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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

SR 13-12

June 7, 2013

TO THE OFFICER IN CHARGE OF SUPERVISION

 AT EACH FEDERAL RESERVE BANK

SUBJECT: Commodity Futures Trading Commission (CFTC) Swap Clearing Rules

Applicability to Community Banking Organizations: This guidance applies to all institutions 

supervised by the Federal Reserve that participate in interest rate and credit default swaps, 

including institutions with total consolidated assets of $10 billion or less. Banks with total 

consolidated assets of $10 billion or less may be eligible for a clearing exception in the CFTC’s 

rules.

This letter reminds supervised institutions that they need to consider new swap clearing 

rules developed by the CFTC. Section 723 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act) added section 2(h) to the Commodity Exchange Act

(CEA), which establishes a clearing requirement for swaps.1

 The Dodd-Frank Act makes it 

unlawful for any person, including a financial institution, to engage in a swap, if the CFTC 

determines such swap is required to be cleared, unless the person submits the swap for clearing 

to a registered derivatives clearing organization (DCO). 

The CFTC has required certain interest rate and credit default swaps to be cleared by a 

DCO.2 Mandatory clearing of these swaps began on March 11, 2013, for swaps between swap 

dealers, major swap participants, and private funds active in the swaps market, and for swaps that 

these counterparties enter into with any other counterparty that desires to clear. On June 10, 

2013, a number of other entities, including persons predominantly engaged in banking or 

financial activities, become subject to mandatory clearing for these swaps with each other, with 

the entities that became subject to clearing on March 11, 2013, and with any other entity that 

desires to clear. This would include bank holding companies, savings and loan holding 

companies, U.S. branches and agencies of foreign banking organizations, and state member 

banks. 

 1 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (July 21, 

2010).

2 The list of swaps subject to mandatory clearing is in the CFTC’s regulations at 17 CFR 50.4. Refer to 77 Fed. Reg.

74284 (December 13, 2012).
 

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Exceptions to the clearing requirement exist for smaller banks3 (total assets of $10 billion 

or less) and certain interaffiliate swaps.4, 5

 Each of the clearing exceptions has terms and 

conditions. Among other things, if a bank is a public company or a subsidiary of a public 

company, then the appropriate committee of the bank’s board of directors may have to review 

and approve the bank’s decision to use a clearing exception. A bank wishing to use a clearing 

exception should review the CFTC’s rules and guidance carefully to ensure it qualifies for the 

exception.6

Institutions supervised by the Federal Reserve entering into swaps subject to mandatory 

clearing should be actively developing the capability to clear these swaps. An institution may 

clear swaps through a futures commission merchant, which clears swaps on the institution’s 

behalf, or by becoming a member of a DCO. Developing the capability to clear swaps will likely 

involve new legal documentation and updates to existing contracts. An institution that is not 

ready to meet the CFTC’s requirements should adjust its activities to ensure compliance with the 

regulation. In addition, the Federal Reserve expects supervised institutions to manage their

derivative activities in a safe-and-sound manner, including the management of legal, operational,

credit, and liquidity risks associated with these activities. 

Reserve Banks are asked to distribute this letter to Federal Reserve-supervised 

institutions that participate in interest rate and credit default swaps and to the appropriate 

examination and supervisory staff. Please direct questions concerning the CFTC’s requirements 

to the CFTC or qualified legal counsel. General questions about the aforementioned activities

may be directed to Christopher McBride, Senior Supervisory Financial Analyst, in the Credit, 

Market, and Liquidity Risk Policy section, at (202) 452-3814. In addition, questions may be sent 

via the Board’s public website.7

Michael S. Gibson

Director

 3 For the purposes of the CEA, a bank, as defined in section 3(a) of the Federal Deposit Insurance Act, is exempt 

from the definition of “financial entity” if it has total assets of $10 billion or less on the last day of the bank’s most 

recent fiscal year.

4 Clearing Requirement Determination Under Section 2(h) of the CEA, 77 Fed. Reg. 74284 (December 13, 2012) (to 

be codified at 17 CFR 50.50); Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 Fed. Reg.

21750 (April 11, 2013) (to be codified at 17 CFR 50.52).

5 Also note that Sections 23A and 23B of the Federal Reserve Act and Regulation W would apply to certain 

interaffiliate swaps.

6 77 Fed. Reg. 42560 (July 19, 2012). See also the CFTC’s issuances entitled, “Final Rule on End-User Exception 

to the Clearing Requirement for Swaps,” at: 

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/eue_factsheet_final.pdf and “Q & A – EndUser Exception to the Clearing Requirement for Swaps” at: 

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/eue_qa_final.pdf

7 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.