has 

determined are required to be cleared 

pursuant to part 50 of the Commission’s 

regulations and section 2(h)(1) of the 

CEA. 

ISDA commented that DCOs should 

provide swap information, including 

product specifications, in a manner that 

is easy to access and use. ISDA also 

called upon DCOs to provide at least 

one-month’s advance notice for new 

swaps that they plan to accept for 

clearing and to provide a description of 

the margin methodology used in 

clearing the swap. The Commission 

agrees that DCOs should provide 

information in a manner that is easy to 

use and accessible to the public. 

Regulation § 50.3(b) builds upon the 

requirements of § 39.21(c)(1), which 

requires each DCO to disclose publicly 

information concerning the terms and 

conditions of each contract, agreement, 

and transaction cleared and settled by 

the DCO. The Commission also 

welcomes ISDA’s suggestion that DCOs 

voluntarily provide advance notice of 

new swaps that they plan to clear and 

make relevant information regarding 

their margining methodologies 

available.148

LCH commented that it is committed 

to revising the information on its Web 

site so that it is provided in a format 

that is easily understandable by all 

swaps counterparties, including 

customers. 

Regulation § 50.3(b) requires the 

Commission to post on its Web site a list 

of those swaps it has determined are 

required to be cleared and all DCOs that 

are eligible to clear such classes of 

swaps. No comments were received on 

this provision. The Commission is 

adopting the rule as proposed in order 

to provide market participants with 

sufficient notice regarding which swaps 

are subject to a clearing requirement. 

For clarification, the Commission will 

include on its Web site any swaps that 

it has determined through delegated 

authority under § 50.6 fall within a class 

of swaps described in § 50.4. 

D. Regulation 50.4: Classes of Swaps 

Required To Be Cleared 

As discussed at length above, 

proposed § 50.4 set forth the classes of 

interest rate swaps and CDS that the 

Commission proposed for required 

clearing. Proposed § 50.4(a) included a 

table listing those types of interest rate 

swaps the Commission would require to 

be cleared, and proposed § 50.4(b) 

included a table listing those types of 

CDS indices the Commission would 

require to be cleared. 

ISDA recommended that the 

Commission clarify that the stated 

termination date ranges in § 50.4(a) be 

applied only at trade inception for 

purposes of determining whether the 

swap is required to be cleared. The 

Commission confirms ISDA’s 


sroberts on DSK5SPTVN1PROD with 
74316 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

149See discussion below regarding § 50.10 and 

the evasion and abuse standards. 

150Aside from a general assertion about the 

challenges of selecting a DCO for clearing, ISDA did 

not elaborate on its implied assertion that swaps 

subject to ownership changes may be difficult to 

transition to clearing accurately. 

151 Going forward, prior to or at the time of 

ownership change, parties will have to account for 

any additional costs of clearing. 

152For example, an ownership change for a 

bilateral swap may have foreseeable or 

unforeseeable credit or tax implications for the 

remaining party. 

153The Commission observes that the ISDA 

Master Agreement used for most bilateral swaps 

requires the prior written consent of the remaining 

party for any transfer of the agreement other than 

for certain limited transfers of payments upon 

default or upon a merger, acquisition, or transfer of 

all assets. 

understanding of the stated termination 

date range applying only at trade 

inception or upon an ownership event 

change, as discussed in detail below. 

As discussed above, the Commission 

is adopting § 50.4(a) and (b). The 

Commission believes that this format 

provides market participants with a 

clear understanding of which swaps are 

required to be cleared. By using basic 

specifications to identify the swaps 

subject to the clearing requirement, 

counterparties contemplating entering 

into a swap can determine quickly as a 

threshold matter whether or not the 

particular swap may be subject to a 

clearing requirement. If the swap has 

the basic specifications of a class of 

swaps determined to be subject to a 

clearing requirement, the parties will 

know that they need to verify whether 

an eligible DCO will clear that particular 

swap. This will reduce the burden on 

swap counterparties related to 

determining whether a particular swap 

may be subject to the clearing 

requirement. 

i. Disentangling Complex Swaps 

TriOptima commented that the 

complete swap must be assessed against 

the clearing requirement and parties 

should not be required to disentangle 

non-clearable swaps in order to clear the 

clearable components. The Commission 

confirms TriOptima’s view regarding 

those swaps that may have components 

that can be cleared, but would require 

disentangling the clearable part of the 

swap. Adherence to the clearing 

requirement does not require market 

participants to structure their swaps in 

a particular manner or disentangle 

swaps that serve legitimate business 

purposes.149

ii. Swaptions and Extendible Swaps 

In response to the Commission’s 

inquiry in the NPRM regarding how to 

treat a swap that becomes effective upon 

the exercise of a swaption, ISDA 

suggested that the resulting swap should 

only be required to be cleared if the 

underlying swap and the counterparties 

to the swap were subject to a clearing 

requirement at the time that the 

swaption was executed. ISDA also 

commented that the same approach 

should apply to extendible swaps, i.e., 

a swap for which a party has the option 

to extend the term of the swap. ISDA 

reasoned that the parties to a swaption 

or an extendible swap would not have 

taken into account the cost of clearing 

the resultant swap if they negotiated the 

price of the option before a clearing 

requirement was applicable to the 

underlying swap or extended swap. 

LCH similarly commented that a 

swaption entered into before a clearing 

requirement is applicable to the 

underlying swap would not have been 

priced with an expectation that the 

swap created on exercise would be 

cleared. For this reason, LCH also stated 

that an underlying swap of a swaption 

should be subject to an applicable 

clearing requirement only if the 

swaption was entered into after the 

clearing requirement applicable to the 

underlying swap becomes effective. 

The Commission agrees that the cost 

of clearing may not be reflected in the 

pricing of the swaption or extendible 

swap if the clearing requirement for the 

underlying swap or the extendable swap 

arises after the execution of the 

swaption or extendible swap. The 

Commission is thus clarifying that the 

clearing requirement only applies to 

swaps resulting from the exercise of a 

swaption or extendible swap extension 

if the clearing requirement would have 

been applicable to the underlying swap 

or the extended swap at the time the 

counterparties executed the swaption or 

extendible swap. 

iii. Ownership Event Changes 

In the NPRM, the Commission asked 

whether it should clarify that the 

clearing requirement applies to all new 

swaps and changes in the ownership of 

a swap, including assignment, novation, 

exchange, transfer, or conveyance. ISDA 

responded that a swap that is not 

subject to the clearing requirement at 

the time it is executed should not 

become subject to it upon an ownership 

event change unless the parties can 

agree on pricing and other terms 

necessary to reflect the costs of clearing 

and until the swap can be transitioned 

from uncleared to cleared with 

accuracy.150

As the Commission acknowledged 

above, the cost of clearing may not be 

reflected in the pricing of a swap if the 

clearing requirement arises after the 

execution of that swap. However, unlike 

with the exercise of a swaption, 

typically, the original counterparties to 

a swap that is assigned, novated, 

exchanged, transferred, or conveyed, 

along with the new party in ownership, 

each have an opportunity to revisit the 

terms of the original swap and account 

for new costs.151 While there may be 

cost implications for the remaining 

party when its counterparty changes, 

these cost implications can arise for any 

number of foreseeable or unforeseeable 

reasons,152 and if the remaining party is 

concerned about potential cost 

implications resulting from a change of 

its counterparty, it would be able to 

protect itself through the terms of the 

swap, such as including consent rights 

or required price adjustments upon such 

an event.153 The Commission is 

concerned that if such swaps are not 

treated as new swaps for the purposes 

of the clearing requirement, it could be 

creating incentives to ‘‘trade’’ historical 

swaps through the assignment, 

novation, exchange, transfer, or 

conveyance processes to avoid required 

clearing. Accordingly, for purposes of 

this rule, a change in ownership of a 

swap would subject the swap to 

required clearing under section 2(h)(1) 

of the CEA in the same manner and to 

the same extent as a newly executed 

swap. 

Furthermore, for swaps executed after 

the clearing requirement is in place, the 

Commission also believes it is important 

to clarify that a change in ownership 

may result in a requirement to clear. For 

example, a financial entity and an end 

user under section 2(h)(7) of the CEA 

enter into a swap that is not required to 

be cleared, and later if the end user 

transfers its ownership interest in the 

swap to another party that is a financial 

entity not eligible to claim an exception 

under section 2(h)(7), then the swap 

would be required to be cleared if the 

other prerequisites to the requirement 

exist. 

E. Regulation 50.5: Clearing Transition 

Rules 

As proposed, § 50.5 would codify 

section 2(h)(6) of the CEA. Under 

proposed § 50.5(a), swaps that are part 

of a class described in § 50.4 but were 

entered into before the enactment of the 

Dodd-Frank Act would be exempt from 

clearing so long as the swap is reported 

to an SDR pursuant to § 44.02 and 

section 2(h)(5)(A) of the CEA. Similarly, 

under proposed § 50.5(b), swaps entered 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74317 

154Without this delegation process a new swap 

that falls within a class under § 50.4 could have 

automatically been included in the clearing 

requirement without review. The delegation 

provision provides a check on that process. 

155See section 2(h)(3) of the CEA and regulation 

39.5(d). 

156As noted in the proposing release, the 

Commission preliminarily viewed evasion of the 

clearing requirement and abuse of an exemption or 

exception to the clearing requirement, including the 

end-user exception, to be related concepts and are 

informed by new enforcement authority under the 

Dodd-Frank Act, which added new sections 6(e)(4)– 

(5), and 9(a)(6), to the CEA. See Proposed Clearing 

Requirement Determination, 77 FR 47170, 47207 

(Aug. 7, 2012). 

157Proposed § 50.10(a) was informed by and 

consistent with section 6(e)(4) and (5) of the CEA, 

Continued 

into after the enactment of the DoddFrank Act but before the application of 

the clearing requirement would be 

exempt from the clearing requirement if 

reported pursuant to § 44.03 and section 

2(h)(5)(B) of the Act. 

LCH suggested that the Commission 

change the citations in § 50.5(a) from 

§ 44.02 to § 46.3, and in § 50.5(b) from 

§ 44.03 to § 45.3 for swaps entered after 

the enactment of the Dodd-Frank Act 

but prior to the compliance date for 

reporting to an SDR and to § 45.3 for 

swaps entered into after the compliance 

date for SDR reporting but prior to the 

application of a clearing requirement. 

The Commission agrees with LCH and 

is modifying the rule to provide more 

accurate cross references to parts 45 and 

46. In addition, under § 50.5(b), the 

Commission cross references § 46.3 or 

§ 45.3, as appropriate, because until 

April 2013, certain market participants 

may properly rely on § 46.3 for reporting 

swaps executed after the enactment of 

the Dodd-Frank Act. 

F. Regulation 50.6: Delegation of 

Authority 

Under proposed § 50.6(a), the 

Commission would delegate to the 

Director of the Division of Clearing and 

Risk, or the Director’s designee, with the 

consultation of the General Counsel or 

the General Counsel’s designee, the 

authority to determine whether a swap 

falls within a class of swaps described 

in § 50.4 and to communicate such a 

determination to the relevant DCOs. 

ICE supported the Commission’s 

proposal and agreed that this approach 

would allow DCOs to add new swaps in 

a timely and efficient manner and rely 

on the DCOs’ risk management 

processes and governance for adding 

new products to an existing class. 

Citadel also supported the proposed 

delegation provision based on the view 

that the Commission carefully oversees 

DCO risk management and it is 

beneficial to move products into 

clearing without excessive delay. LCH 

generally supported the Commission’s 

proposal, but requested confirmation 

that if the DCO makes a material change 

to an existing type of swap, the 

Commission would follow the full 

clearing requirement determination 

process. 

By contrast, ISDA objected to 

proposed § 50.6 based on a concern that 

the Commission would be delegating 

the clearing determination for DCO 

product expansions to the DCOs 

themselves, which would contradict the 

requirement that the Commission 

review each DCO submission under 

section 2(h)(2)(B)(iii)(II) of the CEA. 

Based on the breadth of the swaps 

classes under § 50.4, ISDA commented 

that DCOs will be able to add new 

swaps under the clearing requirement 

without review by the Commission 

under the five statutory factors. ISDA 

recommended that the delegation 

provision be supplemented to include 

(1) a requirement that new DCO product 

offerings raise no materially different 

considerations regarding the 

Commission’s determination; (2) a 

public comment period; and (3) a 

compliance phase-in period of 90 days. 

In response to LCH’s request for 

clarification, the Commission confirms 

that if a DCO makes a material change 

to an existing type of swap, the 

Commission would follow the full 

clearing requirement determination 

process. Under the example provided by 

LCH—extending the tenor of swaps 

clearing—the DCO’s change would 

require a change to the rule text under 

§ 50.4, which would require 

Commission action. 

In response to ISDA’s comments, the 

Commission observes that the proposed 

delegation provision was not intended 

to displace Commission review under 

section 2(h)(2)(B)(iii)(II) of the CEA. 

With respect to swaps within the classes 

identified in § 50.4 that are already 

being cleared by at least one DCO, the 

delegation provision will facilitate other 

DCOs’ ability to offer new swaps for 

required clearing so long as those swaps 

fall within one of the classes previously 

established by the Commission. With 

respect to swaps that meet the 

specifications identified in § 50.4, but 

have not been previously offered for 

clearing by any DCO, the Commission 

agrees with ISDA that the delegation is 

limited to those swaps that are 

consistent with the prior determination. 

For instance, if a new swap falls within 

a class under § 50.4, but clearing the 

swap requires that DCOs adopt a new 

margining methodology or pricing 

methodology, the Commission would 

subject that swap to a new clearing 

requirement determination process.154

Accordingly, the Commission is 

modifying the rule to limit the 

delegation authority to those instances 

where the newly submitted swap falls 

within the class under § 50.4 and is 

consistent with the Commission’s 

clearing requirement determination for 

that class of swaps. In addition, the 

Commission is modifying the rule to 

require that the Director of the Division 

of Clearing and Risk notify the 

Commission prior to exercising any 

authority delegated under § 50.6. 

The Commission declines to adopt 

ISDA’s other recommendations. 

Provided that inclusion of the new 

swaps under § 50.4 is consistent with 

the Commission’s previous clearing 

requirement determination, there is no 

need for an additional public comment 

period beyond that provided for as part 

of the initial clearing requirement 

determination process. Moreover, under 

the CEA and Commission regulation, 

any counterparty to a swap can apply 

for a stay of the clearing requirement.155

This stay provision would serve to 

notify the Commission of objections to 

inclusion of a particular swap in a 

previously-defined class. In addition, 

the Commission does not believe that an 

additional phase-in period is necessary. 

Provided that including the new swap is 

consistent with the prior determination, 

the compliance phasing for the original 

class will afford sufficient time for 

operational and systems 

implementation. If such time had not 

been sufficient, the Director of the 

Division of Clearing and Risk could 

submit the matter to the Commission for 

its consideration, or the Commission 

could itself exercise the delegated 

authority, under § 50.6(b). 

G. Regulation 50.10: Prevention of 

Evasion of the Clearing Requirement 

and Abuse of an Exception or 

Exemption to the Clearing Requirement 

The Commission proposed § 50.10 

under the rulemaking authority in 

sections 2(h)(4)(A), 2(h)(7)(F), and 8a(5) 

of the CEA. Proposed § 50.10 would 

prohibit evasions of the requirements of 

section 2(h) of the CEA and abuse of any 

exemption or exception to the 

requirements of section 2(h), including 

the end-user exception or any other 

exception or exemption that the 

Commission may provide by rule, 

regulation, or order.156

Proposed § 50.10(a) would make it 

unlawful for any person to knowingly or 

recklessly evade, participate in, or 

facilitate an evasion of any of the 

requirements of section 2(h).157 This 


sroberts on DSK5SPTVN1PROD with 
74318 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

which states that any DCO, swap dealer, or major 

swap participant that ‘‘knowingly or recklessly 

evades or participates in or facilitates an evasion of 

the requirements of section 2(h) shall be liable for 

a civil monetary penalty in twice the amount 

otherwise available for a violation of section 2(h).’’ 

158These requirements include the clearing 

requirement under section 2(h)(1), reporting of data 

under section 2(h)(5), and the trade execution 

requirement under section 2(h)(8), among other 

requirements. For example, it would be a violation 

of proposed § 50.10(a) for a SEF to knowingly or 

recklessly evade or participate in or facilitate an 

evasion of the trade execution requirement under 

section 2(h)(8). 

159Any person engaged in a swap that would be 

required to be cleared under section 2(h) and Part 

50 of the Commission’s Regulations, and such 

person did not submit the swap for clearing, absent 

an exemption or exception, would be subject to a 

Commission enforcement action regardless of 

whether the person knowingly or recklessly failed 

to submit the swap for clearing. 

160See End-User Exception to the Clearing 

Requirement for Swaps, 77 FR 42560 (July 19, 

2012). 

161Proposed § 50.10(b) is adopted under the 

authority in both section 2(h)(4)(A) and section 

2(h)(7)(F). 

162This provision was informed by the DoddFrank Act amendments in section 2(h)(4)(A) to 

prescribe rules necessary to prevent evasions of the 

clearing requirements; section 2(h)(7)(F) to 

prescribe rules necessary to prevent abuse of the 

exceptions to the clearing requirements; and the 

Commission’s general rulemaking authority in 

section 8a(5) to promulgate rules that, in the 

judgment of the Commission, are reasonably 

necessary to accomplish any purposes of the CEA. 

163The Commission’s discussion of § 50.10 is 

similar to its approach for the anti-evasion rules 

§§ 1.3(xxx)(6) and 1.6 that it recently adopted in a 

joint final rulemaking with the Securities and 

Exchange Commission. See Further Definition of 

‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘SecurityBased Swap Agreement’’; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping, 77 FR 

48208, 48350–48354 (Aug. 13, 2012). 

would apply to any requirement under 

section 2(h) of the CEA or any 

Commission rule or regulation 

promulgated thereunder.158 In the 

proposing release, the Commission 

noted, however, that section 2(h)(1)(A) 

of the CEA provides that it ‘‘shall be 

unlawful for any person to engage in a 

swap unless that person submits such 

swap for clearing’’ to a DCO if the swap 

is required to be cleared. Unlike the 

knowing or reckless standard under 

proposed § 50.10(a), section 2(h)(1)(A) 

imposes a non-scienter standard on 

swap market participants.159

Proposed § 50.10(b) would make it 

unlawful for any person to abuse the 

end-user exception to the clearing 

requirement as provided under section 

2(h)(7) of the CEA and § 39.6 (now 

§ 50.50).160 The proposing release stated 

that an abuse of the end-user exception 

to the clearing requirement may also, 

depending on the facts and 

circumstances, be an evasion of the 

requirements of section 2(h). The 

Commission’s preliminary view was 

informed by section 9(a)(6) of the CEA, 

which cross-references both the 

prevention of evasion authority in 

section 2(h)(4) and prevention of abuse 

to the exception to the clearing 

requirement in section 2(h)(7)(F).161

Thus, the Commission proposed to 

interpret a violation of section 9(a)(6) of 

the CEA to also be a violation of 

proposed § 50.10(b). 

Proposed § 50.10(c) would make it 

unlawful for any person to abuse any 

exemption or exception to the 

requirements of section 2(h) of the CEA, 

including any exemption or exception, 

as the Commission may provide by rule, 

regulation, or order.162

In the preamble to the NPRM, the 

Commission proposed to adopt a 

‘‘principles-based’’ approach to 

applying proposed § 50.10 and declined 

to provide a bright-line test of nonevasive or abusive conduct, because 

such an approach may be a roadmap for 

engaging in evasive or abusive conduct 

or activities. The Commission, however, 

did propose additional guidance to 

provide clarity to market participants. 

