Vol. 81 Thursday, 

No. 116 June 16, 2016 

Part VI 

Commodity Futures Trading Commission 

17 CFR Part 50 

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

Interest Rate Swaps; Proposed Rule 


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39506 Federal Register / Vol. 81, No. 116 / Thursday, June 16, 2016 / Proposed Rules 

1 17 CFR 145.9. Commission regulations referred 

to herein are found on the Commission’s Web site 

at http://www.cftc.gov/LawRegulation/Commodity

ExchangeAct/index.htm. 

2Clearing Requirement Determination Under 

Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 

2012) (codified at 17 CFR 50.1 through 50.10). 

3See 17 CFR 50.25; 77 FR at 74319–21. 

4See 77 FR at 74287. 

5 Id. at 74308. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 50 

RIN 3038–AE20 

Clearing Requirement Determination 

Under Section 2(h) of the CEA for 

Interest Rate Swaps 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing to amend the 

Commission’s rules to establish a new 

clearing requirement under the 

pertinent section of the Commodity 

Exchange Act (CEA). The amended 

regulation would require that interest 

rate swaps denominated in certain 

currencies or having certain termination 

dates, as described herein, be submitted 

for clearing by persons required to do so 

under the pertinent section of the CEA 

to a derivatives clearing organization 

(DCO) that is registered under the CEA 

(registered DCO) or a DCO that has been 

exempted from registration under the 

CEA (exempt DCO). 

DATES: Comments must be received on 

or before July 18, 2016. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AE20, 

by any of the following methods: 

• CFTC Web site: http://

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Comments Online process 

on the Web site. 

• Mail: Send to Christopher 

Kirkpatrick, Secretary of the 

Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

Mail, above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http://

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that you believe is exempt from 

disclosure under the Freedom of 

Information Act (FOIA), a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the Commission’s regulations.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed that contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the FOIA. 

FOR FURTHER INFORMATION CONTACT: 

Sarah E. Josephson, Deputy Director, 

Division of Clearing and Risk (DCR), at 

202–418–5684 or sjosephson@cftc.gov; 

Peter A. Kals, Special Counsel, DCR, at 

202–418–5466 or pkals@cftc.gov; 

Melissa A. D’Arcy, Special Counsel, 

DCR, at 202–418–5086 or mdarcy@

cftc.gov; Meghan A. Tente, Special 

Counsel, DCR, at 202–418–5785 or 

mtente@cftc.gov; Michael A. Penick, 

Economist, Office of the Chief 

Economist (OCE), at 202–418–5279 or 

mpenick@cftc.gov; or Lihong McPhail, 

Research Economist, OCE, at 202–418– 

5722 or lmcphail@cftc.gov, in each case 

at the Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. The Commission’s First Clearing 

Requirement Determination 

B. Clearing Requirements in Other 

Jurisdictions 

C. Regulatory Background 

D. Commission Processes for Review and 

Surveillance of DCOs 

II. Review of Swap Submissions 

A. General Description of Information 

Considered 

B. Proposed Determination Analysis 

III. Proposed Amended Regulation 50.4(a) 

IV. Proposed Implementation Schedule 

V. Cost Benefit Considerations 

A. Statutory and Regulatory Background 

B. Overview of Swap Clearing 

C. Consideration of the Costs and Benefits 

of the Commission’s Action 

D. Costs and Benefits of the Proposed Rule 

as Compared to Alternatives 

E. Section 15(a) Factors 

VI. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

I. Background 

A. The Commission’s First Clearing 

Requirement Determination 

In December 2012, pursuant to section 

2(h)(1)(A) of the CEA, which was added 

to the CEA by section 723 of Title VII 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (DoddFrank Act), the Commission published 

its first clearing requirement 

determination (First Clearing 

Requirement Determination).2 The First 

Clearing Requirement Determination 

was implemented between March 2013 

and October 2013 based on the schedule 

described in regulation 50.25 and the 

preamble to the First Clearing 

Requirement Determination.3

The First Clearing Requirement 

Determination required the clearing of 

swaps within four classes of interest rate 

swaps and two classes of credit default 

swaps (CDS) that meet certain 

specifications. The Commission focused 

on these interest rate swaps and CDS in 

the First Clearing Requirement 

Determination because of the size of 

these markets relative to the derivatives 

market overall and because these swaps 

were already widely being cleared.4

The four classes of interest rate swaps 

required to be cleared by the First 

Clearing Requirement Determination 

were: (i) Fixed-to-floating swaps; (ii) 

basis swaps; (iii) overnight index swaps 

(OIS); and (iv) forward rate agreements 

(FRAs). As set forth in regulation 

50.4(a), each class is limited to swaps 

having certain specifications pertaining 

to: (i) The currency in which the 

notional and payment amounts are 

specified; (ii) the floating rate index 

referenced in the swap; (iii) the stated 

termination date; (iv) optionality; (v) 

dual currencies; and (vi) conditional 

notional amounts. 

With respect to the currency 

specification, the Commission limited 

the interest rate swaps required to be 

cleared to those denominated in U.S. 

dollars (USD), Euros (EUR), British 

pounds (GBP), and Japanese yen (JPY). 

