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BILLING CODE: 6351-01

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 Dodd-Frank 

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 [INSERT DATE 60 DAYS AFTER 

PUBLICATION IN THE FEDERAL REGISTER]. 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 
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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 Dodd-Frank 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.
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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 

 

1 Clearing Requirement Determination Under Section 2(h) of the CEA; Proposed Rule, 77 FR 47170 (Aug. 

7, 2012).
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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 

 

2 On 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 Pub. L. 110-343, 122 Stat. 3765 (2008). 

3

See 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/GPO-FCIC.pdf. 

4

See id. at 386.
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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 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

 

5

Financial Regulatory Reform: A New Foundation, June 2009, available at

http://www.treasury.gov/initiatives/Documents/FinalReport_web.pdf and cited in S. Rep. 111-176 at 29-30 

(Apr. 30, 2010).

6 Adam Davidson, “How AIG fell apart,” Reuters, Sept. 18, 2008, available at 

http://www.reuters.com/article/2008/09/18/us-how-aig-fell-apart-idUSMAR85972720080918.

7 Hugh 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.

8 The President’s Working Group on Financial Markets, “Policy Statements on Financial Market 

Developments,” Mar. 2008, available at http://www.treasury.gov/resource-center/finmkts/Documents/pwgpolicystatemktturmoil_03122008.pdf.

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ISDA, ISDA Margin Survey, 2009, available at http://www.isda.org/c_and_a/pdf/ISDA-Margin-Survey2009.pdf.
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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 

 

10 The 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.

11 The 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.

12 See 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.
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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 Dodd-Frank 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

 

13 The 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). 
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Clearing is at the heart of the Dodd-Frank 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.

 

14 S. 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.”).

15 S. Rep. 111-176, at 33. 
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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.

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 

 

16 See “Implementing OTC Derivatives Market Reforms,” Financial Stability Board, Oct. 25, 2010, 

available at http://www.financialstabilityboard.org/publications/r_101025.pdf.
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“[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. dollar- and euro-denominated interest rate swaps, as well as yen-denominated 

interest rate swaps referencing TIBOR. The JFSA also will consider mandating singlename CDS referencing Japanese reference entities, and index and single-name 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 

 

17 OTC 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.
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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 
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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 

 

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

20 See 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 
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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.” 

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 

 

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.” 

21 The 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.

22 As discussed in detail below, IDCH has been purchased by LCH.Clearnet Group.

23 Other 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. 
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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 

 

24 The 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. 

25 See, e.g., letters from the CME Group (CME), the Futures Industry Association (FIA), the Managed 

Funds Association (MFA), and Americans for Financial Reform (AFR).

26 Bank of International Settlements (BIS) data, December 2011, available at

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

27 Id.; LCH data.
15

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 

 

28 BIS 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.

31 Comment letters received in response to the NPRM may be found on the Commission’s website at 

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1252.
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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 

 

32 An unsigned comment submitted on September 4, 2012, questioned the need for additional regulation as 

a general matter.

33 See 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).
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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 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 

 

34 See, e.g., letter from Citadel (reviewing each of the five statutory factors and supporting the 

Commission’s analysis).

35 CME 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. 

36 See, e.g., letter from ISDA (requesting changes to the delegation provisions of proposed § 50.6).

37 See, e.g., letter from The Financial Services Roundtable (FSR) (requesting that the Commission clarify 

the meaning of “conditional notional amount”).

38 See, 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).

39 FIA 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.
18

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

 

40 See letters from AFR and Chris Barnard. 
19

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 

 

41 See Section II.D for a discussion of iTraxx and the availability of client clearing.

42 The rule text of § 50.2(a) has been modified to clarify this two-step process.
20

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 

 

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. 

44 See Section II.D for a discussion of iTraxx and the availability of client clearing.
21

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 previouslyestablished 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 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 

 

45 Many other commenters also agreed with this approach. See, e.g., TriOptima and Citadel.
22

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 class-based 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, 

 

46 See 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).
23

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 fellowcustomer risk. 

 

48 This factor is discussed further in Sections II.D and II.F below.
24

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 accomplished49 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 category51 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,

 

49 The 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.

50 See Section IV for a complete discussion of compliance dates.

51 Under 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.
25

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 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 crossborder 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. 