The Commission proposed to determine 

on a case-by-case basis in light of all the 

relevant facts and circumstances, 

whether particular transactions or other 

activities constitute a violation of 

§ 50.10. Similar to its approach in the 

final rules further defining the term 

‘‘swap’’ (the ‘‘Product Definition 

Rules’’), the Commission proposed that 

it would not consider transactions or 

other activities structured in a manner 

solely motivated by a legitimate 

business purpose to constitute evasion 

or abuse.163

i. In General 

Four commenters discussed different 

aspects of proposed § 50.10, including 

the standard of intent that proposed 

§ 50.10 requires and the proposed 

legitimate business purpose guidance. 

After considering the comments as 

discussed more fully below, the 

Commission has determined that § 50.10 

is necessary to prevent evasion of the 

requirements of section 2(h) and abuses 

of any exemption or exception to the 

requirements of section 2(h). Therefore, 

the Commission is adopting § 50.10 as 

proposed, but the Commission is 

providing additional interpretive 

guidance regarding § 50.10 as set out 

below. 

ii. Standard of Intent 

Two commenters discussed the 

relevant standard of intent for proposed 

§ 50.10. ISDA commented that 

§ 50.10(a), (b), and (c) should be 

governed by a single standard of intent. 

ISDA noted that proposed § 50.10(a) 

would make it unlawful for any person 

to ‘‘knowingly or recklessly’’ evade the 

requirements of section 2(h); whereas, 

proposed § 50.10(b) and (c) would make 

it unlawful to ‘‘abuse’’ exceptions or 

exemptions to the requirements of 

section 2(h). ISDA requested the 

Commission clarify that all three 

provisions are subject to a scienter 

standard. 

FreddieMac commented that the 

statutory ‘‘knowing or reckless’’ 

standard for evasion indicates that 

Congress intended that parties to a swap 

should be deemed in compliance with 

the clearing requirement at least where 

they have submitted a swap for clearing 

in good faith and have a reasonable 

expectation of clearing. 

In consideration of the comments, the 

Commission clarifies that it interprets 

the ‘‘knowingly or recklessly’’ standard 

in § 50.10(a) to be the same as the 

‘‘abuse’’ standard in § 50.10(b) and (c). 

The Commission believes that a 

‘‘knowingly or recklessly’’ standard is 

consistent with and an appropriate 

standard of intent for any ‘‘abuse’’ of 

any exemption or exception to the 

requirements of section 2(h). 

Additionally, the purpose of § 50.10 is 

to prevent evasion of the requirements 

under section 2(h) or to prevent an 

abuse of an exception or exemption to 

the requirements under section 2(h). 

Therefore, the Commission confirms 

that it would not constitute a violation 

of § 50.10 where a party submits a swap 

for clearing in good faith and the party 

has a reasonable expectation of clearing. 

iii. Legitimate Business Purpose 

Four commenters discussed the 

proposed guidance on what constitutes 

a legitimate business purpose. 

TriOptima supported the proposed 

principles-based approach to prevent 

evasion and the proposed guidance. 

TriOptima also requested the 

Commission clarify that activities and 

transactions carried out for the purpose 

of reducing counterparty credit risk 

constitute a legitimate business purpose. 

FreddieMac commented that the 

proposing release creates ambiguity as 

to the circumstances in which a swap is 

required to be submitted for clearing. In 

particular, FreddieMac commented that 

the NPRM appears to represent the 

Commission’s view that swaps that 

differ in regard to ‘‘mechanical’’ terms 

may be sufficiently close substitutes 

such that parties may be required to use 

such a ‘‘substitute swap’’ (where one is 

available) that is subject to a clearing 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74319 

164See NRPM at 47191, fn. 97 (discussing a 

category of interest rate swap specifications ‘‘that 

are commonly used to address mechanical issues’’). 165See Product Definition Rules, 77 FR at 48302, 

fn. 1052. 166NPRM at 47171. 

167NPRM at 47207. 

168Examples described in the guidance are 

illustrative and not exhaustive of the conduct or 

activities that could be considered evasive or 

abusive. In considering whether conduct or 

activities is evasive or abusive, the Commission will 

consider the facts and circumstances of each 

situation. 

169 ISDA also requested clarification that avoiding 

‘‘unwanted aspects of clearing or trading’’ should be 

considered to be a legitimate business purpose. 

ISDA did not specify what it means by ‘‘unwanted 

aspects,’’ nor did it explain how avoiding aspects 

of clearing or trading could be distinguished from 

evasion. Accordingly, the Commission is declining 

to include this concept as part of its guidance 

regarding legitimate business purposes. 

170Section 2(h)(4)(A) of the CEA, 7 U.S.C. 

2(h)(4)(A). 

requirement.164 FreddieMac asserted 

that the Commission should not prejudge when a swap that is required to 

be cleared is a close substitute for a 

swap that is not subject to a clearing 

requirement. Furthermore, FreddieMac 

commented that the Commission should 

clarify that a swap that would otherwise 

be required to be cleared but for a 

variation in one or more material 

contract terms should not also be 

required to be submitted for clearing, 

provided that such variation of the 

terms is for legitimate business 

purposes. 

In response to the proposed guidance, 

ISDA asserted that the Commission did 

not clearly respond to its comment to 

the Product Definition Rules that 

variations based on considerations of 

the costs and burdens of regulation 

should be considered to have a 

legitimate business purpose.165 ISDA 

requested the Commission clarify that if 

a business has a choice, in the absence 

of fraud, deceit, or unlawful activity, of 

entering into an uncleared swap, rather 

than a cleared swap, ‘‘because [the 

uncleared swap] is cheaper, or free of 

unwanted aspects of clearing or trading, 

then that choice should be identified by 

the Commission as legitimate.’’ ISDA 

also asserted that presence of fraud, 

deceit, or unlawful activity is a proper 

prerequisite to evasion or abuse 

violations. Furthermore, ISDA argued 

that market participants will be subject 

to constant uncertainty when 

structuring and transacting in markets 

that offer legitimate alternatives if the 

proposal were adopted. 

The Commission is guided by the 

central role that clearing plays under the 

Dodd-Frank Act. As noted in the 

proposing release, ‘‘the requirement that 

swaps be cleared by DCOs is one of the 

cornerstones of that reform.’’ 166 But 

even given the importance of central 

clearing as a means to mitigate 

counterparty credit risk, reduce 

systemic risk, and protect U.S. 

taxpayers, the Commission accepts that 

a person may have legitimate business 

purposes for entering into swaps that 

are not subject to the clearing 

requirement. 

In that regard, commenters requested 

that the Commission confirm that 

considering the costs and burdens of 

regulation, or reduction of counterparty 

credit risk, are legitimate business 

purposes. As stated in the proposing 

release, the Commission will not 

provide a bright-line test of non-evasive 

or abusive conduct because such an 

approach may be a roadmap for 

engaging in evasive or abusive conduct 

or activities.167 The Commission 

expects, however, that a person acting 

for legitimate business purposes will 

naturally weigh many costs and benefits 

associated with different transactions, 

including different swap classes and 

swap specifications that may or may not 

be subject to the clearing requirement. 

Therefore, the Commission clarifies that 

a person’s specific consideration of, for 

example, costs or regulatory burdens, 

including the avoidance thereof, is not, 

in and of itself, dispositive that the 

person is acting without a legitimate 

business purpose in a particular case.168

The Commission will view legitimate 

business purpose considerations on a 

case-by-case basis in conjunction with 

all other relevant facts and 

circumstances. 

In the context of the clearing 

requirement and § 50.10(a), however, 

the Commission does not believe it 

would be sufficient to satisfy the 

legitimate business purpose test where a 

person’s principal purpose of entering 

into a swap that is not subject to the 

clearing requirement is to circumvent 

the costs of clearing.169 Circumventing 

the costs of clearing may be a 

consideration, but cannot be the 

principal consideration in order to 

satisfy the legitimate business purpose 

test. The Commission notes ISDA’s 

comment regarding evasion, and the 

Commission has determined that to 

permit such an outcome would create 

an exception that would swallow the 

rule and could render the central 

clearing objectives and benefits under 

the Dodd-Frank Act meaningless. 

Moreover, section 2(h)(4)(A) requires 

the Commission prescribe the rules that 

the Commission determines ‘‘to be 

necessary to prevent evasions of the 

mandatory clearing requirements,’’ 170

which evinces Congress’s concern that 

evasion of the clearing requirement 

would undermine a central purpose of 

the Dodd-Frank Act. As noted above, 

the Commission determines that the 

proposed rules are necessary to prevent 

evasions of the mandatory clearing 

requirements, and is therefore adopting 

them. 

Furthermore, the Commission 

believes that this standard will not 

subject market participants to 

significant uncertainty, and the benefits 

of central clearing will outweigh the 

costs and burdens of any such 

uncertainty. In response to Freddie 

Mac’s comment regarding the 

Commission discussion of 

‘‘mechanical’’ specifications in the 

NPRM, that discussion served only to 

explain the Commission’s decision not 

to include those specifications in the set 

of class-defining specifications 

identified by the Commission for its 

class-based clearing requirement 

determination. The Commission is not 

pre-judging whether a swap that 

contains non class-defining 

specifications that are not accepted by a 

DCO would constitute evasion. The 

Commission recognizes that including 

such specifications in a swap could 

serve a legitimate business purpose if, 

for example, such specifications would 

legitimately result in a more accurate 

hedge of a business risk. In keeping with 

the Commission’s guidance that it will 

use a principles-based approach, 

assessing whether any particular swap 

that includes such terms would 

constitute evasion will be done on a 

case-by-case basis in light of all the 

relevant facts and circumstances. 

Finally, the Commission declines to 

adopt ISDA’s suggestion that the 

presence of fraud, deceit, or other 

unlawful activity is a prerequisite to 

establishing a violation of evasion or 

abuse under § 50.10. Although it is 

likely that fraud, deceit, or unlawful 

activity will be present where knowing 

or reckless evasion or abuse has 

occurred, the Commission does not 

believe that these factors are 

prerequisites to a violation of § 50.10. 

Rather, the presence or absence of fraud, 

deceit, or unlawful activity is one 

circumstance the Commission will 

consider when evaluating a person’s 

conduct or activities. 

IV. Implementation 

The Commission proposed to require 

compliance with the clearing 

requirement for the classes of swaps 

identified in proposed § 50.4 according 

to the compliance schedule contained in 


sroberts on DSK5SPTVN1PROD with 
74320 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

171 17 CFR 50.25, Swap Transaction Compliance 

and Implementation Schedule: Clearing 

Requirement Under Section 2(h) of the CEA, 77 FR 

44441 (July 30, 2012). Regulation 50.25 defines the 

terms Category 1 Entity and Category 2 Entity; this 

release uses the term Category 3 Entity to refer to 

counterparties to swaps falling under § 50.25(b)(3). 

172 17 CFR 140.99 sets for the process for 

addressing requests for exemptive, no-action, and 

interpretative letters. 

173Confirmation, Portfolio Reconciliation, 

Portfolio Compression, and Swap Trading 

Relationship Documentation Requirements for 

Swap Dealers and Major Swap Participants, 77 FR 

55904 (Sept. 11, 2012). 

174See 77 FR at 55940. 

175See Swap Transaction Compliance and 

Implementation Schedule: Clearing Requirement 

Under Section 2(h) of the CEA, 77 FR at 44456. 

§ 50.25.171 Under this schedule, 

compliance with the clearing 

requirement would be phased by type of 

market participant entering into a swap 

subject to the clearing requirement. 

The Commission received no 

comments specifically addressing the 

use of § 50.25. Vanguard recommended 

that the Commission should not 

implement mandatory clearing for any 

swaps until market participants have 

time to negotiate and execute all 

necessary documentation. Vanguard 

recommended the Commission delay 

compliance with the clearing 

requirement until six months after 

August 29, 2012, the date on which 

ISDA and FIA published a standard 

form of the futures agreement 

addendum for cleared swaps, i.e., 

February 28, 2013. SIFMA AMG also 

expressed concern about legal 

documentation and negotiations taking 

many months, and the difficulty buyside clients face in finding FCMs to 

clear for them. SIFMA AMG also 

recommended the clearing requirement 

be delayed for six months. 

In response to Vanguard’s and SIFMA 

AMG’s comments and light of the 

circumstances discussed below, 

compliance with the clearing 

requirement will not be required for any 

swaps until March 11, 2013. This 

extension of at least 6 months beyond 

publication of the FIA-ISDA clearing 

addendum applies to all market 

participants and addresses Vanguard’s 

and SIFMA AMG’s concerns about 

documentation. The Commission 

accounted for precisely this type of 

documentation issue in its adoption of 

§ 50.25. Accordingly, Category 2 Entities 

and Category 3 Entities have 90 and 180 

days beyond March 11, 2013, to come 

into compliance with the new clearing 

requirement, which is well beyond the 

six months from August 29, 2012, as 

requested by Vanguard and SIFMA 

AMG. The Commission also notes that 

any market participant may petition for 

relief under § 140.99 if that entity is 

unable to find an FCM to clear its swaps 

or if it needs additional time to 

complete requisite documentation.172

On September 10, 2012, the 

Commission clarified the timing of its 

swap dealer registration rules. The swap 

dealer registration regulations go into 

effect on October 12, 2012, and entities 

that have more than the de minimis 

level of dealing (swaps entered into after 

October 12) must register by no later 

than two months after the end of the 

month in which they surpass the de 

minimis level. By way of example, if an 

entity reaches $8 billion in swap dealing 

the day after October 12, then the entity 

would have to register within two 

months after the end of October, or by 

December 31, 2012. 

Given that swap dealers will not be 

required to register until the end of the 

year, and in light of requests for 

clarification regarding the application of 

§ 50.25, the Commission is clarifying 

that swaps executed prior to specific 

compliance dates set forth below are not 

subject to the clearing requirement. 

To promote certainty for market 

participants, the Commission is setting 

specific dates for compliance. 

Accordingly, the requirement for 

Category 1 Entities to begin clearing will 

commence on Monday, March 11, 2013, 

for swaps they enter into on or after that 

date. Category 2 Entities are required to 

clear swaps beginning on Monday, June 

10, 2013, for swaps entered into on or 

after that date, and Category 3 Entities 

would be required to clear swaps 

beginning on Monday, September 9, 

2013, for swaps entered into on or after 

that date. 

For example, no swap executed 

between two Category 1 Entities prior to 

March 11, 2013, is required to be 

cleared. In other words, Category 1 

Entities entering into swaps falling 

within one of the classes identified in 

§ 50.4 on or after March 11, 2013, are 

required to clear those swaps. Category 

2 Entities must begin clearing swaps 

pursuant to the new clearing 

requirement on or after June 10, 2013, 

and Category 3 Entities must begin 

clearing such swaps if they are entered 

into on or after the September 9, 2013. 

The above schedule will apply to 

compliance with required clearing for 

iTraxx. However, if no DCO has begun 

offering client clearing for iTraxx by 

February 11, 2013, then compliance 

with the required clearing of iTraxx will 

commence sixty days after the date on 

which iTraxx is first offered for client 

clearing by an eligible DCO. If an 

eligible DCO offers client clearing for 

iTraxx on or before September 9, 2013, 

the following phased implementation 

schedule will apply: Category 1 Entities 

are required to clear iTraxx indices 

entered into on or after the date 60 days 

after the date on which iTraxx is first 

offered for client clearing by an eligible 

DCO; Category 2 Entities are required to 

clear iTraxx entered into on or after the 

date 150 days after the date on which 

iTraxx is first offered for client clearing 

by an eligible DCO; and Category 3 

Entities are required to clear iTraxx 

entered into on or after the date 240 

days after the date on which iTraxx is 

first offered for client clearing by an 

eligible DCO. There will be no phasing 

of compliance if an eligible DCO offers 

client clearing for iTraxx after 

September 9, 2013. Rather, all three 

categories of market participants will be 

expected to come into compliance by 60 

days after the date on which iTraxx is 

first offered for client clearing by an 

eligible DCO. 

This clarification avoids the 

possibility that Active Funds that are 

included in Category 1 Entities would 

be required to clear before swap dealers, 

and provides market participants with 

certainty as to when they must begin 

clearing swaps. 

With regard to Active Funds, in order 

to promote orderly implementation of 

part 23 and the part 50 rules, both of 

which refer to Active Funds, the 

Commission is harmonizing the annual 

calculation period for both 

implementation of part 23’s swap 

trading relationship documentation 

requirements under § 23.504 173 and the 

clearing requirement compliance 

schedule under § 50.25. For purposes of 

implementing § 23.504, the Commission 

defined an Active Fund, as any private 

fund as defined in section 202(a) of the 

Investment Advisers Act of 1940, that is 

a not a third party subaccount and that 

executes 200 or more swaps per month 

based on a monthly average over the 12 

months preceding the adopting release, 

i.e., September 11, 2012.174 For 

purposes of § 50.25, the Commission 

defined Active Fund in the same 

manner except that the monthly average 

over the 12 months would be preceding 

the date of publication of the clearing 

requirement determination in the 

Federal Register, i.e., whatever date this 

adopting release is published.175 Market 

participants have asked the Commission 

to harmonize these two dates so that 

there will be one self-identified list of 

Active Funds for purposes of both 

implementation schedules under parts 

23 and 50. The Commission agrees with 

this approach and is modifying both 

compliance schedules to require private 

funds to calculate the number of swaps 

they enter into as a monthly average 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74321 

176See http://www.treasury.gov/press-center/

press-releases/Documents/11-16-2012%20FX%

20Swaps%20Determination%20pdf.pdf (finalizing 

Determinations of Foreign Exchange Swaps and 

Forwards, 75 FR 66829 (Oct. 28, 2010)). 

177Clearing Exemption for Swaps Between 

Certain Affiliated Entities, 77 FR 50425 (Aug. 21, 

2012). 

178 77 FR 47170 (Aug. 7, 2012). See also Section 

I.B above. 

179 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, 124 Stat. 1376 

(2010). 180This section states: ‘‘It shall be unlawful for 

any person to engage in a swap unless that person 

submits such swap for clearing to a derivatives 

clearing organization that is registered under this 

Act or a derivatives clearing organization that is 

exempt from registration under this Act if the swap 

is required to be cleared.’’ 181 76 FR 44464 (July 26, 2011). 182See § 39.5(b), § 39.5(c). Under section 

2(h)(2)(B)(ii) of the CEA, ‘‘[a]ny swap or group, 

category, type, or class of swaps listed for clearing 

by a [DCO] as of the date of enactment shall be 

considered submitted to the Commission.’’ 

183Section 2(h)(2)(D) of the CEA and § 39.5(b)(ii). 

184 77 FR 47172 (August 7, 2012). See also 

Section I.F above. 

over the past 12 months preceding 

November 1, 2012. 

In addition, the Commission clarifies 

that for purposes of calculating the 

number of swaps a fund executes as a 

monthly average over the 12 months 

preceding November 1, 2012, for both 

part 23 and part 50, private funds as 

defined in section 202(a) of the 

Investment Advisers Act of 1940 are not 

required to include foreign exchange 

swaps, in light of the final 

determination from the Secretary of the 

Treasury to exempt such swaps from the 

CEA.176

Finally, ISDA commented that the 

inter-affiliate exemption should be 

finalized prior to requiring compliance 

with the clearing requirement. The 

Commission has proposed its interaffiliate exemption rules 177 and 

anticipates that it will finalize those 

rules prior to the aforementioned 

compliance dates for these clearing 

requirement determinations. 

V. Cost-Benefit Considerations 

A. Statutory and Regulatory Background 

As discussed in the NPRM, and 

above, certain OTC derivatives, such as 

credit default swaps (CDS) played a 

prominent role in the financial crisis in 

the fall of 2008, highlighting the risk 

that opaque OTC markets can create for 

the financial system by linking together 

financial institutions in ways that are 

not well-understood.178 The failure to 

adequately collateralize the risk 

exposures posed by OTC derivatives, 

along with the contagion effects of the 

vast web of uncollateralized 

counterparty credit risk, led many to 

conclude that OTC derivatives should 

be centrally cleared. 

A fundamental premise of the DoddFrank Act is that the use of properly 

functioning central clearing can reduce 

systemic risk. Congress included the 

statutory clearing requirement in the 

Dodd-Frank amendments to the CEA to 

standardize and reduce counterparty 

risk associated with swaps, and, in turn, 

mitigate the potential systemic impact 

of such risks and reduce the likelihood 

for swaps to cause or exacerbate 

instability in the financial system. The 

clearing requirement determinations 

and regulations contained in this 

adopting release identify certain classes 

of swaps that are required to be cleared 

pursuant to the Dodd-Frank Act’s 179

clearing requirement incorporated 

within amended section 2(h)(1)(A) of 

the CEA.180

The Commission’s regulations 

establishing the process for the review 

of swaps that are submitted for a 

mandatory clearing determination are 

found in Part 39 of the Commission’s 

regulations. Regulation 39.5 provides an 

outline for the Commission’s review of 

swaps for required clearing.181

Regulation 39.5 requires the 

Commission to review all swaps 

submitted by DCOs or those swaps that 

the Commission opts to review on its 

own initiative.182 Under section 

2(h)(2)(D) of the CEA, in reviewing 

swaps for required clearing, the 

Commission must take into account the 

following factors: (1) Significant 

outstanding notional exposures, trading 

liquidity and adequate pricing data, (2) 

the availability of rule framework, 

capacity, operational expertise and 

credit support infrastructure, (3) the 

effect on the mitigation of systemic risk, 

(4) the effect on competition and (5) the 

existence of reasonable legal certainty in 

the event of the insolvency of the DCO 

or one or more of its clearing 

members.183 Regulation 39.5 also directs 

DCOs to provide to the Commission 

other information, such as product 

specifications, participant eligibility 

standards, pricing sources, risk 

management procedures, a description 

of the manner in which the DCO has 

provided notice of the submission to its 

members and any additional 

information requested by the 

Commission. This information is 

designed to assist the Commission in 

identifying those swaps that are 

required to be cleared. 

On February 1, 2012, Commission 

staff sent a letter requesting that 

registered DCOs submit all swaps that 

they were accepting for clearing as of 

that date, pursuant to § 39.5 of the 

Commission’s regulations. The 

Commission received submissions 

relating to CDS and interest rate swaps, 

as well as agricultural and energy 

swaps. 

This initial Commission 

determination addresses certain interest 

rate swaps and CDS, and is the first of 

a series of determinations that the 

Commission anticipates making as part 

of a phased approach to implementing 

mandatory clearing. The Commission 

chose to issue its first clearing 

requirement proposal for interest rate 

swaps and CDS because those swaps 

represent a significant share of the 

market in the case of interest rate swaps, 

and pose a unique risk profile in the 

case of CDS. In addition, the market has 

been clearing both types of swaps for 

some time, and market participants 

asked that the Commission begin with 

interest rate swaps and CDS. The 

Commission intends subsequently to 

consider other swaps submitted by 

DCOs, such as agricultural, energy, and 

equity indices. 

As stated in both the NPRM and 

above, the decision to initially focus on 

CDS and interest rate swaps from 

amongst the swaps submitted to the 

Commission for mandatory clearing 

determinations pursuant to section 

2(h)(2) is a function of both the market 

importance of these swaps and the fact 

that they already are widely cleared. In 

order to move the largest number of 

swaps to required clearing in its initial 

determinations, the Commission 

believes that it is prudent to focus on 

those swaps that have the highest 

market shares and market impact. 

Further, for these swaps there is already 

a blueprint for clearing and appropriate 

risk management. CDS and interest rate 

swaps fit these considerations and 

therefore are well suited for required 

clearing consideration.184 In the 

discussion that follows, the importance 

of central clearing is explained and 

highlighted to provide the background 

for the Commission’s consideration of 

the costs and benefits in this rulemaking 

as the Commission exercises its 

discretion under section 2(h)(2)(D) of 

the CEA to determine whether swaps 

that are submitted for a mandatory 

clearing determination are required to 

be cleared. 

B. Overview of Swap Clearing 

The following background discussion 

provides context for the Commission’s 

consideration of the costs and benefits 

of its clearing determinations in this 

rulemaking. 


sroberts on DSK5SPTVN1PROD with 
74322 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

185As a measure of volume, LCH accounts for 

each swap it clears as one trade side, which 

represents one counterparty to each two-sided 

trade. 

186 Data provided to the Commission by LCH. In 

the context of interest rate swaps, the notional 

amount refers to the specified amount on which the 

exchanged swap payments are calculated. It is a 

nominal amount that is not exchanged between 

counterparties. 

187See http://www.lchclearnet.com/swaps/ 

volumes/. Since the Dodd-Frank Act was passed in 

July 2010, outstanding trade sides at LCH have 

increased from approximately 1.6 million to 2.3 

million in September of 2012, an increase of 

approximately 44%. Indeed, the number of new 

trade sides being submitted for clearing per month 

increased from approximately 55,000 trade sides 

per month to 150,000 trade sides per month, an 

increase of approximately 270%. 

188See http://www.cmegroup.com/trading/ 

interest-rates/cleared-otc/index.html#data and 

http://www.trioptima.com/repository/historicalreports.html. Notably, CME launched its interest 

rate swap clearing service in the fall of 2010, after 

the Dodd-Frank Act was passed. 

189See Federal Reserve Bank of New York, Press 

Release, ‘‘New York Fed Welcomes Further 

Industry Commitments on Over-the-Counter 

Derivatives,’’ Oct. 31, 2008, available at http:// 

www.newyorkfed.org/newsevents/news/markets/ 

2008/an081031.html, which references documents 

prepared by market participants describing the 

importance of clearing. See also Ciara Linnane and 

Karen Brettell, ‘‘NY Federal Reserve pushes for 

central CDS counterparty,’’ Reuters, Oct. 6, 2008. 

190See http://www.cmegroup.com/clearing/cmeclearing-overview/safeguards.html for data 

regarding CME’s guaranty fund, posted as of May 

10, 2012. 

191See https://www.theice.com/clear_credit.jhtml 

for data on the size of guaranty fund, posted as of 

May 10, 2012. 

192 Id. The data is not adequate to enable the 

Commission to determine how much of the 

movement into clearing is attributable to natural 

market forces or anticipated requirements under the 

Dodd-Frank Act. 

i. How Clearing Reduces Risk 

When a bilateral swap is cleared, the 

clearinghouse becomes the counterparty 

to each of the original counterparties to 

the swap. This standardizes 

counterparty credit risk for the original 

swap participants in that they each bear 

the same risk—i.e., the risk attributable 

to facing the clearinghouse as 

counterparty. In addition, clearing 

mitigates counterparty risk to the extent 

that the clearinghouse is a more 

creditworthy counterparty relative to 

the original swap participants. 

Clearinghouses have demonstrated 

resilience in the face of past market 

stress. Most recently, they remained 

financially sound and effectively settled 

positions in the midst of turbulent 

events in 2007–2008 that threatened the 

financial health and stability of many 

other types of entities. 

Given the variety of effective 

clearinghouse tools to monitor and 

manage counterparty credit risk, the 

Commission believes that DCOs will 

continue to be some of the most 

creditworthy counterparties in the swap 

markets. These tools include the 

contractual right to: (1) Collect initial 

and variation margin associated with 

outstanding swap positions; (2) mark 

positions to market regularly (usually 

one or more times per day) and issue 

margin calls whenever the margin in a 

customer’s account has dropped below 

predetermined levels set by the DCO; (3) 

adjust the amount of margin that is 

required to be held against swap 

positions in light of changing market 

circumstances, such as increased 

volatility in the underlying; and (4) 

close out the swap positions of a 

customer that does not meet margin 

calls within a specified period of time. 

Moreover, in the event that a clearing 

member defaults on their obligations to 

the DCO, the latter has a number of 

remedies to manage associated risks, 

including transferring the swap 

positions of the defaulted member, and 

covering any losses that may have 

accrued with the defaulting member’s 

margin and other collateral on deposit. 

In order to transfer the swap positions 

of a defaulting member and manage the 

risk of those positions while doing so, 

the DCO has the ability to: (1) Hedge the 

portfolio of positions of the defaulting 

member to limit future losses; (2) 

partition the portfolio into smaller 

pieces; (3) auction off the pieces of the 

portfolio, together with their 

corresponding hedges, to other members 

of the DCO; and (4) allocate any 

remaining positions to members of the 

DCO. In order to cover the losses 

associated with such a default, the DCO 

would typically draw from (in order): 

(1) The initial margin posted by the 

defaulting member; (2) the guaranty 

fund contribution of the defaulting 

member; (3) the DCO’s own capital 

contribution; (4) the guaranty fund 

contribution of non-defaulting members; 

and (5) an assessment on the nondefaulting members. These mutualized 

risk mitigation capabilities are largely 

unique to clearinghouses, and help to 

ensure that they remain solvent and 

creditworthy swap counterparties even 

when dealing with defaults by their 

members or other challenging market 

circumstances. 

ii. Movement of Swaps Into Clearing 

There is significant evidence that 

some parts of the OTC swap markets 

(the interest rate swaps and CDS 

markets in particular) have been 

migrating into clearing over the last 

number of years in response to market 

incentives as well as in anticipation of 

the Dodd-Frank Act’s clearing 

requirement. LCH data, for example, 

shows that the outstanding volume of 

interest rate swaps cleared by LCH has 

grown steadily since at least November 

2007, as has the monthly registration of 

new trade sides.185 Data provided to the 

Commission shows that the notional 

amount of cleared interest rate swaps is 

approximately $72 trillion as of January 

2007, and just over $236 trillion in 

September 2010, an increase of 228% in 

three and a half years.186 Together, 

those facts indicate increased demand 

for LCH clearing services related to 

interest rate swaps, a portion of which 

preceded the Dodd-Frank Act.187 Data 

available through CME and TriOptima 

indicate similar patterns of growing 

demand for interest rate swap clearing 

services, although their publically 

available data does not provide a picture 

of demand prior to the passage of the 

Dodd-Frank Act.188

In addition to interest rate swap 

clearing, major CDS market participants 

are clearing their CDS indices and single 

names in significant volumes. As 

explained above, in 2008, prior to the 

enactment of the Dodd-Frank Act, the 

Federal Reserve Bank of New York 

(FRBNY) began encouraging market 

participants to establish a central 

counterparty to clear CDS.189 In the past 

four years CDS clearing has grown 

significantly. As a representation of this 

growth, CME now has initial margin for 

CDS in excess of $1.8 billion and a 

guaranty fund of approximately $629 

million,190 and ICE Clear Credit has 

initial margin on deposit for CDS of 

$10.8 billion and a guaranty fund equal 

to $4.4 billion.191 ICE Clear Europe has 

initial margin for CDS totaling $6.8 

billion and a guaranty fund of $2.7 

billion.192

iii. The Clearing Requirement and Role 

of the Commission 

In the Dodd-Frank Act, Congress 

directed that clearing shift from a 

voluntary practice to a mandatory 

practice for certain swaps and gave the 

Commission responsibility for 

determining which swaps would be 

required to be cleared. Under section 

2(h)(2) of the CEA, the Commission is 

required to review each swap, or group, 

category, type, or class of swaps that a 

DCO clears and submits to the 

Commission in order to determine 

whether the submitted swaps are 

required to be cleared. In making these 

clearing determinations and 

promulgating the final rules, the 

Commission has taken its direction from 

the statutory text and is implementing 

the statute by determining, in 

accordance with the five factors set forth 

in the statute, whether swaps submitted 

to the Commission for a mandatory 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74323 

193The Commission also recognizes that there 

might not be a linear relationship between the 

quantity of swaps that are cleared (whether 

measured by number of swaps, the notional value 

of swaps, or some other measure of swap quantity, 

such as the exposure resulting from the swaps) and 

the costs and benefits resulting from clearing. For 

example, if the Commission were to assume that the 

rule would result in a doubling of the quantity of 

a certain type of swap that is cleared, it would not 

necessarily be the case that the costs and benefits 

of clearing that type of swap would double. Rather, 

the relationship could be non-linear for a variety of 

reasons (such as variations among the users of that 

type of swap). In fact, it may be reasonable to 

assume that where the costs of clearing are 

relatively low and the benefits are relatively high, 

market participants already voluntarily clear swaps 

even in the absence of a clearing requirement. 

194Embedded in this approach is the assumption 

that costs and benefits of increased clearing prior 

to the determination is not a function of the DoddFrank Act or the clearing determination contained 

herein. As stated above, the Commission 

acknowledges that some increases in clearing that 

have already occurred are likely the result of 

anticipated clearing requirements. However, it is 

not possible to estimate how much of the increases 

in clearing are the result market forces, and how 

much is a function of expected requirements related 

to clearing. Both factors have likely contributed to 

the increases in clearing that have occurred prior 

to this rule. 

195 It is also possible that some market 

participants would respond to the current rule’s 

requirement that certain types of swaps be cleared 

by decreasing their use of such swaps. This 

possibility contributes to the uncertainty regarding 

how the current rule will affect the volume of 

swaps that are cleared. 

196For example, the PEW Economic Policy Group 

estimates total costs of the acute stage of the crisis 

for U.S. interests were approximately $12.04 

trillion, including lost GDP, wages, real estate 

wealth, equity wealth, and fiscal costs. Their 

estimates include $7.4 trillion in losses in the 

Continued 

clearing determination are required to 

be cleared. As described above, the 

Commission has decided to initially 

focus on interest rate swaps and CDS 

because of the market importance of 

these swaps and the fact that they 

already are widely cleared. 

In determining pursuant to section 

2(h)(2)(D) whether these particular 

swaps should be required to be cleared, 

the Commission has taken into account 

the fact that voluntary clearing of swaps 

has increased over the past years 

(perhaps due in part to anticipation of 

the clearing requirement to be imposed 

under the Dodd-Frank Act, but perhaps 

due in part to a realization of the 

benefits of clearing after the financial 

crisis). These industry efforts and the 

extent to which voluntary clearing of 

swaps has already occurred provide a 

useful reference point for the 

Commission’s consideration of the costs 

and benefits of its actions in 

determining whether particular swaps 

should be required to be cleared.193

In the discussion that follows, the 

Commission summarizes and evaluates 

the costs and benefits of the new 

clearing requirements resulting from the 

Commission’s clearing determinations 

in this rulemaking. In the context of this 

relevant statutory provision and ongoing 

industry initiatives, in the sections that 

follow, the Commission also has 

considered its clearing determinations 

in light of cost-benefit issues raised by 

commenters and suggested alternatives. 

In general, the Commission believes 

that the costs and benefits related to the 

required clearing of the classes of 

interest rate swaps and CDS resulting 

from this rulemaking are attributable, in 

part to (1) Congress’s stated goal of 

reducing systemic risk by, among other 

things, requiring clearing of swaps and 

the statutory clearing mandate in 

section 2(h) of the CEA to achieve that 

objective; and (2) the Commission’s 

determination under section 2(h)(2)(D) 

that these particular classes of swaps 

should be required to be cleared. The 

Commission will discuss the costs and 

benefits of the overall move from 

voluntary clearing to required clearing 

for the particular swaps subject to this 

new clearing requirement.194 However, 

in so doing, the Commission believes 

that it is not readily ascertainable 

whether an increased use of clearing 

following such determinations should 

be attributed to statutory or regulatory 

requirements that particular swaps be 

required to be cleared, as compared to 

swap market participants’ market-based 

decisions to increase the use clearing to 

reduce risks and costs.195

C. Consideration of the Costs and 

Benefits of the Commission’s Action 

i. CEA Section 15(a) 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of the 

following five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. 

Accordingly, the Commission considers 

the costs and benefits resulting from its 

discretionary determinations with 

respect to the section 15(a) factors. 

As stated above, the Commission 

received a total of 33 comment letters 

following the publication of the NPRM, 

many of which strongly supported the 

proposed regulations. Some commenters 

generally addressed the cost-and-benefit 

aspect of the current rule; none of them, 

however, provided any quantitative data 

in response to the Commission’s 

requests for comment. In the sections 

that follow the Commission considers: 

(1) Costs and benefits of required 

clearing for the classes of swaps 

identified in this adopting release; (2) 

alternatives contemplated by the 

Commission and the costs and benefits 

relative to the approach adopted herein; 

(3) the impact of required clearing for 

swaps under the identified classes of 

swaps in light of the 15(a) factors. The 

Commission also discusses the 

corresponding comments accordingly. 

ii. Costs and Benefits of Required 

Clearing Under the Final Rule 

In order to comply with required 

clearing under this adopting release, 

market participants are likely to face 

certain startup and ongoing costs 

relating to technology and 

infrastructure, new or updated legal 

agreements, ongoing fees from service 

providers, and costs related to 

collateralization of their positions. The 

per-entity costs related to changes in 

technology, infrastructure, and legal 

agreements are likely to vary widely, 

depending on each market participant’s 

existing technology infrastructure, legal 

agreements, operations, and anticipated 

needs in each of these areas. For market 

participants that already use clearing 

services, some of these costs may be 

expected to be lower, while the opposite 

will likely be true for market 

participants that must begin to use 

clearing services only because of the 

new clearing requirement. The costs of 

collateralization, on the other hand, are 

likely to vary depending on a number of 

factors, including whether an entity is 

subject to capital requirements or not, 

and the differential between the cost of 

capital for the assets the entity uses as 

collateral, and the returns the entity 

realizes on those assets. 

There are also significant benefits 

associated with increased clearing, 

including reducing and standardizing 

counterparty credit risk, increased 

transparency, and easier access to the 

swap markets. These effects together 

will contribute significantly to the 

stability and efficiency of the financial 

system. The Commission lacks data to 

quantify these benefits with any degree 

of precision. The Commission notes, 

however, that the extraordinary 

financial system turbulence of 2008 has 

had profound and long-lasting adverse 

effects on the economy, and therefore 

reducing systemic risk provides 

significant, if unquantifiable, 

benefits.196 Also, as is the case for the 


sroberts on DSK5SPTVN1PROD with 
74324 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

equity markets between June 2008 and March 2009, 

but do not include subsequent gains in equity 

markets that restored markets to their mid-2008 

levels by the end of 2009. In addition, their 

calculations do not include continued declines in 

real estate markets subsequent to March 2009. See 

Pew Economic Policy Group, ‘‘The Cost of the 

Financial Crisis: The Impact of the September 2008 

Economic Collapse,’’ March 2010. The IMF 

estimated that the cost to the banking sector of the 

financial crisis through 2010 was approximately 

$2.2 trillion and reported a range of estimates for 

total cost to the taxpayer of GSE bailouts that 

ranged from $160 billion (Office of Management 

and Budget, February 2010) to $500 billion 

(Barclays Capital, December 2009). See IMF, 

‘‘Global Financial Stability Report: Responding to 

the Financial Crisis and Measuring Systemic 

Risks,’’ October 2010. Both studies acknowledge 

that the estimates are subject to uncertainties. 

197See comments to End-User Exception to 

Mandatory Clearing of Swaps; Proposed Rule, 75 FR 

80747 (Dec. 23, 2011), including Chatham Financial 

letter at 2, available at http://comments.cftc.gov/ 

PublicComments/ViewComment.aspx?id=58077, 

and Webster Bank letter at 3, available at http:// 

comments.cftc.gov/PublicComments/ 

ViewComment.aspx?id=58076. 

198 In its letter, FIA stated that it does not collect 

information from its members concerning fees 

charged for particular services, and thus is unable 

to respond to the Commission’s request for date 

regarding FCM fees. No other commenter responded 

to the request for information regarding legal fees. 