 

52 Category 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. 

53 See, 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.
26

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 

websites.56 The submissions also are published on the Commission’s website.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 

 

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 website at: 

http://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizationProducts.

55 The 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.

56 Available 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 webpage.

57 See http://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizationProducts.
27

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 

website.

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-to-default 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 
28

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 

 

58 As 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. 
29

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.

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:
30

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
31

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 

 

61 To 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.
32

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 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. 

 

62 As discussed in further detail below, the clearing requirement does not require existing swaps in the older 

series to be cleared. The requirement is prospective, only requiring newly executed swaps in these older 

series to be cleared.
33

If no DCO were to offer these swaps for clearing, the Commission has the 

authority to commence a Commission-initiated 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.

 

63 The 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. 

64 See 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.
34

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 
35

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 

 

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.
36

eligibility, and other relevant rules. The discussion of all of these factors is set forth 

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, 

back-tested, 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 
37

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-to-default 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 single-name 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-of-day settlement prices using clearing members’ price 
38

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 

 

66 Such single-name CDS are defined as “security-based swaps” under section 721(a) of the Dodd-Frank 

Act.
39

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 single-name CDS.69 Specifically, the Commission anticipates addressing 

ICE’s portfolio margining petitions for CDS in the near term. 

Based upon the Commission’s on-going 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 

 

67 See 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/iceclearcredit100411publi

c.pdf. See also ICE Clear Europe’s petition available at 

http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/icecleareurope4dfreques

t.pdf.

68 See 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.

69 A discussion of comments concerning portfolio margining is included below.
40

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

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 study70 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 €680 billion for the iTraxx 

 

70 See BIS data, available at http://www.bis.org/statistics/otcder/dt1920a.pdf. 

71 Based on data published on www.markit.com as of September 27, 2012.
41

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-therun indices. The decline however can be more precipitous among older off-the-run 

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

 

72 The term “on-the-run” refers to current series of an index, while older series are referred to “off-the-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.”

73 The 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-the-run” 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 
42