199See Section IV above, clarifying that 

compliance for Category I, II, and III Entities will 

apply, respectively, to swaps executed on or after 

March 11, 2013, June 10, 2013, and September 9, 

2013. 

200See Section II.B above. 

201The Commission has not adopted a ‘‘brightline’’ standard for evasion in order to avoid 

providing a ‘‘road-map’’ for evasion. The 

Commission’s discussion of § 50.10 is similar to its 

approach for the anti-evasion rules §§ 1.3(xxx)(6) 

and 1.6 that it recently adopted in a joint final 

rulemaking with the Securities and Exchange 

Commission. See Further Definition of ‘‘Swap,’’ 

‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap 

Agreement’’; Mixed Swaps; Security-Based Swap 

Agreement Recordkeeping, 77 FR 48208, 48350– 

48354 (Aug. 13, 2012). 

costs related to clearing, these benefits 

would be relatively less to the extent 

that market participants are already 

using clearing in the absence of a 

requirement. 

a. Technology, Infrastructure, and Legal 

Costs 

With respect to technology and 

infrastructure, for market participants 

that already use swap clearing services 

or trade futures, many of the backend 

requirements for technology and 

infrastructure that supports cleared 

swaps are likely to be quite similar, and 

therefore necessary changes to those 

systems are likely to require relatively 

lower costs. Market participants that are 

not currently using swap clearing 

services or trade futures, however, may 

need to implement appropriate 

infrastructure and technology to connect 

with an FCM that will clear swaps on 

their behalf. 

Similarly for legal fees, the costs 

related to clearing the swaps that are 

subject to this clearing requirement are 

likely to vary widely depending on 

whether market participants already use 

clearing services or trade futures. For 

those market participants that have not 

already engaged an FCM, it has been 

estimated, in response to another 

rulemaking, that smaller financial 

institutions will spend between $2,500 

and $25,000 reviewing and negotiating 

legal agreements when establishing a 

new business relationship with an 

FCM.197 Commenters on this 

rulemaking did not provide data that 

would enable the Commission to 

determine to what degree these 

estimates would apply to larger entities 

establishing a relationship with an FCM 

or to determine costs associated with 

entities that already have established 

relationships with one or more FCMs, 

but need to revise those agreements.198

Even accepting the data provided for 

smaller financial institutions, the 

Commission lacks sufficient data to 

calculate a reasonable estimate of the 

potential costs that are likely to depend 

significantly on the specific business 

needs of each entity and therefore are 

expected to vary widely among market 

participants. 

Citadel commented that the fact that 

all the interest rate swaps and CDS 

included in the Commission’s proposal 

are already being cleared by registered 

DCOs in material volumes provides 

clear evidence that there is the rule 

framework, capacity, operational 

expertise and resources, and credit 

support infrastructure necessary to clear 

each of the swaps that are the subject of 

the Commission’s determination. 

SIFMA AMG and Vanguard expressed 

concern about legal documentation and 

negotiations taking many months, and 

recommended the clearing requirement 

be delayed. They also raised doubt 

about the readiness of market 

participants to comply with the 

Commission’s upcoming swap customer 

segregation rules. Vanguard further 

stated that it has ‘‘serious reservations 

about the potential impact on cost, 

liquidity, and heightened margin risk 

which could result from the premature 

roll-out of the clearing mandate.’’ 

In light of the ‘‘lack of experience and 

practical know-how’’ related to DCO 

insolvency, ISDA recommended that the 

Commission conduct a study on 

insolvency. Citadel, on the other hand, 

stated that reasonable legal certainty 

exists in the event of an insolvency of 

a DCO or one or more DCO members 

with regard to the treatment of customer 

and swap counterparty positions, funds, 

and property. 

Commission Response 

In response to Vanguard and SIFMA 

AMG’s concerns about legal 

documentation and operational 

readiness, the Commission has clarified 

that compliance with the clearing 

requirement will not be required for any 

swaps until March 11, 2013, which 

responds to commenters’ 

recommendation that the clearing 

requirement by delayed for six months 

to allow for documentation. Moreover, 

Category 2 and Category 3 entities will 

have until June 10, 2013, and September 

9, 2013, respectively, to come into 

compliance with the new 

requirement.199 In response to ISDA’s 

statements regarding insolvency, as 

explained above, Commission staff 

actively participates in a number of 

international efforts related to 

clearinghouses and clearing member 

insolvency, as well as in coordination 

efforts with U.S. authorities.200

Additionally, the Commission is 

exercising the anti-evasion rulemaking 

authority granted to it by the DoddFrank Act. In terms of legal costs, 

market participants will be responsible 

for complying with the new anti-evasion 

requirements. Generally, rule § 50.10 

states that it is unlawful for any person 

to knowingly or recklessly evade or 

participate in or facilitate an evasion of 

the requirements of section 2(h) of the 

CEA, to abuse the exception to the 

clearing requirement as provided under 

section 2(h)(7) of the CEA and 

Commission rules, or to abuse any 

exemption or exception to the 

requirements of section 2(h) of the CEA, 

including any exemption or exception 

as the Commission may provide by rule, 

regulation, or order. 

This rule is expected to help ensure 

that would-be evaders cannot engage in 

conduct or activities that constitute an 

evasion of the requirements of section 

2(h) or an abuse of any exemption or 

exception to such requirements. The 

Commission also sets forth guidance as 

to how it would determine if such 

evasion or abuse has occurred, while at 

the same time preserving the 

Commission’s ability to determine, on a 

case-by-case basis, with consideration 

given to all the facts and circumstances, 

that other types of transactions or 

activities constitute an evasion or abuse 

under § 50.10.201

The Commission believes that 

participants in the swap markets should 

have policies and procedures already in 

place to ensure that their employees, 

affiliates, and agents will refrain from 

engaging in activities, including 

devising transactions, for the purpose of 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74325 

202See above at Section III.G. 

203See CME pricing charts at: http://www.cme

group.com/trading/cds/files/CDS-Fees.pdf; 

http://www.cmegroup.com/trading/interest-rates/

files/CME-IRS-Customer-Fee.pdf; 

and http://www.cmegroup.com/trading/interestrates/files/CME-IRS-Self-Clearing-Fee.pdf. 

204See LCH pricing for clearing services related 

to OTC interest rate swaps at: http://www.lch

clearnet.com/swaps/swapclear_for_clearing_

members/fees.asp. 

205See ICE Clear Credit fees for CDS at: https:// 

www.theice.com/publicdocs/clear_credit/circulars/

ICEClearCredit%20Fee%20Schedule%20Notice_

FINAL.pdf. 

206See CME pricing charts. 

207See id. 

208See ICE Clear Credit fees for CDS at: https:// 

www.theice.com/publicdocs/clear_credit/circulars/

ICEClearCredit%20Fee%20Schedule%20Notice_

FINAL.pdf. 

209See letters from Chatham and Webster Bank. 

The Commission is not aware of similar annual fees 

charged to larger customers. The Commission 

believes that FCMs are more likely to charge such 

fees to smaller customers in order to cover the fixed 

costs that are not likely covered through fees 

charged on a per-swap basis to customers that use 

swaps less frequently. 

evading, or in reckless disregard of, the 

requirements of section 2(h) of the CEA 

and Commission regulations or to abuse 

any exemption or exception to such 

requirements. The Commission believes 

that it will not be necessary for firms 

that currently have adequate 

compliance programs to hire additional 

staff or significantly upgrade their 

systems to comply with the proposed 

rule. Firms may, however, incur some 

costs, such as costs associated with 

training staff on the new clearing 

requirement rules. 

In addition, market participants may 

incur costs when determining whether 

they are properly relying on a legitimate 

business purpose. The Commission in 

choosing a principles-based approach 

rather than a bright-line test, recognizes 

that there may be direct costs and 

indirect costs due to perceived 

uncertainty related to determining what 

constitutes a legitimate business 

purpose for entering into swaps that are 

not subject to the clearing requirement. 

As stated above, the Commission will 

not provide a bright-line test of nonevasive or abusive conduct because 

such an approach may be a roadmap for 

engaging in evasive or abusive conduct 

or activities. However, the Commission 

has provided guidance above regarding 

what is meant by certain key terms in 

§ 50.10, and the Commission has 

clarified its belief that where a person’s 

principal purpose in entering into a 

swap that is not subject to the clearing 

requirement is to circumvent the costs 

of clearing, the legitimate business 

purpose test would not be satisfied. The 

Commission anticipates that this 

guidance will mitigate costs related to 

determining whether particular conduct 

or activity could be construed as being 

an evasion of the requirements of 

section 2(h) or an abuse of any 

exemption or exception to the 

requirements.202

b. Ongoing Costs Related to FCMs and 

Other Service Providers 

In the NPRM, the Commission 

considered ongoing costs associated 

with fees charged by FCMs that market 

participants will bear, in addition to 

costs associated with technological and 

legal infrastructure. Regarding fees, 

DCOs typically charge FCMs an initial 

transaction fee for each of the FCM’s 

customers’ interest rate swaps that are 

cleared, as well as an annual 

maintenance fee for each of their 

customers’ open positions. Not 

including customer-specific and volume 

discounts, the transaction fees for 

interest rate swaps at the CME range 

from $1 to $24 per million notional 

amount for interest rate swaps and the 

maintenance fees are $2 per year per 

million notional amount for open 

positions.203 LCH transaction fees for 

interest rate swaps range from $1-$20 

per million notional amount, and the 

maintenance fee ranges from $5-$20 per 

swap per month, depending on the 

number of outstanding swap positions 

that an entity has with the 

clearinghouse.204 For CDS, ICE Clear 

Credit charges an initial transaction fee 

of $6 per million notional amount. 

There is no maintenance fee charged by 

ICE for maintaining open CDS 

positions.205

FCMs will also bear additional fees 

with respect to their house accounts at 

the DCO to the extent that they clear 

more swaps due to the clearing 

requirement. For example, for interest 

rate swaps that they clear through CME, 

clearing members are charged a 

transaction fee that ranges from $0.75 to 

$18.00 per million notional, depending 

on the transaction maturity.206

Members, however, are not charged 

annual maintenance fees for their open 

house positions.207 For CDS, clearing 

members at ICE Clear Credit are charged 

$5–6 per transaction per million 

notional and there is no maintenance 

fee.208

As discussed above, it is difficult to 

predict precisely how the requirement 

to clear the classes of swaps covered by 

this new requirement will increase the 

use of swap clearing, as compared to the 

use of clearing that would occur in the 

absence of the requirement. However, 

the Commission expects that 

application of the clearing requirement 

to the swaps covered by the new rule 

will generally increase the use of 

clearing, leading to the ongoing 

transaction costs noted above. 

In addition, the Commission 

understands that FCM customers that 

only transact in swaps occasionally are 

typically required to pay a monthly or 

annual fee to each FCM that ranges from 

$75,000 to $125,000 per year.209 Again, 

although it is difficult to predict 

precisely how many FCM customers 

would be subject to such fees based on 

the clearing requirement for CDS and 

interest rate swaps, the Commission 

expects that some market participants 

that previously did not use clearing 

would be subject to the requirements of 

the current rule. 

In the NPRM, the Commission asked 

a series of questions related to FCM fees 

and invited comment on the fee 

information presented. No commenter 

responded to the questions asked or 

provided any additional information 

with regard to clearing fees. As noted 

above, FIA raised the issue only to 

explain that it does not collect such 

information from its members. 

c. Costs Related to Collateralization of 

Cleared Swap Positions 

As mentioned above, market 

participants that enter into swaps with 

the specifications identified in the 

classes subject to this adopting release 

will be required to post collateral with 

their FCM and/or at the DCO. The 

incremental cost of collateral resulting 

from the application of the clearing 

requirement depends on the extent to 

which such swaps are already being 

cleared (even in the absence of the 

requirement) or otherwise collateralized 

bilaterally. The incremental cost also 

depends on whether such swaps are, if 

not collateralized, priced to include 

implicit contingent liabilities and 

counterparty credit risk born by the 

counterparty to the swap. 

1. Quantitative Approach Presented in 

the NPRM 

A conservative approach would be to 

assume that all the swaps that are 

currently not cleared would be covered 

by the new clearing requirement, and 

that they are completely 

uncollateralized, and not priced to 

include implicit contingent liabilities 

and counterparty credit risk born by the 

counterparty. Under this approach, 

imposition of the clearing requirement 

for those types of swaps would create 

additional costs due to: (1) The 

difference between cost of capital and 

returns on that capital for assets posted 

to meet initial margin for the entire term 

of the swap; and (2) the difference 


sroberts on DSK5SPTVN1PROD with 
74326 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

210The numbers calculated above may either 

over-estimate or under-estimate the amount of 

additional initial margin that would need to be 

posted under the conservative assumptions stated 

above. For instance, differences in the amount of 

netting that is possible within portfolios currently 

being cleared versus those not currently being 

cleared could have a significant impact on the 

amount of additional margin that is required to be 

posted. Other factors such as differences in 

liquidity among swaps currently being cleared and 

those not being cleared could also impact the 

amount of additional margin that is posted. 

211The total amount of initial margin on deposit 

at CME for interest rate swaps is $5 billion, but for 

purposes of this estimate, the Commission is not 

including that amount. 

212The total amount of initial margin on deposit 

only includes those amounts reported to the 

Commission by registered DCOs. Other 

clearinghouses, such as LCH.Clearnet.SA, clear the 

indices included in the proposed determination, 

however, the relative size of the open interest in the 

relevant CDS indices is substantially smaller than 

each of the DCOs included in this calculation. 

213BIS estimates that the gross notional value of 

outstanding CDS contracts is $28.6 trillion, and that 

$10.5 trillion of that is index related CDS. See BIS 

data, available at http://www.bis.org/statistics/ 

otcder/dt21.pdf. 

214 In the NPRM, the Commission noted that 

ISDA has estimated that 14.5% of the index-based 

CDS market is currently being cleared, whereas the 

total outstanding notional at CME, ICE Clear 

Europe, and ICE Credit represents approximately 

7.5% of the global index-based CDS market 

estimated by BIS. Such a discrepancy would be 

expected if one or more of the following occurred: 

(1) If ISDA overestimated the percentage of the 

index-based CDS that is currently being cleared; (2) 

if BIS overestimated the size of the global indexbased swap market; (3) if a significant amount of 

compression occurs as index-based CDS are moved 

into clearing; and/or (4) if a significant portion of 

the cleared index-based CDS market is held at 

clearinghouses other than CME, ICE Clear Europe, 

and ICE Clear Credit. The Commission noted in the 

NPRM that it believes that the compression of CDS 

positions moving into clearing is the most likely 

explanation and therefore used the ISDA estimate. 

215As well as, applying to swaps subject to a 

change in ownership, as explained above in Section 

III.D. 

216Cross-Border Application of Certain Swaps 

Provisions in the Commodity Exchange Act, 77 FR 

41214 (July 12, 2012). 

217See ISDA Margin Survey 2012, at 15, available 

at http://www2.isda.org/functional-areas/research/ 

surveys/margin-surveys/. Although it is unclear 

exactly how many of the derivatives covered by this 

survey are swaps, it is reasonable to assume that a 

large part of them are. 

218This estimate, however, does not adjust for 

double counting of collateral assets. The same 

survey reports that as much as 91.1% of cash used 

as collateral and 43.8% of securities used as 

collateral are being reused, and therefore are 

counted two or more times in the ISDA survey. See 

ISDA Margin Survey 2012, at 20 and 11, 

respectively. 

between cost of capital and returns on 

that capital for assets paid to meet the 

cost of capital for variation margin to 

the extent a party is ‘‘out of the money’’ 

on each swap. Under the assumptions 

mentioned above, if every interest rate 

swap and CDS that is not currently 

cleared were moved into clearing, the 

additional initial margin that would 

need to be posted is approximately 

$19.2 billion for interest rate swaps and 

$53 billion for CDS.210

In the NPRM, the Commission 

calculated its estimated additional 

initial margin amounts based on the 

following assumptions. According to 

representations made to the 

Commission by LCH, they clear 

approximately 51% of the interest rate 

swaps market. The total amount of 

initial margin on deposit at LCH for 

interest rate swaps is approximately $20 

billion.211 Therefore, if all remaining 

interest rate swaps were moved into 

clearing, approximately $19.2 billion 

($20B/0.51¥$20B = 19.2B) would have 

to be posted in initial margin. 

Similarly, the initial margin related to 

CDS currently on deposit at CME, ICE 

Clear Credit, and ICE Clear Europe is 

approximately $21.4 billion.212 This 

amount includes initial margin based on 

both index-based CDS and single-name 

CDS positions. BIS data indicates that 

approximately 36.6% of the CDS market 

comprises index-based CDS.213 In the 

NPRM, the Commission noted that if it 

is assumed that approximately 36.6% of 

the overall portfolio-based CDS margin 

(i.e., CDS indices and single-name CDS 

margined together) currently held by 

DCOs for CDS positions is related to 

index-based CDS, and then add any 

margin held by DCOs attributable solely 

to index-based CDS, it can be estimated 

that approximately $9.0 billion in 

margin currently held by those DCOs is 

related to index-based CDS. ISDA data 

indicates that 14.5% of the index-based 

CDS market is currently cleared.214

Therefore, the Commission noted in the 

NPRM that if the entire index-based 

CDS market moved into clearing, $53 

billion ($9.0B/0.145¥$9.0 = $53B) in 

initial margin would have to be posted 

at DCOs. 

Both of the above estimates assume 

that additional interest rate swaps 

brought into clearing would have 

similar margin requirements per unit of 

notional amount to those interest rate 

swaps that are already in clearing, and 

assumes that additional CDS brought 

into clearing would have similar margin 

requirements per unit of notional 

amount to those CDS that are already 

being cleared. These assumptions, in 

turn, assume similar levels of liquidity, 

compression, netting, and similar tenors 

for the swaps that are currently cleared 

and those that are not. While the 

Commission recognizes that these 

factors are unlikely to be identical 

among both groups of products, 

adequate information to quantify the 

impact of each of these possible 

differences between the two groups of 

swaps on the amount of additional 

collateral that would have to be posted 

is not available. 

In any case, the Commission noted 

that it is probable that the estimates in 

the NPRM significantly overstate the 

amount of additional capital that would 

be posted for a number of reasons 

described below. First, these estimates 

are based upon the assumption that 

every interest rate swap and indexbased CDS not currently cleared is 

brought into clearing as a result of the 

Commission’s determinations herein. 

However, in this adopting release the 

Commission has set forth clearing 

requirements only for certain classes of 

interest rate swaps and CDS, and not for 

all interest rate swaps and CDS. 

Therefore, there will still be certain 

types of interest rate swaps, such as 

those related to the thirteen additional 

currencies cleared by LCH, that are not 

required to be cleared. Moreover, the 

clearing requirement will apply only to 

new swap transactions 215 whereas 

market estimates include legacy 

transactions. In addition, these 

estimates assume that no additional 

voluntary clearing would be taking 

place in the absence of the 

Commission’s determinations. The 

Commission also observes that, to the 

extent that portfolio margining for 

products such as CDS is expanded to all 

market participants, it is likely to reduce 

the additional margin that is required. 

In some instances, these margin 

reductions for well-balanced portfolios 

could be significant. 

In addition, non-financial entities 

entering into swaps for the purpose of 

hedging or mitigating commercial risk 

are not required to use clearing under 

section 2(h)(7) of the CEA. As a 

consequence, many entities will not be 

required to clear, even when entering 

into interest rate swaps or CDS that are 

otherwise required to be cleared. Third, 

some interest rate swaps and CDS 

involve cross border transactions to 

which the Commission’s clearing 

requirement will not apply.216 Fourth, 

collateral is already posted with respect 

to many non-cleared interest rate swaps 

and CDS. ISDA conducted a recent 

survey which reported that 93.4% of all 

trades involving credit derivatives, and 

78.1% of all trades involving fixed 

income derivatives are subject to 

collateral agreements.217 Moreover, 

although the Commission cannot verify 

the accuracy of the estimate, ISDA 

estimated that the aggregate amount of 

collateral in circulation in the noncleared OTC derivatives market at the 

end of 2011 was approximately $3.6 

trillion.218


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74327 

219 77 FR at 47214. 

220See Morgan Stanley, Morgan Stanley Research, 

‘‘Swap Central Clearing: What is the Impact on 

Collateral?’’ (August 2012). 

221This ratio is the initial margin divided by the 

notional outstanding. 222 In particular, Morgan Stanley assumed that 

‘‘dealer [initial margin] may grow over time due to 

higher CCP collateral requirements and 

counterparty diversification regulations.’’ 

223See End User Exception to the Clearing 

Requirement for Swaps, 77 FR 42560 (July 19, 

2012). 

224See TABB Group, ‘‘The New Global Risk 

Transfer Market: Transformation and the Status 

Quo,’’ (Sept. 2012). 

2. Comments Received in Response to 

NPRM Consideration of Costs and 

Benefits 

In the NPRM, the Commission 

requested comment regarding the total 

amount of additional collateral that 

would be required due to the proposed 

clearing requirement. In particular, the 

Commission sought quantifiable data 

and analysis.219 No commenter 

addressed the quantitative approach 

laid out by the Commission in the 

NPRM. Nor did any commenter provide 

quantifiable data and analysis to 

support or refute such analysis. Citadel 

stated that the Commission’s 

determination is justified on a costbenefit basis, but did not address the 

costs of collateral directly. FIA noted 

that the NPRM’s cost-benefit discussion 

‘‘is among the more thoughtful and 

comprehensive the Commission has 

ever prepared,’’ but did not address the 

costs of collateral, fees, or other costs. 

3. Additional Research Reviewed by the 

Commission 

Despite the lack of feedback from 

commenters regarding the costs of 

collateral, the Commission continued to 

research market and academic literature 

in the public domain for additional 

data. The Commission identified and 

obtained two relevant papers. These 

papers are presented as additional 

informative background regarding the 

costs of mandatory clearing. The 

Commission has reviewed, but has not 

been able to verify, the conclusions 

reached in these papers. 

In a recent research note, Morgan 

Stanley estimated the global increase in 

initial margin for interest rate swaps 

trades as a result of the swap clearing 

requirements.220 Its ‘‘bull case’’ figure of 

$20 billion is largely consistent with the 

Commission’s estimate of $19.2 billion 

in the NPRM calculated above, though 

its methodology is different. Morgan 

Stanley obtained this figure in several 

steps. First, it considered two main 

groups of interest rate swaps traders: 

dealers and buy-side investors, which 

Morgan Stanley believes have interest 

rate swaps with notional values of 

approximately $339 trillion and $89 

trillion, respectively, outstanding. Next, 

Morgan Stanley projected that the 

amount of new interest rate swaps that 

will be cleared as a percentage of 

current notional would be 10% for 

dealers and 80% for buy-side 

participants, assuming that ‘‘most of the 

eligible dealer-to-dealer trades are 

already centrally cleared.’’ Finally, 

Morgan Stanley multiplied the resulting 

amount of new interest rate swaps that 

will be cleared for each group of traders 

by an initial margin to notional ratio 

that they estimated.221 Currently, 

according to Morgan Stanley, ‘‘the 

aggregate dealer initial margin as a 

percentage of notional reported by LCH 

is approximately 0.005%.’’ For dealers, 

the value of 0.00005 was therefore 

chosen as their initial margin to 

notional ratio. For buy-side investors, 

however, Morgan Stanley scaled up 

LCH’s benchmark ratio of 0.00005 by a 

growth factor of 5 to ‘‘[capture] the 

extent to which buy-side portfolios are 

less diversified than dealers and may 

enjoy less netting efficiencies.’’ Overall, 

the report argued, dealers and buy-side 

participants should expect their 

aggregate initial margin to increase by 

$2 billion ($339,000B × 10% × 0.00005 

≈ $2B) and $18 billion ($89,000B × 80% 

× 0.00005 × 5 ≈ $18B), respectively, 

resulting in a total estimate of $20 

billion in additional margin for the bull 

case scenario. By scaling up LCH’s 

benchmark ratio by a growth factor in 

the range between 10–20 for each group 

of investors, Morgan Stanley further 

obtained a ‘‘base case’’ figure of $480 

billion and a ‘‘bear case’’ figure of $1.3 

trillion. The difference between the 

Commission’s estimate and Morgan 

Stanley’s base case figure or bear case 

figure can largely be attributed to the 

following: the Commission used LCH’s 

current overall initial margin to notional 

ratio in its calculations, whereas Morgan 

Stanley used LCH’s current dealer 

initial margin to notional ratio; more 

importantly, the Commission made the 

simplifying assumption that the initial 

margin to notional ratio will stay more 

or less constant, whereas Morgan 

Stanley scaled up its benchmark ratio by 

a growth factor in a range between 10– 

20 based on its ‘‘discussions with 

clearing and banking industry 

professionals and estimates made by 

[BIS]’’ as well as its internal 

estimates.222 Putting aside the growth 

factor effect, it is worth emphasizing 

that Morgan Stanley’s estimates refer to 

the global increase in initial margin, 

which may potentially be much larger 

than the additional amount of initial 

margin required for those entities under 

the Commission’s jurisdiction. 

Also, the Commission notes that in 

Morgan Stanley’s calculations, the 

additional collateral required for buyside swaps represents the vast majority 

of the additional collateral required in 

each scenario (approximately 95%, 

74%, and 81% of the total additional 

capital required for the ‘‘bull case,’’ 

‘‘base case,’’ and ‘‘bear case,’’ 

respectively). A critical assumption 

driving each of these calculations is that 

swaps with 80% of the total buy-side 

notional amount are moved into 

clearing as a result of the mandate. 

However, the Commission believes this 

assumption may be high in light of the 

end-user exception, which includes an 

exemption for small financial 

institutions with less than $10 billion in 

assets.223 Adjusting this assumption 

downward would result in dramatic 

reductions in Morgan Stanley’s 

calculations regarding the amount of 

additional collateral that may be 

required as a result of the mandate. 

TABB Group has also conducted a 

study recently that estimated the global 

‘‘margin shortfall’’ (i.e., the additional 

amount of initial margin that will be 

required) for all OTC swaps due to 

clearing requirements and anticipated 

margin requirements for uncleared 

swaps.224 According to their model, the 

total amount of margin that will be 

required for both cleared and uncleared 

swaps is estimated to be between $2.9 

trillion to $4.1 trillion, depending on 

the degree of netting for each type of 

traders. Further, they estimate that $1.34 

trillion of margin is already posted for 

all OTC swaps, leaving an additional 

$1.56–2.76 trillion in margin that would 

need to be posted for all swaps, 

including both cleared and uncleared 

positions. The table below summarizes 

TABB Group’s margin estimates by 

trader type. 


sroberts on DSK5SPTVN1PROD with 
74328 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

225 Id. 

226The NERA study is available at http:// 

comments.cftc.gov/PublicComments/ 

ViewComment.aspx?id=50037 and their comments 

defending their cost of capital are available in their 

letter at http://comments.cftc.gov/PublicComments/ 

ViewComment.aspx?id=57015. 227Moreover, according to Morgan Stanley’s 

research note cited above, many dealers and buyside investors currently hold enough 

unencumbered collateral to meet at least part of the 

incremental initial margin requirements. In other 

words, each of these entities will need to raise only 

a portion of the additional capital required. 228This aspect of the NERA study has been 

described in greater detail by MIT professors John 

Parsons and Antonio Mello, available at http:// 

bettingthebusiness.com/2012/01/22/phantom-coststo-the-swap-dealer-designation-and-otc-reform/ and 

http://bettingthebusiness.com/2012/03/19/neradoubles-down/. 

229Antonio S. Mello, and John E. Parsons, 

‘‘Margins, Liquidity, and the Cost of Hedging,’’ MIT 

Center for Energy and Environmental Policy 

Research, May 2012. 

230See id. at 12; Mello and Parsons state in their 

paper, ‘‘Hedging is costly. But the real source of the 

cost is not the margin posted, but the underlying 

credit risk that motivates counterparties to demand 

that margin be posted.’’ The paper goes on to 

demonstrate that, ‘‘To a first approximation, the 

cost charged for the non-margined swap must be 

equal to the cost of funding the margin account. 

This follows from the fact that the non-margined 

swap just includes funding of the margin account 

as an embedded feature of the package.’’ Id. at 15– 

16. 

TABLE 6—MARGIN ESTIMATES BY TRADER TYPE IN BILLIONS OF U.S. DOLLARS 225

Trader type Gross 

notional 

Gross 

margin 

(1.5% of 

notional) 

Estimated netting benefit 

Estimated 

margin 

posted 

Dealers with CCP .......................................................................................... 248,561 3,728 3,710 (99.5%) 19 

Other Dealers ................................................................................................ 305,624 4,584 1,605–2,521 (35–55%) 2,063–2,980 

Financial Institutions ...................................................................................... 59,964 899 225–405 (25–45%) 495–675 

Non-Financial End Users ............................................................................... 33,851 508 76–178 (15–35%) 330–432 

Others ............................................................................................................ 60,000 

Total ........................................................................................................ .................... .................... ...................................... 2,906–4,105 

As shown in the table, if the amount 

for non-financial end-users is excluded, 

then the margin shortfall will be 

adjusted down to $1.23–2.33 trillion. 

Like the Commission, the TABB Group 

considered all the OTC swaps, some of 

which are not covered by the clearing 

requirement. 

The TABB Group estimates are 

considerably higher than those of the 

Commission and of Morgan Stanley 

largely because of different estimates 

about what amount of netting will be 

possible for swaps not currently being 

cleared, and in particular, for the swaps 

between dealers that do not involve a 

CCP. 

4. Collateral Costs and Costs of Capital 

Given the increased collateral 

demands that required clearing of 

interest rate swaps and CDS is likely to 

bring, there will be corresponding 

demand for capital. To calculate the 

additional collateral cost to market 

participants, the Commission in the 

NPRM estimated the difference between 

the cost of capital for the additional 

collateral and the returns on that 

capital. Although no comments 

discussed this issue in comments on the 

NPRM, the Commission notes that in 

comments regarding other Commission 

rules, commenters have sometimes 

taken the view that the difference 

between the cost and returns on capital 

for funds that are used as collateral is 

substantial. 

The Commission described a 

comment on behalf of the Working 

Group of Commercial Energy Firms in 

the NPRM. In this comment, an 

economic consulting firm, NERA, used 

an estimate of 13.08% for the pre-tax 

weighted average cost of capital for the 

firm, and an estimate of 3.49% for the 

pre-tax yield on collateral, for a 

difference as 9.59% which NERA used 

as the net pre-tax cost of collateral.226

However, as noted in the NPRM, these 

estimates use the borrowing costs for the 

entire firm, but only consider the 

returns on capital for one part of the 

firm, when determining the spread 

between the two.227 The result is an 

over-stated difference, and therefore a 

higher cost associated with collateral 

than would result if the costs of capital 

and returns of capital were compared on 

a consistent basis.228

However, as the Commission noted in 

the NPRM, this cost is not only likely 

overstated, for the reasons mentioned 

above, but it also may not be a new cost. 

Rather, it is a displacement of a cost that 

is embedded in uncleared, 

uncollateralized (or undercollateralized) swaps. Entering into a 

swap is costly for any market 

participant because of the default risk 

posed by its counterparty, whether the 

counterparty is a DCO, swap dealer, or 

other market participant. When a market 

participant faces the DCO, the DCO 

accounts for that counterparty risk by 

requiring collateral to be posted, and the 

cost of capital for the collateral is part 

of the cost that is necessary in order to 

maintain the swap position. When a 

market participant faces a dealer or 

other counterparty in an uncleared 

swap, however, the uncleared swap 

contains an implicit line of credit upon 

which the market participant effectively 

draws when its swap position is out of 

the money. Counterparties charge for 

this implicit line of credit in the spread 

they offer on uncollateralized, uncleared 

swaps. It can be shown that the cash 

flows of an uncollateralized swap (i.e., 

a swap with an implicit line of credit) 

are, over time, substantially equivalent 

to the cash flows of a collateralized 

swap with an explicit line of credit.229

Moreover, because the counterparty 

credit risk created by the implicit line 

of credit is the same as the counterparty 

risk that would result from an explicit 

line of credit provided to the same 

market participant, to a first order 

approximation, the charge for each 

should be the same as well.230 This 

means that the cost of capital for 

additional collateral posted as a 

consequence of requiring 

uncollateralized swaps to be cleared 

does not introduce an additional cost, 

but rather takes a cost that is implicit in 

an uncleared, uncollateralized swap and 

makes it explicit. This observation 

applies to capital costs associated with 

both initial margin and variation 

margin. 

The Commission received no 

comment regarding the costs of 

collateral it presented in the NPRM. 

5. Regulatory Capital Implications 

Another potential impact of the new 

clearing requirement that the 

Commission described in the NPRM 

may result from the fact that financial 

institutions are required to hold 

additional capital with respect to their 

swap positions pursuant to prudential 

regulatory capital requirements. Basel III 

standards are designed to incentivize 

central clearing of derivatives by 

applying a lower capital weighting to 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74329 

231See Basel Committee on Banking Supervision 

reforms—Basel III, available at http://www.bis.org/ 

bcbs/basel3/b3summarytable.pdf (indicating that 

Basel III reforms will create capital incentives for 

banks to use central counterparties for derivatives). 

232The Commission’s proposed is Margin 

Requirements for Uncleared Swaps for Swap 

Dealers and Major Swap Participants, 76 FR 23732 

(Apr. 28, 2011); and the U.S. prudential regulators 

proposed a similar requirement, Margin and Capital 

Requirements for Covered Swap Entities, 76 FR 

27564 (May 11, 2011). 

233BIS data, December 2011, available at http:// 

www.bis.org/statistics/derstats.htm. As explained 

above, the Commission observes that while CDS 

accounts for a smaller portion of the total swaps 

market, its unique risk profile involving jump-todefault risk contributed to the Commission’s 

decision to include it in among the first clearing 

determinations. 

234See § 50.2(a) (setting for the timeframe for 

submission of swaps to DCOs). 

them than for similar uncleared 

derivatives positions.231 Moreover, 

bilateral margining regulations are 

currently being developed by the 

Commission and U.S. prudential 

regulators that will subject uncleared 

swaps entered into by swap dealers and 

major swap participants to increased 

margin requirements in the near 

future.232 Therefore, the Commission 

expects that, all things being equal, the 

capital that certain financial institutions 

are required to hold is likely to be 

reduced as a consequence of their 

increased use of swap clearing. 

The Commission received no 

comment regarding the regulatory 

capital discussion it presented in the 

NPRM. 

6. Operational Issues Related to 

Collateralization 

The Commission also discussed in the 

NPRM the operational costs that may 

result from the collateral requirements 

that apply to the clearing requirement. 

With uncleared swaps, the Commission 

noted, counterparties may agree not to 

collect variation margin until certain 

thresholds of exposure are reached, thus 

reducing or perhaps entirely eliminating 

the need to exchange variation margin 

as exposure changes. DCOs, on the other 

hand, collect and pay variation margin 

on a daily basis and sometimes more 

frequently. As a consequence, more 

required clearing may increase certain 

operational costs associated with 

moving variation margin to and from the 

DCO. On the other hand, increased 

clearing is also likely to lead to benefits 

from reduced operational costs related 

to valuation disputes, as parties to 

cleared swaps agree to abide by the 

DCO’s valuation procedures. To the 

extent that the requirement to clear the 

types of swaps covered by the new 

clearing requirement leads to increased 

use of clearing, these costs and benefits 

are likely to result. 

The Commission received no 

comment regarding the operational costs 

of collateral discussion it offered in the 

NPRM. 

7. Guaranty Fund Contribution as a 

Collateral Cost 

As explained in the NPRM, increases 

in clearing as a result of the clearing 

requirement also may result in 

additional costs for clearing members in 

the form of guaranty fund contributions. 

However, the Commission noted, it may 

be that increased clearing of swaps 

would decrease guaranty fund 

contributions for certain clearing 

members. Market participants that 

currently transact swaps bilaterally, and 

do not clear such swaps, must either 

become clearing members of an eligible 

DCO or submit such swaps for clearing 

through an existing clearing member of 

an eligible DCO, once the clearing 

requirement applies to such swaps. A 

party that chooses to become a clearing 

member of a DCO must make a guaranty 

fund contribution based on the risk that 

its positions pose to the DCO. A party 

that chooses to clear swaps through an 

existing clearing member may have a 

share of the clearing member’s guaranty 

fund contribution passed along to it in 

the form of fees. While the addition of 

new clearing members and new 

customers for existing clearing members 

may result in existing clearing members 

experiencing an increase in their 

guaranty fund requirements, it should 

be noted that if (1) new clearing 

members are not among the two clearing 

members used to calculate the guaranty 

fund and (2) any new customers trading 

through a clearing member do not 

increase the size of uncollateralized 

risks at either of the two clearing 

members used to calculate the guaranty 

fund, all else held constant, existing 

clearing members may experience a 

decrease in their guaranty fund 

requirement. 

The Commission received no 

comment regarding the guaranty fund 

costs discussion it presented in the 

NPRM. 

d. Benefits of Clearing 

In the NPRM, the Commission also 

described the benefits of swap clearing, 

which in general, are significant. Thus, 

to the extent that the new clearing 

requirement for certain classes of 

interest rate swaps and CDS leads to 

increased use of clearing, these benefits 

are likely to result. As is the case for the 

costs noted above, it is difficult to 

predict the precise extent to which the 

use of clearing will increase as a result 

of the new requirement, and therefore 

the benefits of the requirement cannot 

be precisely quantified. But the 

Commission believes that the benefits of 

increased clearing resulting from this 

requirement will be significant, because 

the classes of swaps required to be 

cleared represent a substantial portion 

of the total swap markets. 

Currently outstanding interest rate 

swaps and CDS indices represent about 

77.8% and 1.6%, respectively, of the 

total global swaps market, when 

measured by notional amount.233 As 

noted above, the new clearing 

requirement requires that only certain 

classes of interest rate swaps and CDS 

indices be cleared, but such classes 

likely represent the most common 

swaps within those overall asset classes, 

and therefore are likely to comprise a 

relatively large portion of those asset 

classes. The Commission reiterates the 

conclusion stated in the NPRM, which 

is that by requiring these particular 

swaps to be cleared, the benefits of 

clearing are expected to be realized 

across a relatively large portion of the 

market. 

The new clearing requirement that 

swaps within certain classes be cleared 

is expected to increase the number of 

swaps in which market participants will 

face a DCO, and therefore, will face a 

highly creditworthy counterparty. DCOs 

are some of the most creditworthy 

counterparties in the swap market 

because, as explained above, they have 

at their disposal a number of risk 

management tools that enable them to 

manage counterparty risk effectively. 

Those tools include contractual rights 

that enable them to use margin to 

manage current and potential future 

exposure, to close out and transfer 

defaulting positions while minimizing 

losses that result from such defaults, 

and to protect solvency during the 

default of one or more members through 

a waterfall of financial resources from 

which they can draw, as outlined above. 

Also, clearing protects swap customers 

from the risk of having to share losses 

in the event of the default of another 

clearing member. 

Under § 50.2(a) of this adopting 

release, swaps meeting the 

specifications of the classes of swaps 

that are required to be cleared must be 

submitted to clearing ‘‘as soon as 

technologically practicable after 

execution, but in any event by the end 

of the day of execution.’’ 234 This 

conforms to the requirements 

established in the recently finalized rule 


sroberts on DSK5SPTVN1PROD with 
74330 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

235See Client Clearing Documentation, Timing of 

Acceptance for Clearing, and Clearing Member Risk 

Management, 77 FR 21278 (Apr. 9, 2012). 