Table 2

DTCC DATA - BY CONTRACT AND SERIES

DTCC DATA NET NOTIONAL $ OPEN DTCC DATA NET NOTIONAL $OPEN

CONTRACT/SERIES OUTSTANDING CONTRACTS CONTRACT/SERIES OUTSTANDING CONTRACTS

CDX.NA.IG.19 66,726,525,313 4,252 CDX.NA.HY.19 18,711,387,000 3,375

CDX.NA.IG.18 25,242,980,217 3,961 CDX.NA.HY.18 11,541,266,409 3,449

CDX.NA.IG.17 14,206,051,225 1,539 CDX.NA.HY.17 5,210,899,501 1,206

CDX.NA.IG.16 20,827,143,020 1,531 CDX.NA.HY.16 5,455,287,000 705

CDX.NA.IG.15 12,170,776,001 756 CDX.NA.HY.15 9,325,100,909 561

CDX.NA.IG.14 10,198,264,081 588 CDX.NA.HY.14 11,458,175,000 183

CDX.NA.IG.13 6,157,634,760 460 CDX.NA.HY.13 1,437,587,000 95

CDX.NA.IG.12 4,869,179,644 343 CDX.NA.HY.12 1,371,245,731 62

CDX.NA.IG.11 4,190,465,694 297 CDX.NA.HY.11 8,291,604,030 233

CDX.NA.IG.10 5,926,634,799 346

CDX.NA.IG.9 105,430,399,716 2,067

CDX.NA.IG.8 17,469,789,333 240

ITRAXX EUROPE SERIES 18 38,510,438,087 4,588 ITRAXX EUROPE CROSSOVER SERIES 18 10,029,587,719 3,908

ITRAXX EUROPE SERIES 17 25,990,566,144 5,754 ITRAXX EUROPE CROSSOVER SERIES 17 5,412,535,536 4,288

ITRAXX EUROPE SERIES 16 7,653,052,828 2,472 ITRAXX EUROPE CROSSOVER SERIES 16 1,447,868,452 1,005

ITRAXX EUROPE SERIES 15 8,497,672,575 1,685 ITRAXX EUROPE CROSSOVER SERIES 15 2,565,759,387 743

ITRAXX EUROPE SERIES 14 3,591,025,566 1,011 ITRAXX EUROPE CROSSOVER SERIES 14 1,178,421,409 528

ITRAXX EUROPE SERIES 13 4,606,938,470 1,202 ITRAXX EUROPE CROSSOVER SERIES 13 688,838,218 485

ITRAXX EUROPE SERIES 12 5,819,694,487 632 ITRAXX EUROPE CROSSOVER SERIES 12 982,576,569 319

ITRAXX EUROPE SERIES 11 3,377,529,200 427 ITRAXX EUROPE CROSSOVER SERIES 11 967,068,894 153

ITRAXX EUROPE SERIES 10 7,771,594,503 543 ITRAXX EUROPE CROSSOVER SERIES 10 632,592,631 143

ITRAXX EUROPE SERIES 9 73,791,616,614 3,698

ITRAXX EUROPE SERIES 8 16,035,466,103 751

ITRAXX EUROPE SERIES 7 14,848,063,469 297

ITRAXX EUROPE HIVOL SERIES 18 732,900,895 31

ITRAXX EUROPE HIVOL SERIES 17 432,663,278 50

ITRAXX EUROPE HIVOL SERIES 16 461,075,069 39

ITRAXX EUROPE HIVOL SERIES 15 351,245,323 61

ITRAXX EUROPE HIVOL SERIES 14 1,020,850,710 69

ITRAXX EUROPE HIVOL SERIES 13 832,944,990 78

ITRAXX EUROPE HIVOL SERIES 12 1,750,515,674 68

ITRAXX EUROPE HIVOL SERIES 11 666,174,288 58

ITRAXX EUROPE HIVOL SERIES 10 1,327,323,849 52

Notwithstanding the declining volumes that occur when an index is no longer onthe-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 

 

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. 

75 The 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 
43

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 

 

series based on DTCC data. The Commission will continue to monitor these volumes and take action as 

appropriate. 
44

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 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.
45

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 ongoing 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. 

 

76 See 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.
46

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 single-name 

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 single-name 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 
47

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 While recognizing that 

 

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 website 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 website 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 
48

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 

 

determination, to the extent that swap satisfies the factors required 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.
49

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 

 

81 The 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.
50

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 
51

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 clearing-eligible 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 viceversa; providing counterparties with daily mark-to-market valuations and exchange of 

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 

 

82 Available at http://occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq212.pdf.
52

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 

 

83 Other 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.

84 See Section II.F for further discussion of this comment.
53

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 

 

85 See 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 
54

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 

 

consideration of this factor, the Commission believes its analysis appropriately covers competition as it 

relates to clearinghouses, as well as to other market participants.

88 The 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.
55

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 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 posttrade 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 

 

89 The 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)) .
56

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 
57

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 

 

90 The 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. 

92 See 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].”).

93 See 11 U.S.C. 766(h). 
58

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 C.F.R. 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. 
59

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

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
60

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

 

94 BIS, 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.
61

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 Summary97

 

95 The 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.

97 LCH.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.
62

LCH CME

Swap Classes Fixed-to-floating, basis, 

forward rate agreements 

(FRAs), overnight index 

swaps (OIS).

Fixed-to-floating.

98

Currencies99 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, BACDOR, PRIBOR, CIBORDKNA13, CIBOR2-

DKNA13, EURIBORTelerate, EURIBOR-Reuters, 

HIBOR-HIBOR, HIBORHKAB, HIBOR-ISDC, 

BUBOR-Reuters, NIBOR, 

BBR-FRA, BBR-Telerate, 

PLN-WIBOR, PLZ-WIBOR, 

STIBOR, SOR-Reuters, 

JIBAR.

For OIS: FEDFUNDS, 

SONIA, EONIA, TOIS.

USD-LIBOR, CAD-BA, 

CHF-LIBOR, GBPLIBOR, JPY-LIBOR, 

and EURIBOR.

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 

 

98 Subsequent 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.
63

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 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 (fixed-to-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 

 

100 These 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.

101 See, e.g., ISDA Swap Taxonomies, available at http://www2.isda.org/identifiers-and-otc-taxonomies/; 

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.
64

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 

 
65

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 

 

102 After 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.

103 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).
66

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%

Other105 $65,689 13% 617,637 14%

Total $503,879 100% 4,289,004 100%

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.