236The Commission notes that if a market 

participant executed a swap that is required to be 

cleared on a SEF or DCM, then that market 

participant will be deemed to have met their 

obligation to submit the swap to a DCO because of 

the straight-through processing rules previously 

adopted by the Commission. 

237For a comprehensive discussion of the various 

types of contagion effects in times of financial 

stress, see Brunnermeier, M., A. Crocket, C. 

Goodhart, A. Persaud, and H. Shin: ‘‘The 

Fundamental Principles of Financial Regulation,’’ 

(2009), available at http://www.princeton.edu/ 

∼markus/research/papers/Geneva11.pdf. 

238No DCO required government assistance, and 

all DCOs were able to manage their open positions 

in both swaps and futures. Even difficult default 

situations were handled in an orderly fashion. For 

example, during the Lehman Brothers’ bankruptcy 

in September 2008, LCH was able to manage the 

default of Lehman’s significant swap portfolio. See 

77 FR at 47188 and LCH IRS submission, at 4 

(discussing LCH’s management of the Lehman 

Brothers’ bankruptcy in September 2008, where 

upon Lehman’s default, LCH needed to risk manage 

a portfolio of approximately 66,000 interest rate 

swaps, which it hedged with approximately 100 

new swap trades in less than five days and only 

used approximately 35% of the initial margin 

Lehman had posted). 

239BIS data, June 2011, available at http:// 

www.bis.org/publ/otc_hy1111.pdf. 

240See id. 

241See id. 

regarding timing of acceptance for 

clearing,235 which is designed to 

promote rapid submission of these 

swaps for clearing and reduce the 

unnecessary counterparty risk that can 

develop between the time of execution 

and submission to clearing.236

As it noted in the NPRM, the 

Commission expects that the 

requirement for rapid submission, 

processing, and acceptance or rejection 

of swaps for clearing will be beneficial 

in several respects. It is important to 

note that when two parties enter into a 

bilateral swap with the intention of 

clearing it, each party bears 

counterparty risk until the swap is 

cleared. Once the swap is cleared, the 

clearinghouse becomes the counterparty 

to each of the original parties, which 

minimizes and standardizes 

counterparty risk. 

Where swaps of the type covered by 

the new clearing requirement are not 

executed on an exchange, the 

requirements of § 50.2(a) should 

significantly reduce the amount of time 

needed to process them. Although costs 

associated with latency-period 

counterparty credit risk cannot be 

completely eliminated in this context, 

the rules will reduce the need to 

discriminate among potential 

counterparties in executing off-exchange 

swaps, as well as the potential costs 

associated with swaps that are rejected 

from clearing. By reducing the 

counterparty risk that could otherwise 

develop during the latency period, these 

rules promote a market in which all 

eligible market participants have access 

to counterparties willing to trade on 

terms that approximate the best 

available terms in the market. This is 

likely to improve price discovery and 

promote market integrity. 

Another benefit of the new clearing 

requirement is the mitigation of 

systemic risk. Counterparty risk readily 

develops into systemic risk in an 

interconnected financial system 

especially in times of financial stress 

due to various types of contagion 

effects.237 By ensuring that outstanding 

potential future and current exposures 

are collateralized in a timely fashion for 

more swaps, this new clearing 

requirement contributes to the 

mitigation of systemic risk. 

The Commission’s consideration of 

the effect on the mitigation of systemic 

risk is generally supported by 

comments, which provided general 

observations regarding the mitigation of 

systemic risk. Citadel and Eris Exchange 

both stated that implementing the 

clearing requirement is a significant 

milestone toward ‘‘achieving the DoddFrank Act’s objectives of reducing 

interconnectedness, mitigating systemic 

risk, increasing transparency, and 

promoting competition in the swaps 

market.’’ Freddie Mac commented that 

it ‘‘supports the Commission’s goal to 

reduce systemic risk through central 

clearing of swaps where appropriate.’’ 

On the other hand, ISDA urged the 

Commission to consider the argument 

that ‘‘clearing involves a greater 

centralization of risk than the over-the 

counter markets ever did.’’ ISDA also 

questioned the risk-mitigating aspects of 

central clearing as contrasted with the 

new regulatory regime for uncleared 

swaps. In response to ISDA’s comment, 

the Commission observes that while the 

regime for bilateral, uncleared swaps 

will be greatly improved after full 

implementation of the Dodd-Frank Act 

reforms, central clearing provides for 

certain risk management features that 

cannot be replicated on a bilateral basis. 

To name just one critical distinction, a 

clearinghouse addresses the tail risk of 

open positions through mutualization. 

Each clearing member must contribute 

to a default fund that protects the 

system as a whole. Also, recent 

experience indicates that all DCOs were 

able to withstand the 2008 financial 

crisis in a relatively sound manner.238

Regarding competition, Markit stated 

that the new clearing requirement might 

lower barriers to entry in the index 

provider market ‘‘because new indices 

would not necessarily be subject to the 

clearing mandate, which can be costly.’’ 

Citadel commented that the framework 

established by the Commission 

promotes competition among swap 

dealers, as ‘‘counterparty credit risk no 

longer features as a consideration in the 

selection of executive counterparties.’’ 

In addition, § 50.10 and related 

guidance provides market participants 

with a useful framework for behavior 

under the requirements of section 2(h), 

which will promote the benefits of swap 

clearing without introducing 

uncertainty regarding market behavior. 

Activity conducted principally for a 

legitimate business purpose, absent 

other indicia of evasion or abuse, would 

not constitute a violation of § 50.10 as 

described in the Commission’s 

interpretation. 

D. Consideration of Alternative Swap 

Classes for Clearing Determinations 

The Commission’s determination to 

require initially the clearing of certain 

CDS and interest rate swaps is a 

function of both the market importance 

of these products and the fact that they 

already are widely cleared. In order to 

move the largest number of swaps to 

required clearing in its initial 

determination, the Commission 

continues to believe that it is prudent to 

focus on swaps that are widely used and 

for which there is already a blueprint for 

clearing and appropriate risk 

management. CDS and interest rate 

swaps that match these factors are 

therefore well suited for required 

cleared. 

As noted in the NPRM and discussed 

above, interest rate swaps with a 

notional amount of $504 trillion are 

currently outstanding—the highest 

proportion of the $648 trillion global 

swaps market of any class of swaps.239

CDS indices with a notional amount of 

about $10.4 trillion are currently 

outstanding.240 While CDS indices do 

not have as prominent a share of the 

entire swaps market as interest rate 

swaps, uncleared CDS is capable of 

having a sizeable market impact, as it 

did during the 2008 financial crisis. In 

addition, many of the swaps within 

each of the classes that will now be 

subject to required clearing are already 

cleared by one or more clearinghouses. 

LCH claims to clear interest rate swaps 

with a notional amount of about $284 

trillion—meaning that, in notional 

terms, LCH represents that they clear 

just over 50% of the interest rate swap 

market.241 The swap market has made a 

smooth transition into clearing CDS on 

its own initiative. As a result, DCOs, 

FCMs, and many market participants 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74331 

242 ISDA, FIA, MFA, and D.E. Shaw. 

already have experience clearing the 

types of swaps that will be subject to 

required clearing. The Commission 

expects, therefore, that DCOs and FCMs 

are equipped to handle the increases in 

volume and outstanding notional 

amount in these swaps that is likely to 

be cleared as the result of this rule. 

Because of the wide use of these swaps 

and their importance to the market, and 

because these swaps are already cleared 

safely, the Commission continues to 

believe it is reasonable to initially 

subject certain types of interest rate 

swaps and CDS to the clearing 

requirement. 

In reviewing the swap submissions 

provided by DCOs, the Commission 

decided to classify swaps according to 

certain key specifications for CDS and 

interest rate swaps. These specifications 

inform whether a particular swap falls 

within one of the classes of swaps that 

the Commission has determined are 

required to be cleared. The two classes 

of CDS that are required to be cleared 

are (1) U.S. dollar-denominated CDS 

covering North America corporate 

credits and (2) euro-denominated CDS 

referencing European corporate 

obligations. The four classes of interest 

rate swaps required to be cleared are (1) 

fixed-to-floating swaps, (2) basis swaps, 

(3) OIS, and (4) FRAs. In formulating 

each of the six classes under this 

adopting release, the Commission 

considered a number of alternatives. 

Regarding CDS, the Commission 

outlined three key specifications 

comprising (1) region and nature of 

reference entity, (2) the nature of the 

CDS itself, and (3) tenor. Each of these 

specifications will assist market 

participants in determining whether a 

swap falls within the CDS classes of 

swaps required to be cleared. For the 

first, a distinguishing characteristic is 

whether the reference entity is in North 

American or European and whether it is 

one of Markit’s CDX.NA.IG, 

CDX.NA.HY, iTraxx Europe, iTraxx 

Europe Crossover and iTraxx Europe 

High Volatility indices. The second key 

specification relates to whether the CDS 

is tranched or untranched. The classes 

that are required to be cleared include 

only untranched CDS where the 

contract covers the entire index loss 

distribution of the index and settlement 

is not linked to a specified number of 

defaults. Tranched swaps, first- or 

‘‘Nth’’ to-default, options, or any other 

product variations on these indices are 

excluded from these classes. Finally, the 

third key specification entails whether a 

swap falls within a tenor, specific to an 

index, that is required to be cleared. The 

Commission has determined that each 

of the 3-, 5-, 7-, and 10-year tenors be 

included within the class of swaps 

subject to the clearing requirement 

determination for CDX.NA.IG; the 5- 

year tenor be included for CDX.NA.HY; 

each of the 5- and 10-year for iTraxx 

Europe; the 5-year for iTraxx Europe 

Crossover; and, the 5-year for iTraxx 

Europe High Volatility. In addition, it 

should be noted that only certain series 

will be viewed as required to be cleared. 

The Commission considered a 

number of possible alternatives. First, 

the Commission could have used a 

narrower or broader group of reference 

entities. For example, the Commission 

has not included the CDX.NA.IG.HVOL 

within the North American swap class, 

but it considered doing so. The 

Commission concluded that while doing 

so would have increased the number of 

swaps required to be cleared, there is 

not sufficient liquidity to justify 

required clearing at this time given that 

the recent series of CDX.NA.IG.HVOL 

has not been cleared by ICE (and is not 

offered at all by CME). 

Several commenters raised issues 

regarding the operational capabilities of 

clearinghouses to manage the clearing of 

iTraxx CDS indices for customers.242

More specifically, they pointed out that 

no registered DCO currently offers 

customer clearing for iTraxx and 

expressed concerns about the ability of 

clearinghouses to manage restructuring 

credit events applicable to iTraxx. On 

the other hand, Citadel and ICE both 

supported the inclusion of iTraxx CDS 

indices in the clearing requirement. In 

particular, ICE stated that ICE Clear 

Europe has begun the process of 

pursuing regulatory approval for 

clearing of iTraxx and that ICE Clear 

Credit will do the same; moreover, ICE 

said that it has worked closely with 

market participants and DTCC to 

develop an industry wide solution for 

processing a restructuring credit event. 

Having considered the different 

views, the Commission is including the 

iTraxx class of CDS as proposed. The 

Commission believes that the 

uncertainty surrounding the 

implementation of customer clearing for 

iTraxx will be resolved within the next 

few months, which will allow this 

standard and liquid class of CDS to be 

cleared. If no eligible DCO offers iTraxx 

for client clearing, compliance with the 

required clearing of iTraxx will 

commence sixty days after the date on 

which iTraxx is first offered for client 

clearing by an eligible DCO. 

The Commission also considered 

whether it could include tranched CDS 

in the clearing requirement. The 

Commission recognized in the NPRM 

that there is a significant market for 

tranched swaps using the indices. In 

these transactions, parties to the CDS 

contract agree to address only a certain 

range of losses along the entire loss 

distribution curve. Other swaps such as 

first or ‘‘Nth’’ to default baskets, and 

options, also exist on the indices. 

However, these swaps are not being 

cleared currently and were not 

submitted by a DCO for consideration 

under § 39.5. As a result, including 

tranched CDS was not a viable 

alternative for this determination. 

AFR noted that requiring clearing of 

only untranched CDS indices may give 

rise to arbitrage opportunities, as the 

payoff properties desired from an index 

can be closely replicated by trading 

tranches of that index. The Commission 

recognizes this concern and will take 

into account the possibility of arbitrage 

opportunities in its future reviews of 

tranched CDS for clearing 

determination. 

Regarding tenor, the Commission 

could have included more of those 

offered within the classes of swaps 

required to be cleared. For example, the 

Commission noted in the NPRM that the 

CDX.NA.IG has 1- and 2-year tenors and 

the CDX.NA.HY, has 3-, 7-, and 10-year 

tenors that have not been included 

among the specified tenors. The iTraxx 

Europe has 3- and 7-year tenors and the 

Crossover and High Volatility each have 

3-, 7-, and 10-year tenors that have not 

been included. In addition, the 

Commission could have included all 

series of active indices. The 

Commission’s concern, regarding both 

tenors and series, is that certain tenors 

and series have lower liquidity and may 

be difficult for a DCO to adequately risk 

manage, which is reflected in the fact 

that those tenors and series are not 

currently cleared by any DCO. While 

including more tenors and series would 

have increased the volume of swaps 

required to be cleared to some degree, 

the Commission concluded that doing 

so could raise costs for DCOs and other 

market participants and be less 

desirable relative to the factors 

established in § 39.5. 

AFR commented that both the 1- and 

2-year tenors of the CDX.NA.IG should 

be included in the clearing requirement. 

It is concerned that ‘‘market participants 

might shift to those tenors to avoid 

mandatory clearing [of the longer 

tenors].’’ The Commission notes that no 

DCO currently clears the 1- or 2-year 

tenor of CDX.NA.IG, making the 

clearing of either swap infeasible. 

However, the Commission recognizes 

that requiring mandatory clearing of 

these shorter tenors may prevent 


sroberts on DSK5SPTVN1PROD with 
74332 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

243As noted in Section II.E above, mechanical 

specifications include characteristics such as 

floating rate reset tenors, reference city for business 

days, business day convention, and others that have 

some small impact on valuation but that do not 

fundamentally alter the economic consequence of 

the swap for the parties that enter into it. 

244 In a comment, ISDA questioned the 

Commission’s description of mechanical and 

idiosyncratic factors. In response, the Commission 

clarified that it is not introducing a new test for 

interest rate swaps, but was merely setting forth and 

describing relevant class-defining specifications. 

See Section II.D above for a full discussion. 

245For instance, in the example noted above, 

swaps with a term of five years and one day would 

not be required to be cleared. 

246AllianceBernstein, R.J. O’Brien, Citadel, Eris 

Exchange, CME, FIA, D.E. Shaw, Arbor Research, 

LCH, Knight Capital, Jefferies, Coherence Capital, 

CRT Capital, Javelin Capital, SDMA, Chris Barnard, 

and Svenokur. 

arbitrage opportunities if they generate 

sufficient trading volumes in the future. 

With regard to interest rate swaps, as 

mentioned above, the Commission is 

finalizing a clearing requirement for 

four classes of interest rate swaps: 

Fixed-to-floating swaps, basis swaps, 

OIS, and FRAs. Within those four 

classes, there are three affirmative 

specifications for each class ((i) 

Currency in which the notional and 

payment amounts are specified, (ii) rates 

referenced for each leg of the swap, and 

(iii) stated termination date of the 

swap). There are also three ‘‘negative’’ 

specifications for each class ((i) No 

optionality (as specified by the DCOs); 

(ii) no dual currencies; and (iii) no 

unknown notional amounts). The 

Commission considered whether to 

establish clearing requirements on a 

product-by-product basis. As noted in 

the NPRM, such a determination would 

need to identify the multitude of legal 

specifications of each product that 

would be subject to the clearing 

requirement. Although the industry uses 

standardized definitions and 

conventions, the product descriptions 

would be lengthy and require 

counterparties to compare all of the 

legal terms of their particular swap 

against the terms of the many different 

swaps that would be included in a 

clearing requirement. The Commission 

continues to believe that for interest rate 

swaps, a product-by-product 

determination would be unnecessarily 

burdensome for market participants in 

trying to assess whether each swap 

transaction is subject to the 

requirement. A class-based approach 

allows market participants to determine 

quickly whether they need to submit 

their swap to a DCO for clearing by 

checking initially whether the swap has 

the basic specifications that define each 

class subject to the clearing 

requirement. 

As an alternative to the classes 

selected, LCH recommended in its IRS 

submission that the Commission use the 

following specifications to classify 

interest rate swaps for purposes of 

making a clearing determination: (i) 

Swap class (i.e., what the two legs of the 

swap are (fixed-to-floating, basis, OIS, 

etc.)); (ii) floating rate definitions used; 

(iii) the currency designated for swap 

calculations and payments; (iv) stated 

final term of the swap (also known as 

maturity); (v) notional structure over the 

life of the swap (constant, amortizing, 

roller coaster, etc.); (vi) floating rate 

frequency; (vii) whether optionality is 

included; and (viii) whether a single 

currency or more than one currency is 

used for denominating payments and 

notional amount. In its submission, 

CME recommended a clearing 

determination for all non-option interest 

rate swaps denominated in a currency 

cleared by any qualified DCO. 

The Commission noted in the NPRM 

that these alternative specifications fall 

into two general categories: 

specifications that are commonly used 

to address mechanical issues for most 

swaps, and specifications that are less 

common and address idiosyncratic 

issues related to the particular needs of 

a counterparty. Examples of the latter 

are special representations added to 

address particular legal issues, unique 

termination events, special fees, and 

conditions tied to events specific to the 

parties. None of the DCOs clear interest 

rate swaps with terms in the second 

group. While such specifications may 

affect the value of the swap, such 

specifications are not, generally 

speaking, fundamental to determining 

the economic result the parties are 

trying to achieve.243 The Commission is 

finalizing the three affirmative 

specifications described above because 

it believes that they are fundamental 

specifications used by counterparties to 

determine the economic result of a swap 

transaction for each party.244

The Commission also noted in the 

NPRM that it could have not included 

the negative specifications for interest 

rate swaps, which would have had the 

potential effect of including more 

interest rate swaps within the universe 

of those required to be cleared. 

However, the Commission continues to 

believe that swaps with optionality 

(such as swaptions or swaps with 

embedded options), multiple currency 

swaps, and swaps with notional 

amounts that are not specified at the 

time of execution raise concerns 

regarding adequate pricing measures 

and consistency across swap contracts. 

Additionally, at this time, no DCO is 

offering them for clearing. 

Another alternative considered by the 

Commission and discussed in the 

NPRM was that of stating the clearing 

requirement in terms of a particular type 

of swap, rather than using broad 

characteristics to describe the type of 

swaps for which clearing would be 

required. For example, rather than 

requiring that all interest rate swaps that 

meet the six specifications in § 50.4(a) 

be cleared, the Commission noted in the 

NPRM that the rule could have specified 

that only certain sub-types of those 

interest rate swaps—such as all such 

interest rate swaps with a term of five 

years—are required to be cleared. Such 

an approach might permit the 

Commission to account for variation in 

liquidity and outstanding notional 

values among different sub-types of 

swap, and thereby focus the clearing 

requirement on very particular swaps to 

account for these differences within the 

same general class. Also, generally 

speaking, limiting the clearing 

requirement to fewer swaps could 

reduce some costs associated with 

clearing. 