 

104 TriOptima 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.
67

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 pre-determined 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 
68

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. 

 

106 LCH 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.
69

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 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 

 

108 The 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.
70

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 fixed-tofloating 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 

 

109 For 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.
71

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. 

 

110 Although 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. 
72

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 
73

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 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

 

111 Each 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.

112 LCH 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.
74

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-by-swap 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 productby-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 

 

113 AllianceBernstein, 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.
75

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 
76

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 class-defining 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. 
77

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 class-defining specifications. The Commission noted that certain 

specifications “affect the value of the swap in a mechanical way, they are not, 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 
78

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 

 

114 See Section III.B for a discussion of the reasonable efforts standard in this context.
79

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 website 

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 

 

115 See, 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)).
80

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 

 

116 See Sections II and III for further discussion of this issue. 
81

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 non-clearable, 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 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 
82

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 over-hedging. 

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 

 

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.
83

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 
84

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 
85

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 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); 

trade-by-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 

 

118 See 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.
86

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 

 

119 All 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.

120 The 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.
87

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. 
88

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-tofloating 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

 

121 Percentages 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.

122 LCH 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.
89

 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 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 

 

123 See 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.
90

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 

 

124 TriOptima data, as of March 16, 2012. 
91

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 
92

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.

 

125 The 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.
93

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.

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 
94

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-by-transaction 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 EURLIBOR 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 
95

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 EUROLIBOR 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.
96

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 

 

126 The “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.

127 Other 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.
97

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. 

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 

 

128 For 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.
98

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 
99

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 
100

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 noncontroversial. 

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.
101

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

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
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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 

 

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.
103

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.
104

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-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.

 

130 77 FR at 44441-44456.
105

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 
106

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 
107

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 paper131

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.

 

131 See, 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
108

By contrast, ISDA commented on how mandatory clearing may centralize risk in 

DCOs and questioned the risk-mitigating 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. 

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 

 

132 See Section II.D above for a more detailed discussion of these issues. 
109

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 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. 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 
110

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 
111

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. 

 

133 The 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. 

135 See 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]”).

136 See 11 U.S.C. 766(h). 
112

Moreover, the Bankruptcy Code and the Commission’s rules thereunder (in particular 11 

USC § 764(b) and 17 C.F.R. 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 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 
113

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 
114

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 

4:00pm, 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 4:00pm cut off for same-day submission to a DCO is 

 

137 Section 2(h)(2)(D)(iii) of the CEA.
115

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 

 

138 This 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).

139 The 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.
116

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

 

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 infrastructures142 and market participants.143 However, none 

 

140 If the person submitting the swap is a customer, as § 1.3(k) defines that term, then only a 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.

141 See End-User Exception to the Clearing Requirement for Swaps, 77 FR 42560, 42562 (July 19, 2012). 

142 See, 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).
117

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 website or the DCO’s website 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 

 

143 See 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).

144 Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk 

Management, 77 FR 21278, 21307 (Apr. 9, 2012). 
118

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 website a 

list of all swaps that it will accept for clearing and clearly indicate which of those swaps 

 

145 See Section III.G for further discussion regarding scienter.

146 See discussion in Section II.E regarding LCH’s and CME’s efforts to provide such a screening 

mechanism.

147 The 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. 
119

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 website 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 website 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 

 

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. 
120

Commission will include on its website 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 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. 
121

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 

 

149 See discussion below regarding § 50.10 and the evasion and abuse standards.
122

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, 

 

150 Aside 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.
123

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 

 

151 Going forward, prior to or at the time of ownership change, parties will have to account for any 

additional costs of clearing. 

152 For example, an ownership change for a bilateral swap may have foreseeable or unforeseeable credit or 

tax implications for the remaining party.

153 The 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.
124

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 into after the enactment of the Dodd-Frank 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 
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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 
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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.

 

154 Without 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.
127

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 previouslydefined 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 

 

155 See section 2(h)(3) of the CEA and regulation 39.5(d).

156 As 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 
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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 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 

 

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).

157 Proposed § 50.10(a) was informed by and consistent with section 6(e)(4) and (5) of the CEA, 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).” 

158 These 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).

159 Any 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.

160 See End-User Exception to the Clearing Requirement for Swaps, 77 FR 42560 (July 19, 2012).
129

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 “principlesbased” approach to applying proposed § 50.10 and declined to 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. 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 

 

161 Proposed § 50.10(b) is adopted under the authority in both section 2(h)(4)(A) and section 2(h)(7)(F). 

162 This provision was informed by the Dodd-Frank 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. 
130

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. 

 

163 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).
131

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 
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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 requirement.164 FreddieMac asserted that the Commission 

should not pre-judge 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 

 

164 See NRPM at 47191, fn. 97 (discussing a category of interest rate swap specifications “that are 

commonly used to address mechanical issues”).

165 See Product Definition Rules, 77 FR at 48302, fn. 1052. 
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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 DoddFrank 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 

 

166 NPRM at 47171.

167 NPRM at 47207.
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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.

 

168 Examples 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.

170 Section 2(h)(4)(A) of the CEA, 7 U.S.C. 2(h)(4)(A).
135

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
136

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 § 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 buy-side 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 

 

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).
137

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, 

 

172 17 CFR 140.99 sets for the process for addressing requests for exemptive, no-action, and interpretative 

letters. 
138

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 
139

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 § 23.504173 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 

 

173 Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship 

Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904 (Sept. 11, 

2012).

174 See 77 FR at 55940.

175 See Swap Transaction Compliance and Implementation Schedule: Clearing Requirement Under Section 

2(h) of the CEA, 77 FR at 44456.
140

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 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 inter-affiliate exemption rules177 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 

 

176 See 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)).

177 Clearing Exemption for Swaps Between Certain Affiliated Entities, 77 FR 50425 (Aug. 21, 2012).
141

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 Dodd-Frank 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’s179 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 

 

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

179 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 

(2010).

180 This 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).
142

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 

 

182 See § 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.”

183 Section 2(h)(2)(D) of the CEA and § 39.5(b)(ii).
143

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. 

 

184 77 FR 47172 (August 7, 2012). See also Section I.F above. 
144

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. 

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. 
145

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 non-defaulting 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 
146

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 

 

185 As 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.

187 See 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%.

188 See http://www.cmegroup.com/trading/interest-rates/cleared-otc/index.html#data and 

http://www.trioptima.com/repository/historical-reports.html. Notably, CME launched its interest rate swap 

clearing service in the fall of 2010, after the Dodd-Frank Act was passed.

189 See 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 
147

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,

190and 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 clearing determination are required to be cleared. As 

described above, the Commission has decided to initially focus on interest rate swaps and 

 

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.

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

CME’s guaranty fund, posted as of May 10, 2012.

191 See 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. 
148

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. 

 

193 The 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 nonlinear 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.
149

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 

 

194 Embedded in this approach is the assumption that costs and benefits of increased clearing prior to the 

determination is not a function of the Dodd-Frank 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. 
150

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 
151

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 costs related to 

 

196 For 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 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. 
152

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 

 

197 See 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.
153

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

 

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. 
154

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 Dodd-Frank 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 

 

199 See 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.

200 See Section II.B above.
155

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 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 

 

201 The Commission has not adopted a “bright-line” 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 antievasion 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; Security-Based Swap Agreement Recordkeeping, 77 FR 48208, 

48350-48354 (Aug. 13, 2012).
156

the clearing requirement. As stated above, 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. 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 

 

202 See above at Section III.G.

203 See CME pricing charts at: http://www.cmegroup.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/interest-rates/files/CME-IRS-Self-Clearing-Fee.pdf.
157

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 

 

204 See LCH pricing for clearing services related to OTC interest rate swaps at: 

http://www.lchclearnet.com/swaps/swapclear_for_clearing_members/fees.asp.

205 See ICE Clear Credit fees for CDS at: 

https://www.theice.com/publicdocs/clear_credit/circulars/ICEClearCredit%20Fee%20Schedule%20Notice

_FINAL.pdf.