However, this advantage was weighed 

against an important disadvantage of 

this approach. A highly focused clearing 

requirement could increase the ability 

for market participants to replicate the 

economic results of a swap that is 

required to be cleared by substituting a 

swap not required to be cleared; this 

greater latitude for clearing avoidance, 

in turn, could increase systemic risk and 

dampen the beneficial effects of clearing 

noted above.245 Under the approach 

proposed by the Commission, all swaps 

that fall within identified classes are 

covered by the clearing requirement, 

provided an eligible DCO offers the 

swap for clearing, which reduces the 

risk of such avoidance and the 

associated reduction of benefits. 

Moreover, stating the clearing 

requirement in more general terms 

reduces the costs associated with 

determining whether or not a particular 

swap is subject to the clearing 

requirement. 

Numerous commenters expressed 

support for the Commission’s 

specifications determination.246 CME 

stated that ‘‘the Commission has struck 

an appropriate balance for the initial 

slate of classes subject to the 

requirement.’’ LCH commented that 

‘‘the Commission’s decision to classify 

interest rate swaps based on six 

principle swap specifications * * * is 

sound.’’ Citadel stated that the 

Commission’s class designation 

approach ‘‘reflects the risk management 

approach utilized across the industry, 

and most importantly by DCOs’’ to 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74333 

247See Section II.F above for more thorough 

discussion of the data. 

248For instance, the Commission decided not to 

include CDX.NA.IG.HiVol from the proposed 

determination given the lack of volume in the 

current on-the-run and recent off-the-run series. In 

addition, CME currently does not clear any HiVol 

contracts, and ICE Clear Credit no longer clears the 

most recent series. 

249As discussed in Section II.C and II.E above, 

DCOs offering clearing for CDS and interest rate 

swaps have established extensive risk management 

practices, which focus on the protection of market 

participants. See also Sections II.D and II.F for a 

discussion of the effect on the mitigation of 

systemic risk in the CDS market and in the interest 

rate swaps market, as well as the protection of 

market participants during insolvency events at 

either the clearing member or DCO level. 

250See Sections II.D and II.F above for a further 

discussion of how DCOs obtain adequate pricing 

data for the CDS and interest rate swaps that they 

clear. Based on this pricing data, valuation disputes 

are minimized, if not eliminated for cleared swaps. 

determine necessary margin and other 

safeguards. 

On the other hand, regarding interest 

rate swaps, ISDA is concerned that the 

Commission’s class-based approach will 

impose great burdens and uncertainties 

in terms of ‘‘the search efforts needed to 

filter out from among the broad class 

those specific products that a DCO will 

accept for clearing.’’ The Commission 

notes that ISDA’s concern may not be 

justified, as CME already has a platform 

in place that ‘‘provides market 

participants with a tool to screen a 

particular swap for eligibility for 

clearing upon submission of the swap to 

CME.’’ 

The Commission also considered 

requiring clearing for all seventeen 

currencies of interest rate swaps that are 

currently offered for clearing, but 

decided instead to require clearing at 

this time for interest rate swaps in four 

currencies (EUR, USD, GBP, and JPY). 

As noted in the NPRM, the Commission 

recognizes that requiring interest rate 

swaps in all seventeen currencies 

submitted by LCH to be cleared would 

provide the benefit of some incremental 

reduction in overall counterparty, and 

thus systemic, risk attendant to clearing 

a greater portion of interest rate swaps. 

However, as noted above, the 

Commission continues to believe that 

initiating the clearing requirement in a 

measured manner with respect to 

interest rate swaps in the four specified 

currencies familiar to many market 

participants is the preferable approach 

at this time because it would give 

market participants an opportunity to 

identify and address any operational 

challenges related to required clearing. 

Moreover, the currencies included in 

the required classes constitute 

approximately 93% of cleared interest 

rate swaps, which suggests that 

significant reductions in counterparty 

risk and gains in systemic protection 

will be accomplished by limiting the 

clearing determination to them.247

LCH supported the Commission’s 

determination, and recommended that 

the Commission propose mandatory 

clearing of swaps denominated in the 

other 13 currencies once the initial 

phase of mandatory clearing is wellestablished. LCH stated that there is 

‘‘ample volume and liquidity in swaps 

denominated in these currencies to 

support mandatory clearing.’’ The 

Commission will evaluate the benefits 

of this recommendation against the cost 

burdens in its future determinations. 

Similarly, the Commission considered 

requiring clearing of all CDS that are 

currently being cleared, but did not 

propose to include, in the initial 

clearing requirement, certain types of 

CDS that have a less significant role in 

the current market.248

AFR and Chris Barnard both urged the 

Commission to rapidly designate 

energy, agriculture and equity swaps for 

mandatory clearing as well. The 

Commission reiterates that it will 

continue to review swap submissions 

received from DCOs and will issue 

clearing requirement for other classes of 

swaps so as to realize the benefits of 

clearing in a timely manner. 

E. Section 15(a) Factors 

As noted above, the requirement to 

clear swaps within the classes of swaps 

covered by this adopting release is 

expected to result in increased use of 

clearing, although it is difficult to 

quantify the extent of that increase. 

Thus, this section discusses the 

expected results from an overall 

increase in the use of swap clearing in 

terms of the factors set forth in section 

15(a) of the CEA. 

i. Protection of Market Participants and 

the Public 

As described above, required clearing 

of CDS and interest rate swaps resulting 

from this clearing determination is 

expected to reduce counterparty credit 

risk for market participants that will 

now be required to clear those swaps 

because they will face the DCO rather 

than another market participant that 

lacks the full array of risk management 

tools that the DCO has at its disposal. 

This increase in clearing of CDS and 

interest rate swaps also reduces 

uncertainty in times of market stress 

because market participants facing a 

DCO are less concerned with the impact 

of such stress on the solvency of their 

counterparty for cleared trades. 

Moreover, by reducing uncertainty 

about counterparty solvency for market 

participants facing a DCO, the clearing 

determinations under this adopting 

release are likely to reduce the risk of 

contagion if one or more DCO customers 

or clearing members fails during a time 

of market stress, which creates benefits 

for the public. 

By requiring clearing of swaps within 

certain classes, all of which are already 

available for clearing, the Commission 

continues to expect, as it stated in the 

NPRM, that this rule will encourage a 

smooth transition to clearing by creating 

an opportunity for market participants 

to work out challenges related to 

required clearing of swaps while 

operating in familiar terrain. More 

specifically, the DCOs will clear an 

increased volume of swaps that they 

already understand and have experience 

managing. Similarly, FCMs likely will 

realize increased customer and 

transaction volume as the result of the 

requirement, but will not have to 

simultaneously learn how to 

operationalize clearing for new types of 

swaps. Additionally, the experience that 

current FCMs have with these swaps is 

likely to benefit customers that are new 

to swap clearing, as the FCM guides 

them through initial process of clearing 

swaps.249

In addition, uncleared swaps subject 

to collateral agreements can be the 

subject of valuation disputes. These 

valuation disputes sometimes require 

several months, or longer, to resolve. 

Uncollateralized exposure can grow 

significantly during that time, leaving 

one of the two parties exposed to 

counterparty credit risk that was 

intended to be covered through a 

collateral agreement. DCOs eliminate, or 

reduce, valuation disputes for cleared 

swaps as well as the risk that 

uncollateralized exposure can develop 

and accumulate during the time when 

such a dispute would have otherwise 

occurred, thus providing additional 

protection to market participants that 

transact in swaps subject to required 

clearing.250

As far as costs are concerned, market 

participants that do not currently have 

established clearing relationships with 

an FCM will have to set up and 

maintain such a relationship in order to 

clear swaps that are required to be 

cleared. As discussed above, market 

participants that conduct a limited 

number of swaps per year will likely be 

required to pay monthly or annual fees 

that FCMs charge to maintain both the 

relationship and outstanding swap 

positions belonging to the customer. In 

addition, the FCM is likely to pass along 

fees charged by the DCO for establishing 

and maintaining open positions. 


sroberts on DSK5SPTVN1PROD with 
74334 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

251See Sections II.D and II.F. 

252See Chen, K., et al., ‘‘An Analysis of CDS 

Transactions: Implications for Public Reporting,’’ 

September 2011, Federal Reserve Bank of New York 

Staff Reports, at 14, available at http:// 

www.newyorkfed.org/research/staff_reports/ 

sr517.pdf. 

253As discussed in Sections II.C and II.E above, 

sound risk management practices are critical for all 

DCOs, especially those offering clearing for CDS 

and interest rate swaps. In the discussion above, the 

Commission considered whether each DCO 

submission under review was consistent with the 

core principles for DCOs. In particular, the 

Commission considered the DCO submissions in 

light of Core Principle D, which relates to risk 

management. See also Sections II.D and II.F for a 

discussion of the effect on the mitigation of 

systemic risk in the CDS market and in the interest 

rate swaps market, as well as the protection of 

market participants during insolvency events at 

either the clearing member or DCO level. 

254A list of the G20 commitments made in 

Pittsburgh can be found at: http:// 

www.g20.utoronto.ca/analysis/commitments-09- 

pittsburgh.html. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Swap Markets 

The Commission continues to expect, 

as it explained in the NPRM, that 

increased clearing of the CDS and 

interest rate swaps subject to this 

adopting release is expected to reduce 

uncertainty regarding counterparty 

credit risk in times of market stress and 

promote liquidity and efficiency during 

those times. Increased liquidity 

promotes the ability of market 

participants to limit losses from exiting 

positions effectively when necessary in 

order to manage risk during a time of 

market stress. 

In addition, to the extent that 

positions move from facing multiple 

counterparties in the bilateral market to 

being run through a smaller number of 

clearinghouses, clearing likely facilitates 

increased netting. This netting effect 

reduces operational risk and may reduce 

the amount of collateral that a party 

must post or pay in terms of initial and 

variation margin. 

As discussed in Sections II.D and II.F 

above, in setting forth this new clearing 

requirement, the Commission took into 

account a number of specific factors that 

relate to the financial integrity of the 

swap markets. Specifically, the NPRM 

and the discussion above includes an 

assessment of whether the DCOs 

clearing CDS and interest rate swaps 

have the rule framework, capacity, 

operational expertise and resources, and 

credit support infrastructure to clear 

CDS and interest rate swaps on terms 

that are consistent with the material 

terms and trading conventions on which 

the contract is then traded. The 

Commission also considered the 

financial resources of DCOs to handle 

additional clearing, as well as the 

existence of reasonable legal certainty in 

the event of a clearing member or DCO 

insolvency.251

As discussed above, bilateral swaps 

create counterparty risk that may lead 

market participants to discriminate 

among potential counterparties based on 

their creditworthiness. Such 

discrimination is expensive and time 

consuming insofar as market 

participants must conduct due diligence 

in order to evaluate a potential 

counterparty’s creditworthiness. 

Requiring the certain types of swaps 

subject to this clearing determination to 

be cleared reduces the number of 

transactions for which such due 

diligence is necessary, thereby 

contributing to the efficiency of the 

swap markets. 

In setting forth a clearing requirement 

for both CDS and interest rate swaps, 

the Commission considered the effect 

on competition, including appropriate 

fees and charges applied to clearing. As 

discussed in more detail in Sections II.D 

and II.F above, there are a number of 

potential outcomes that may result from 

required clearing. Some of these 

outcomes may impose costs, such as if 

a DCO possessed market power and 

exercised that power in a 

anticompetitive manner, and some of 

the outcomes would be positive, such as 

if the clearing requirement facilitated a 

stronger entry-opportunity for 

competitors. 

As far as costs are concerned, the 

markets for some swaps within the 

classes that are required to be cleared 

may be less liquid than others. All other 

things being equal, swaps for which the 

markets are less liquid have the 

potential to develop larger current 

uncollateralized exposures after a 

default on a cleared position, and 

therefore will require posting of 

relatively greater amounts of initial 

margin. 

iii. Price Discovery 

As the Commission noted in the 

NPRM, clearing of CDS and interest rate 

swaps subject to this new clearing 

requirement is likely to encourage better 

price discovery because it eliminates the 

importance of counterparty 

creditworthiness in pricing swaps 

cleared through a given DCO. That is, by 

making the counterparty 

creditworthiness of all swaps of a 

certain type essentially the same, prices 

should reflect factors related to the 

terms of the swap, rather than the 

idiosyncratic risk posed by the entities 

trading it.252

As discussed in Sections II.D and II.F 

above, DCOs obtain adequate pricing 

data for the CDS and interest rate swaps 

that they clear. Each DCO establishes a 

rule framework for its pricing 

methodology and rigorously tests its 

pricing models to ensure that the 

cornerstone of its risk management 

regime is as sound as possible. 

iv. Sound Risk Management Practices 

If a firm enters into swaps to hedge 

certain positions and then the 

counterparty to those swaps defaults 

unexpectedly, the firm could be left 

with large outstanding exposures and 

unhedged positions. As explained in the 

NPRM and stated above, when a swap 

is cleared, the DCO becomes the 

counterparty facing each of the two 

original counterparties to the swap. This 

standardizes and reduces counterparty 

credit risk for each of the two original 

participants. To the extent that a market 

participant’s hedges comprise swaps 

that are required to be cleared, the 

requirement enhances their risk 

management practices by reducing their 

counterparty risk. Accordingly, for 

counterparties required to clear those 

CDS and interest rate swaps subject to 

this requirement, risk management will 

be enhanced. 

In addition, from systemic 

perspective, required clearing reduces 

the complexity of unwinding/ 

transferring swap positions from large 

entities that default. Procedures for 

transfer of swap positions and 

mutualization of losses among DCO 

members are already in place, and the 

Commission continues to anticipate that 

they are much more likely to function 

in a manner that enables efficient 

transfer of positions than legal processes 

that apply to uncleared, bilateral 

swaps.253

v. Other Public Interest Considerations 

In September 2009, the President and 

the other leaders of the ‘‘G20’’ nations 

met in Pittsburgh and committed to a 

program of action that includes, among 

other things, central clearing of all 

standardized swaps.254 Together, 

interest rate swaps and CDS represent 

more than 75% of the notional amount 

of outstanding swaps, and therefore, 

requiring the most active, standardized 

classes of swaps within those groups to 

be cleared represents a significant step 

toward the fulfillment of that 

commitment. 

VI. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that agencies consider whether 

the rules they propose will have a 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74335 

255See 5 U.S.C. 601 et seq. 256To the extent that this rulemaking affects 

DCMs, DCOs, or FCMs, the Commission has 

previously determined that DCMs, DCOs, and FCMs 

are not small entities for purposes of the RFA. See, 

respectively and as indicated, 47 FR 18618, 18619, 

Apr. 30, 1982 (DCMs and FCMs); and 66 FR 45604, 

45609, Aug. 29, 2001 (DCOs). 257See 66 F.R. 20740, 20743 (Apr. 25, 2001). 258See joint letter from EEI, NRECA, and ESPA, 

dated Nov. 4, 2011, (Electric Associations Letter), 

commenting on Swap Transaction Compliance and 

Implementation Schedule: Clearing and Trade 

Execution Requirements under Section 2(h) of the 

CEA, 76 FR 58186 (Sept. 20, 2011). 259Small Business Administration, Table of Small 

Business Size Standards, Nov. 5, 2010. 

260See Electric Associations Letter, at 2. The 

letter also suggests that EEI, NRECA, and EPSA 

members are not financial entities. See id., at note 

5, and at 5 (the associations’ members ‘‘are not 

financial companies’’). 

261 44 U.S.C. 3507(d). 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.255 As stated in the NPRM, the 

clearing requirement determinations 

and rules proposed by the Commission 

will affect only eligible contract 

participants (ECPs) because all persons 

that are not ECPs are required to execute 

their swaps on a DCM, and all contracts 

executed on a DCM must be cleared by 

a DCO, as required by statute and 

regulation; not by operation of any 

clearing requirement.256 Accordingly, 

the Chairman, on behalf of the 

Commission, certified pursuant to 5 

U.S.C. 605(b) that the proposed rules 

would not have a significant economic 

impact on a substantial number of small 

entities. The Commission then invited 

public comment on this determination. 

The Commission received no comments. 

The Commission has previously 

determined that ECPs are not small 

entities for purposes of the RFA.257

However, in its proposed rulemaking to 

establish a schedule to phase in 

compliance with certain provisions of 

the Dodd-Frank Act, including the 

clearing requirement under section 

2(h)(1)(A) of the CEA, the Commission 

received a joint comment (Electric 

Associations Letter) from the Edison 

Electric Institute (EEI), the National 

Rural Electric Cooperative Association 

(NRECA) and the Electric Power Supply 

Association (EPSA) asserting that 

certain members of NRECA may both be 

ECPs under the CEA and small 

businesses under the RFA.258 These 

members of NRECA, as the Commission 

understands, have been determined to 

be small entities by the Small Business 

Administration (SBA) because they are 

‘‘primarily engaged in the generation, 

transmission, and/or distribution of 

electric energy for sale and [their] total 

electric output for the preceding fiscal 

year did not exceed 4 million megawatt 

hours.’’ 259 Although the Electric 

Associations Letter does not provide 

details on whether or how the NRECA 

members that have been determined to 

be small entities use the interest rate 

swaps and CDS that are the subject of 

this rulemaking, the Electric 

Associations Letter does state that the 

EEI, NRECA, and EPSA members 

‘‘engage in swaps to hedge commercial 

risk.’’ 260 Because the NRECA members 

that have been determined to be small 

entities would be using swaps to hedge 

commercial risk, the Commission 

expects that they would be able to use 

the end-user exception from the clearing 

requirement and therefore would not be 

affected to any significant extent by this 

rulemaking. 

Thus, because nearly all of the ECPs 

that may be subject to the proposed 

clearing requirement are not small 

entities, and because the few ECPs that 

have been determined by the SBA to be 

small entities are unlikely to be subject 

to the clearing requirement, the 

Chairman, on behalf of the CFTC, 

hereby certifies pursuant to 5 U.S.C. 

605(b) that the rules herein will not 

have a significant economic impact on 

a substantial number of small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(PRA) 261 imposes certain requirements 

on federal agencies (including the 

Commission) in connection with 

conducting or sponsoring any collection 

of information as defined by the PRA. 

As stated in the NPRM, § 50.3(a), would 

require each DCO to post on its Web site 

a list of all swaps that it will accept for 

clearing and clearly indicate which of 

those swaps the Commission has 

determined are required to be cleared, 

builds upon the requirements of 

§ 39.21(c)(1), which requires each DCO 

to disclose publicly information 

concerning the terms and conditions of 

each contract, agreement, and 

transaction cleared and settled by the 

DCO. The Commission received no 

comments related to PRA. Thus, this 

rulemaking will not require a new 

collection of information from any 

persons or entities. 

List of Subjects 

17 CFR Part 39 

Business and industry, Reporting 

requirements, Swaps. 

17 CFR Part 50 

Business and industry, Clearing, 

Swaps. 

For the reasons stated in the 

preamble, amend 17 CFR parts 39 and 

50 as follows: 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

■ 1. The authority citation for part 39 

continues to read as follows: 

Authority: 7 U.S.C. 2 and 7a–1 as amended 

by Pub. L. 111–203, 124 Stat. 1376. 

§ 39.6 [Removed and Reserved] 

■ 2. Remove and reserve § 39.6. 

PART 50—CLEARING REQUIREMENT 

AND RELATED RULES 

■ 3. The authority citation to part 50 is 

revised to read as follows: 

Authority: 7 U.S.C. 2(h) and 7a–1 as 

amended by Pub. L. 111–203, 124 Stat. 1376. 

■ 4. Add subpart A, consisting of 

§§ 50.1 through 50.24 to read as follows: 

Subpart A—Definitions and Clearing 

Requirement 

Sec. 

50.1 Definitions. 

50.2 Treatment of swaps subject to a 

clearing requirement. 

50.3 Notice to the public. 

50.4 Classes of swaps required to be 

cleared. 

50.5 Swaps exempt from a clearing 

requirement. 