206 See CME pricing charts.

207 See id.

208 See ICE Clear Credit fees for CDS at: 

https://www.theice.com/publicdocs/clear_credit/circulars/ICEClearCredit%20Fee%20Schedule%20Notice

_FINAL.pdf.
158

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 

 

209 See 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. 
159

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 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 

 

210 The 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.
160

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 indexbased 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 indexbased CDS market is currently cleared.214

 Therefore, the Commission noted in the 

 

211 The 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.

212 The 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.

213 BIS 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 index-based 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 
161

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 index-based 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. 

 

NPRM that it believes that the compression of CDS positions moving into clearing is the most likely 

explanation and therefore used the ISDA estimate.
162

Moreover, the clearing requirement will apply only to new swap transactions215 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 

 

215 As well as, applying to swaps subject to a change in ownership, as explained above in Section III.D.

216 Cross-Border Application of Certain Swaps Provisions in the Commodity Exchange Act, 77 FR 41214 

(July 12, 2012).

217 See ISDA Margin Survey 2012, at 15, available at http://www2.isda.org/functionalareas/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.
163

estimated that the aggregate amount of collateral in circulation in the non-cleared OTC 

derivatives market at the end of 2011 was approximately $3.6 trillion.218

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 cost-benefit 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. 

 

218 This 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.

219 77 FR at 47214.
164

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 

 

220 See Morgan Stanley, Morgan Stanley Research, “Swap Central Clearing: What is the Impact on 

Collateral?” (August 2012).

221 This ratio is the initial margin divided by the notional outstanding.
165

($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 buy-side 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). 

 

222 In particular, Morgan Stanley assumed that “dealer [initial margin] may grow over time due to higher 

CCP collateral requirements and counterparty diversification regulations.”
166

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. 

Table 6

Margin Estimates by Trader Type in Billions of U.S. Dollars225

Trader Type Gross Notional Gross Margin 

(1.5% of 

Estimated 

Netting Benefit

Estimated 

Margin Posted 

 

223 See End User Exception to the Clearing Requirement for Swaps, 77 FR 42560 (July 19, 2012).

224 See TABB Group, “The New Global Risk Transfer Market: Transformation and the Status Quo,” (Sept.

2012).

225 Id. 
167

Notional)

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, 
168

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 

 

226 The 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.

227 Moreover, according to Morgan Stanley’s research note cited above, many dealers and buy-side 

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.

228 This 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-costs-to-the-swap-dealerdesignation-and-otc-reform/ and http://bettingthebusiness.com/2012/03/19/nera-doubles-down/.
169

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

 

229 Antonio S. Mello, and John E. Parsons, “Margins, Liquidity, and the Cost of Hedging,” MIT Center for 

Energy and Environmental Policy Research, May 2012.

230 See 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 nonmargined 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.
170

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 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 

 

231 See 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).

232 The 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).
171

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 
172

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 

 

233 BIS 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 
173

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 

 

unique risk profile involving jump-to-default risk contributed to the Commission’s decision to include it in 

among the first clearing determinations.
174

execution.”234 This conforms to the requirements established in the recently finalized 

rule 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 

 

234 See § 50.2(a) (setting for the timeframe for submission of swaps to DCOs).

235 See Client Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk 

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

236 The 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.
175

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 Dodd-Frank 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 

 

237 For 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.
176

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. 

 

238 No 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).
177

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 already have 

 

239 BIS data, June 2011, available at http://www.bis.org/publ/otc_hy1111.pdf.

240 See id.

241 See id.
178

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 
179

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 

 

242 ISDA, FIA, MFA, and D.E. Shaw.
180

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.
181

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 
182

mandatory clearing of these shorter tenors may prevent 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.
183

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 

 

243 As 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.
184

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 

 

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.
185

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 determine necessary margin and other safeguards. 

 

245 For instance, in the example noted above, swaps with a term of five years and one day would not be 

required to be cleared.

246 AllianceBernstein, 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.
186

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

 

247 See Section II.F above for more thorough discussion of the data. 
187

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 well-established. 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.

 

248 For 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.
188

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 
189

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 

 

249 As 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. 

250 See 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. 
190

FCM is likely to pass along fees charged by the DCO for establishing and maintaining 

open positions.

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 
191

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

 

251 See Sections II.D and II.F.
192

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. 

 

252 See 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.
193

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 significant economic impact on a substantial number of 

 

253 As 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.

254 A list of the G20 commitments made in Pittsburgh can be found at: 

http://www.g20.utoronto.ca/analysis/commitments-09-pittsburgh.html.
194

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 

 

255 See 5 U.S.C. 601 et seq.

256 To 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).

257 See 66 F.R. 20740, 20743 (Apr. 25, 2001).
195

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 

 

258 See 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).

259 Small Business Administration, Table of Small Business Size Standards, Nov. 5, 2010.

260 See 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”).
196

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 website 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 table of contents for part 39 is revised to read as follows:

 

261 44 U.S.C. 3507(d).
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Subpart A – General Provisions Applicable to Derivatives Clearing Organizations

Sec.

39.1 Scope.

39.2 Definitions.

39.3 Procedures for registration.

39.4 Procedures for implementing derivatives clearing organization rules and clearing 

new products.

39.5 Review of swaps for Commission determination on clearing requirement. 

39.6 [Reserved]

39.7 Enforceability.

39.8 Fraud in connection with the clearing of transactions on a derivatives clearing 

organization.

Subpart B – Compliance with Core Principles

Sec.

39.9 Scope.

39.10 Compliance with core principles.

39.11 Financial resources. 

39.12 Participant and product eligibility. 

39.13 Risk management.

39.14 Settlement procedures. 

39.15 Treatment of funds.

39.16 Default rules and procedures.

39.17 Rule enforcement.
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39.18 System safeguards.

39.19 Reporting.

39.20 Recordkeeping.

39.21 Public information.

39.22 Information sharing.

39.23 Antitrust considerations.

39.24 [Reserved]

39.25 [Reserved]

39.26 [Reserved]

39.27 Legal risk considerations.

Appendix A to Part 39 — FORM DCO DERIVATIVES CLEARING ORGANIZATION 

APPLICATION FOR REGISTRATION

2. 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.

3. Remove and reserve § 39.6.

PART 50 – CLEARING REQUIREMENT AND RELATED RULES

4. The authority citation for part 50 continues to read as follows:

Authority: 7 U.S.C. 2(h), 7a-1 as amended by Pub. L. 111-203, 124 Stat. 1376.

5. Amend part 50 to read as follows:

PART 50 – CLEARING REQUIREMENT AND RELATED RULES 

Subpart A – Definitions and Clearing Requirement 

 § 50.1 Definitions.

 § 50.2 Treatment of swaps subject to a clearing requirement.
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 § 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.

 § 50.7-9 [Reserved]

 § 50.10 Prevention of evasion of the clearing requirement and abuse of an exception or 

exemption to the clearing requirement.

 § 50.11-24 [Reserved]

Subpart B – Compliance Schedule

 § 50.25 Clearing requirement compliance schedule.

 § 50.26-49 [Reserved]

Subpart C – Exceptions and Exemptions to Clearing Requirement

 § 50.50 Exceptions to the clearing requirement.

 § 50.51 Exemption for cooperatives.

 § 50.52 Clearing exemption for swaps between certain affiliated entities.

 § 50.53-74 [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 (A) entered into after 4:00 pm in the location of a party, or (B) 

entered into on a day that is not a business day in the location of a party, then such swap 
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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, and (2) is included in a class of swaps identified in § 50.4,

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) shall undertake reasonable 

efforts to verify whether a swap is required to be cleared.

 (c) For purposes of paragraph (a), persons that are not clearing members of an eligible 

derivatives clearing organization shall be deemed to have complied with paragraph (a) 

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 website 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.
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 (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 website.

§ 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

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 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
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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) 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

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
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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

§ 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 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 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 
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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.

§ 50.7-9 [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.
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Subpart B – Compliance Schedule

 § 50.25 Clearing Requirement Compliance Schedule.

* * * * *

6. Add § 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 
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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;

 (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 non-cleared 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);
207

 (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.
208

 (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
209

 (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:

 (i) 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
210

 (ii) 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.

X

Sauntia S. Warfield

Assistant Secretary of the Commission 

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 
211

convened the G-20 leaders in Pittsburgh in 2009, and an international 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 Dodd-Frank Act, including the first factor that addresses 

outstanding exposures, liquidity and pricing data.

Under the rule, a DCO must post on its website 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 website.