50.6 Delegation of authority. 

50.7–50.9 [Reserved] 

50.10 Prevention of evasion of the clearing 

requirement and abuse of an exception 

or exemption to the clearing 

requirement. 

50.11–50.24 [Reserved] 

Subpart A—Definitions and Clearing 

Requirement 

§ 50.1 Definitions. 

For the purposes of this part, 

Business day means any day other 

than a Saturday, Sunday, or legal 

holiday. 

Day of execution means the calendar 

day of the party to the swap that ends 

latest, provided that if a swap is: 

(1) Entered into after 4:00 p.m. in the 

location of a party; or 

(2) Entered into on a day that is not 

a business day in the location of a party, 

then such swap shall be deemed to have 

been entered into by that party on the 

immediately succeeding business day of 

that party, and the day of execution 

shall be determined with reference to 

such business day. 

§ 50.2 Treatment of swaps subject to a 

clearing requirement. 

(a) All persons executing a swap that: 

(1) Is not subject to an exception 

under section 2(h)(7) of the Act or 

§ 50.50 of this part; and 


sroberts on DSK5SPTVN1PROD with 
74336 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

(2) Is included in a class of swaps 

identified in § 50.4 of this part, shall 

submit such swap to any eligible 

derivatives clearing organization that 

accepts such swap for clearing as soon 

as technologically practicable after 

execution, but in any event by the end 

of the day of execution. 

(b) Each person subject to the 

requirements of paragraph (a) of this 

section shall undertake reasonable 

efforts to verify whether a swap is 

required to be cleared. 

(c) For purposes of paragraph (a) of 

this section, persons that are not 

clearing members of an eligible 

derivatives clearing organization shall 

be deemed to have complied with 

paragraph (a) of this section upon 

submission of such swap to a futures 

commission merchant or clearing 

member of a derivatives clearing 

organization, provided that submission 

occurs as soon as technologically 

practicable after execution, but in any 

event by the end of the day of execution. 

§ 50.3 Notice to the public. 

(a) In addition to its obligations under 

§ 39.21(c)(1), each derivatives clearing 

organization shall make publicly 

available on its Web site a list of all 

swaps that it will accept for clearing and 

identify which swaps on the list are 

required to be cleared under section 

2(h)(1) of the Act and this part. 

(b) The Commission shall maintain a 

current list of all swaps that are required 

to be cleared and all derivatives clearing 

organizations that are eligible to clear 

such swaps on its Web site. 

§ 50.4 Classes of swaps required to be 

cleared. 

(a) Interest rate swaps. Swaps that 

have the following specifications are 

required to be cleared under section 

2(h)(1) of the Act, and shall be cleared 

pursuant to the rules of any derivatives 

clearing organization eligible to clear 

such swaps under § 39.5(a) of this 

chapter. 

Specification Fixed-to-floating swap class 

Currency ......................................................... U.S. dollar (USD) ....... Euro (EUR) ................ Sterling (GBP) ............ Yen (JPY). 

Floating Rate Indexes .................................... LIBOR ........................ EURIBOR ................... LIBOR ........................ LIBOR. 

Stated Termination Date Range .................... 28 days to 50 years ... 28 days to 50 years ... 28 days to 50 years ... 28 days to 30 years. 

Optionality ...................................................... No .............................. No .............................. No .............................. No. 

Dual Currencies ............................................. No .............................. No .............................. No .............................. No. 

Conditional Notional Amounts ........................ No .............................. No .............................. No .............................. No. 

Specification Basis swap class 

Currency ......................................................... U.S. dollar (USD) ....... Euro (EUR) ................ Sterling (GBP) ............ Yen (JPY). 

Floating Rate Indexes .................................... LIBOR ........................ EURIBOR ................... LIBOR ........................ LIBOR. 

Stated Termination Date Range .................... 28 days to 50 years ... 28 days to 50 years ... 28 days to 50 years ... 28 days to 30 years. 

Optionality ...................................................... No .............................. No .............................. No .............................. No. 

Dual Currencies ............................................. No .............................. No .............................. No .............................. No. 

Conditional Notional Amounts ........................ No .............................. No .............................. No .............................. No. 

Specification Forward rate agreement class 

Currency ......................................................... U.S. dollar (USD) ....... Euro (EUR) ................ Sterling (GBP) ............ Yen (JPY). 

Floating Rate Indexes .................................... LIBOR ........................ EURIBOR ................... LIBOR ........................ LIBOR. 

Stated Termination Date Range .................... 3 days to 3 years ....... 3 days to 3 years ....... 3 days to 3 years ....... 3 days to 3 years. 

Optionality ...................................................... No .............................. No .............................. No .............................. No. 

Dual Currencies ............................................. No .............................. No .............................. No .............................. No. 

6. Conditional Notional Amounts ................... No .............................. No .............................. No .............................. No. 

Specification Overnight index swap class 

Currency ......................................................... U.S. dollar (USD) ....... Euro (EUR) ................ Sterling (GBP). 

Floating Rate Indexes .................................... FedFunds ................... EONIA ........................ SONIA. 

Stated Termination Date Range .................... 7 days to 2 years ....... 7 days to 2 years ....... 7 days to 2 years. 

Optionality ...................................................... No .............................. No .............................. No. 

Dual Currencies ............................................. No .............................. No .............................. No.

Conditional Notional Amounts ........................ No .............................. No .............................. No. 

(b) Credit default swaps. Swaps that 

have the following specifications are 

required to be cleared under section 

2(h)(1) of the Act, and shall be cleared 

pursuant to the rules of any derivatives 

clearing organization eligible to clear 

such swaps under § 39.5(a) of this 

chapter. 

Specification North American untranched CDS indices class 

Reference Entities ..................................... Corporate. 

Region ........................................................ North America. 

Indices ........................................................ CDX.NA.IG; CDX.NA.HY. 

Tenor .......................................................... CDX.NA.IG: 3Y, 5Y, 7Y, 10Y; CDX.NA.HY: 5Y. 

Applicable Series ....................................... CDX.NA.IG 3Y: Series 15 and all subsequent Series, up to and including the current Series. 

CDX.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. 

Tranched .................................................... No. 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74337 

Specification European untranched CDS indices class 

Reference Entities ..................................... Corporate. 

Region ........................................................ Europe. 

Indices ........................................................ iTraxx Europe. 

iTraxx Europe Crossover. 

iTraxx Europe HiVol. 

Tenor .......................................................... iTraxx Europe: 5Y, 10Y. 

iTraxx Europe Crossover: 5Y. 

iTraxx Europe HiVol: 5Y. 

Applicable Series ....................................... iTraxx Europe 5Y: Series 10 and all subsequent Series, up to and including the current Series. 

iTraxx 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. 

Tranched .................................................... No. 

§ 50.5 Swaps exempt from a clearing 

requirement. 

(a) Swaps entered into before July 21, 

2010 shall be exempt from the clearing 

requirement under § 50.2 of this part if 

reported to a swap data repository 

pursuant to section 2(h)(5)(A) of the Act 

and § 46.3(a) of this chapter. 

(b) Swaps entered into before the 

application of the clearing requirement 

for a particular class of swaps under 

§§ 50.2 and 50.4 of this part shall be 

exempt from the clearing requirement if 

reported to a swap data repository 

pursuant to section 2(h)(5)(B) of the Act 

and either § 46.3(a) or §§ 45.3 and 45.4 

of this chapter, as appropriate. 

§ 50.6 Delegation of Authority. 

(a) The Commission hereby delegates 

to the Director of the Division of 

Clearing and Risk or such other 

employee or employees as the Director 

may designate from time to time, with 

the consultation of the General Counsel 

or such other employee or employees as 

the General Counsel may designate from 

time to time, the authority: 

(1) After prior notice to the 

Commission, to determine whether one 

or more swaps submitted by a 

derivatives clearing organization under 

§ 39.5 falls within a class of swaps as 

described in § 50.4, provided that 

inclusion of such swaps is consistent 

with the Commission’s clearing 

requirement determination for that class 

of swaps; and 

(2) To notify all relevant derivatives 

clearing organizations of that 

determination. 

(b) The Director of the Division of 

Clearing and Risk may submit to the 

Commission for its consideration any 

matter which has been delegated in this 

section. Nothing in this section 

prohibits the Commission, at its 

election, from exercising the authority 

delegated in this section. 

§ 50.7–50.9 [Reserved]. 

§ 50.10 Prevention of evasion of the 

clearing requirement and abuse of an 

exception or exemption to the clearing 

requirement. 

(a) It shall be unlawful for any person 

to knowingly or recklessly evade or 

participate in or facilitate an evasion of 

the requirements of section 2(h) of the 

Act or any Commission rule or 

regulation promulgated thereunder. 

(b) It shall be unlawful for any person 

to abuse the exception to the clearing 

requirement as provided under section 

2(h)(7) of the Act or an exception or 

exemption under this chapter. 

(c) It shall be unlawful for any person 

to abuse any exemption or exception to 

the requirements of section 2(h) of the 

Act, including any exemption or 

exception as the Commission may 

provide by rule, regulation, or order. 

■ 5. Designate § 50.25 under new 

subpart B under the following heading 

and add reserved §§ 50.26 through 

50.49. 

Subpart B—Compliance Schedule 

Sec. 

50.25 Clearing requirement compliance 

schedule. 

50.26–50.49 [Reserved] 

■ 6. Add subpart C, consisting of 

§ 50.50, to read as follows: 

Subpart C—Exceptions and 

Exemptions to Clearing Requirement 

§ 50.50 Exceptions to the clearing 

requirement. 

(a) Non-financial entities. (1) A 

counterparty to a swap may elect the 

exception to the clearing requirement 

under section 2(h)(7)(A) of the Act if the 

counterparty: 

(i) Is not a ‘‘financial entity’’ as 

defined in section 2(h)(7)(C)(i) of the 

Act; 

(ii) Is using the swap to hedge or 

mitigate commercial risk as provided in 

paragraph (c) of this section; and 

(iii) Provides, or causes to be 

provided, the information specified in 

paragraph (b) of this section to a 

registered swap data repository or, if no 

registered swap data repository is 

available to receive the information 

from the reporting counterparty, to the 

Commission. A counterparty that 

satisfies the criteria in this paragraph 

(a)(1) and elects the exception is an 

‘‘electing counterparty.’’ 

(2) If there is more than one electing 

counterparty to a swap, the information 

specified in paragraph (b) of this section 

shall be provided with respect to each 

of the electing counterparties. 

(b) Reporting. (1) When a 

counterparty elects the exception to the 

clearing requirement under section 

2(h)(7)(A) of the Act, one of the 

counterparties to the swap (the 

‘‘reporting counterparty,’’ as determined 

in accordance with § 45.8 of this part) 

shall provide, or cause to be provided, 

the following information to a registered 

swap data repository or, if no registered 

swap data repository is available to 

receive the information from the 

reporting counterparty, to the 

Commission, in the form and manner 

specified by the Commission: 

(i) Notice of the election of the 

exception; 

(ii) The identity of the electing 

counterparty to the swap; and 

(iii) The following information, unless 

such information has previously been 

provided by the electing counterparty in 

a current annual filing pursuant to 

paragraph (b)(2) of this section: 

(A) Whether the electing counterparty 

is a ‘‘financial entity’’ as defined in 

section 2(h)(7)(C)(i) of the Act, and if the 

electing counterparty is a financial 

entity, whether it is: 

(1) Electing the exception in 

accordance with section 2(h)(7)(C)(iii) or 

section 2(h)(7)(D) of the Act; or 

(2) Exempt from the definition of 

‘‘financial entity’’ as described in 

paragraph (d) of this section; 


sroberts on DSK5SPTVN1PROD with 
74338 Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 

(B) Whether the swap or swaps for 

which the electing counterparty is 

electing the exception are used by the 

electing counterparty to hedge or 

mitigate commercial risk as provided in 

paragraph (c) of this section; 

(C) How the electing counterparty 

generally meets its financial obligations 

associated with entering into noncleared swaps by identifying one or 

more of the following categories, as 

applicable: 

(1) A written credit support 

agreement; 

(2) Pledged or segregated assets 

(including posting or receiving margin 

pursuant to a credit support agreement 

or otherwise); 

(3) A written third-party guarantee; 

(4) The electing counterparty’s 

available financial resources; or 

(5) Means other than those described 

in paragraphs (b)(1)(iii)(C)(1), (2), (3) or 

(4) of this section; and 

(D) Whether the electing counterparty 

is an entity that is an issuer of securities 

registered under section 12 of, or is 

required to file reports under section 

15(d) of, the Securities Exchange Act of 

1934, and if so: 

(1) The relevant SEC Central Index 

Key number for that counterparty; and 

(2) Whether an appropriate committee 

of that counterparty’s board of directors 

(or equivalent body) has reviewed and 

approved the decision to enter into 

swaps that are exempt from the 

requirements of sections 2(h)(1) and 

2(h)(8) of the Act. 

(2) An entity that qualifies for an 

exception to the clearing requirement 

under this section may report the 

information listed in paragraph 

(b)(1)(iii) of this section annually in 

anticipation of electing the exception for 

one or more swaps. Any such reporting 

under this paragraph shall be effective 

for purposes of paragraph (b)(1)(iii) of 

this section for swaps entered into by 

the entity for 365 days following the 

date of such reporting. During such 

period, the entity shall amend such 

information as necessary to reflect any 

material changes to the information 

reported. 

(3) Each reporting counterparty shall 

have a reasonable basis to believe that 

the electing counterparty meets the 

requirements for an exception to the 

clearing requirement under this section. 

(c) Hedging or mitigating commercial 

risk. For purposes of section 

2(h)(7)(A)(ii) of the Act and paragraph 

(b)(1)(iii)(B) of this section, a swap is 

used to hedge or mitigate commercial 

risk if: 

(1) Such swap: 

(i) Is economically appropriate to the 

reduction of risks in the conduct and 

management of a commercial enterprise, 

where the risks arise from: 

(A) The potential change in the value 

of assets that a person owns, produces, 

manufactures, processes, or 

merchandises or reasonably anticipates 

owning, producing, manufacturing, 

processing, or merchandising in the 

ordinary course of business of the 

enterprise; 

(B) The potential change in the value 

of liabilities that a person has incurred 

or reasonably anticipates incurring in 

the ordinary course of business of the 

enterprise; 

(C) The potential change in the value 

of services that a person provides, 

purchases, or reasonably anticipates 

providing or purchasing in the ordinary 

course of business of the enterprise; 

(D) The potential change in the value 

of assets, services, inputs, products, or 

commodities that a person owns, 

produces, manufactures, processes, 

merchandises, leases, or sells, or 

reasonably anticipates owning, 

producing, manufacturing, processing, 

merchandising, leasing, or selling in the 

ordinary course of business of the 

enterprise; 

(E) Any potential change in value 

related to any of the foregoing arising 

from interest, currency, or foreign 

exchange rate movements associated 

with such assets, liabilities, services, 

inputs, products, or commodities; or 

(F) Any fluctuation in interest, 

currency, or foreign exchange rate 

exposures arising from a person’s 

current or anticipated assets or 

liabilities; or 

(ii) Qualifies as bona fide hedging for 

purposes of an exemption from position 

limits under the Act; or 

(iii) Qualifies for hedging treatment 

under: 

(A) Financial Accounting Standards 

Board Accounting Standards 

Codification Topic 815, Derivatives and 

Hedging (formerly known as Statement 

No. 133); or 

(B) Governmental Accounting 

Standards Board Statement 53, 

Accounting and Financial Reporting for 

Derivative Instruments; and 

(2) Such swap is: 

(i) Not used for a purpose that is in 

the nature of speculation, investing, or 

trading; and 

(ii) Not used to hedge or mitigate the 

risk of another swap or security-based 

swap position, unless that other 

position itself is used to hedge or 

mitigate commercial risk as defined by 

this rule or § 240.3a67–4 of this title. 

(d) For purposes of section 2(h)(7)(A) 

of the Act, a person that is a ‘‘financial 

entity’’ solely because of section 

2(h)(7)(C)(i)(VIII) shall be exempt from 

the definition of ‘‘financial entity’’ if 

such person: 

(1) Is organized as a bank, as defined 

in section 3(a) of the Federal Deposit 

Insurance Act, the deposits of which are 

insured by the Federal Deposit 

Insurance Corporation; a savings 

association, as defined in section 3(b) of 

the Federal Deposit Insurance Act, the 

deposits of which are insured by the 

Federal Deposit Insurance Corporation; 

a farm credit system institution 

chartered under the Farm Credit Act of 

1971; or an insured Federal credit union 

or State-chartered credit union under 

the Federal Credit Union Act; and 

(2) Has total assets of $10,000,000,000 

or less on the last day of such person’s 

most recent fiscal year. 

Issued in Washington, DC, on November 

29, 2012, by the Commission. 

Sauntia S. Warfield, 

Assistant Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations: 

Appendices to Clearing Requirement 

Determination Under Section 2(h) of the 

CEA—Commission Voting Summary and 

Statement of the Chairman. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Sommers, Chilton, O’Malia 

and Wetjen voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final rule requiring certain 

interest rate swaps and credit default swap 

(CDS) indices to be cleared, as provided by 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act). 

Central clearing is one of the three major 

building blocks of Dodd-Frank swaps market 

reform—in addition to promoting market 

transparency and bringing swap dealers 

under comprehensive oversight—and this 

rule completes the clearing building block. 

Central clearing lowers the risk of the 

highly interconnected financial system. It 

also democratizes the market by eliminating 

the need for market participants to 

individually determine counterparty credit 

risk, as now clearinghouses stand between 

buyers and sellers. 

In a cleared market, more people have 

access on a level playing field. 

Small and medium-sized businesses, banks 

and asset managers can enter the market and 

trade anonymously and benefit from the 

market’s greater competition. 

Clearinghouses have lowered risk for the 

public and fostered competition in the 

futures markets since the late 19th century. 

Following the 2008 financial crisis, President 

Obama convened the G–20 leaders in 

Pittsburgh in 2009, and an international 


sroberts on DSK5SPTVN1PROD with 
Federal Register / Vol. 77, No. 240 / Thursday, December 13, 2012 / Rules and Regulations 74339 

consensus formed that standardized swaps 

should be cleared by the end of 2012. 

The CFTC has already completed a number 

of significant Dodd-Frank reforms laying the 

foundation of risk management for 

clearinghouses, futures commission 

merchants and other market participants that 

participate in clearing. Other reforms paving 

the way for this rule include straight-through 

processing for swaps and protections for 

customer funds. 

This rule, which fulfills President Obama’s 

G–20 commitment on clearing, is the last step 

on the path to required central clearing 

between financial entities. It benefited from 

significant domestic and international 

consultation. Moving forward, we will work 

with market participants on implementation. 

I would like to thank my fellow 

Commissioners and the CFTC staff for all of 

their hard work and dedication so that now 

clearing will be a reality in the swaps market. 

For this first set of determinations, the 

Commission looked to swaps that are 

currently cleared by four derivatives clearing 

organizations (DCOs). 

This set includes standard interest rate 

swaps in U.S. dollars, euros, British pounds 

and Japanese yen, as well as five CDS indices 

on North American and European corporate 

names. 

With this rule, swap dealers and the largest 

hedge funds will be required to clear these 

swaps in March. Compliance would be 

phased in for other market participants 

through the summer of 2013. 

I believe that the Commission’s 

determination for each class satisfies the five 

factors provided for by Congress in the DoddFrank Act, including the first factor that 

addresses outstanding exposures, liquidity 

and pricing data. 

Under the rule, a DCO must post on its 

Web site a list of all swaps it will accept for 

clearing and must indicate which swaps the 

Commission had determined are required to 

be cleared. In addition, the Commission will 

post this information on our Web site. 

[FR Doc. 2012–29211 Filed 12–12–12; 8:45 am] 

BILLING CODE 6351–01–P 


sroberts on DSK5SPTVN1PROD with