In coming to this decision, the 

Commission noted that the interest rate 

swaps denominated in these currencies 

accounted for an outsized portion of the 

entire interest rate swap market in terms 

of both notional amounts outstanding 

and trading volumes compared to 

interest rate swaps denominated in 

other currencies.5 The Commission also 

noted that it expected to publish a 


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6 Id. at 74309. In the First Clearing Requirement 

Determination, the Commission also stated that it 

intended to consider other swaps submitted by 

DCOs, such as agricultural, energy, and equity 

indices, as well as additional classes of CDS for a 

possible clearing requirement determination. See 

id. at 74287 and n.24. The Commission is 

committed to reviewing all swaps submitted by 

DCOs to determine whether such swaps should be 

required to be cleared, although it is possible that 

the Commission may determine that certain of these 

swaps are not appropriate for required clearing at 

this time. Finally, the Commission also may 

consider other classes of swaps for a clearing 

requirement determination, including additional 

types of CDS, as well as certain foreign exchange 

swaps, such as non-deliverable forwards. 

7Two DCOs that the Commission has exempted 

from registration, ASX Clear (Futures) Pty Ltd. 

(Australia) and OTC Clearing Hong Kong Ltd., clear 

some of the swaps covered by this proposed 

determination (AUD- and HKD-denominated 

interest rate swaps, respectively). Pursuant to 

Commission orders, these two DCOs are permitted 

to clear for U.S. proprietary accounts but not for 

U.S. customers. In addition, these DCOs have not 

submitted filings under Commission regulation 

39.5(b). Consequently, this proposal addresses only 

those registered DCOs that have submitted swaps 

for consideration under CFTC regulations. 

8See Table 1 for information as to which 

registered DCOs clear fixed-to-floating interest rate 

swaps denominated in which currencies. 

9 Id. at 74310. 

10 Id. 

11ASIC Derivative Transaction Rules (Clearing) 

2015, available at: https://www.comlaw.gov.au/

Details/F2015L01960. 

12According to section 1.2.7 of the ASIC 

Derivative Transaction Rules (Clearing) 2015, the 

clearing requirement commenced on April 4, 2016, 

the first ‘‘Clearing Start Date.’’ 

clearing requirement determination for 

interest rate swaps denominated in 

additional currencies in the future.6 For 

the reasons discussed below, the 

clearing requirement determination 

proposed today would amend the First 

Clearing Requirement Determination to 

add a requirement to clear fixed-tofloating interest rate swaps denominated 

in nine additional currencies in which 

Chicago Mercantile Exchange, Inc. 

(CME), Eurex Clearing AG (Eurex), 

LCH.Clearnet Ltd. (LCH), and Singapore 

Exchange Derivatives Clearing Ltd. 

(SGX), each a Commission-registered 

DCO, clear interest rate swaps.7 These 

additional currencies are Australian 

dollar (AUD), Canadian dollar (CAD), 

Hong Kong dollar (HKD), Mexican peso 

(MXN), Norwegian krone (NOK), Polish 

zloty (PLN), Singapore dollar (SGD), 

Swedish krona (SEK), and Swiss franc 

(CHF) (collectively, the nine additional 

currencies).8 The clearing requirement 

determination proposed today also 

would require the clearing of certain 

basis swaps denominated in AUD, 

which are currently cleared by CME and 

LCH. Under the First Clearing 

Requirement Determination, certain 

basis swaps denominated in USD, EUR, 

GBP, and JPY must be cleared. The 

proposal also would require the clearing 

of certain AUD-, NOK-, PLN-, and SEKdenominated FRAs. Under the First 

Clearing Requirement Determination, 

certain FRAs denominated in USD, 

EUR, GBP, and JPY must be cleared. 

With respect to the stated termination 

date specification, which also is referred 

to as the maturity of an interest rate 

swap, the First Clearing Requirement 

Determination stated that, for OIS 

denominated in USD, EUR, and GBP, 

the range of termination dates subject to 

the clearing requirement was 7 days to 

2 years. At the time, the Commission 

found that OIS with termination dates 

within this range warranted a clearing 

requirement determination because they 

had sufficient notional outstanding and 

trading liquidity necessary for a DCO to 

successfully risk manage and price 

them.9

When the First Clearing Requirement 

Determination was published, CME had 

not yet begun clearing OIS with 

termination dates greater than two 

years, and, although LCH had been 

offering such OIS for clearing, LCH data 

did not show any outstanding notional 

for these OIS.10 Both LCH and CME now 

clear OIS out to 30 years, and Eurex 

offers to clear OIS out to 30 years as 

well. For the reasons discussed herein, 

the clearing requirement determination 

proposed today also would amend the 

First Clearing Requirement 

Determination to require the clearing of 

OIS with termination dates out to three 

years. Finally, the clearing requirement 

determination proposed today also 

would require the clearing of OIS 

denominated in AUD and CAD. 

B. Clearing Requirements in Other 

Jurisdictions 

Following is a summary of actions 

taken by other jurisdictions towards 

implementing clearing requirements for 

interest rate swaps denominated in the 

nine additional currencies. The 

Commission believes that it is important 

to harmonize its swap clearing 

requirement with clearing requirements 

promulgated in other jurisdictions. For 

example, if a non-U.S. jurisdiction 

issued a clearing requirement and a 

swap dealer (SD) located in the U.S. 

were not subject to that non-U.S. 

clearing requirement, then a swap 

market participant located in the nonU.S. jurisdiction might be able to avoid 

the non-U.S. clearing requirement by 

entering into a swap with the SD located 

in the U.S. 

As the Commission reviewed the 

regulation 39.5(b) submissions from 

DCOs, it considered whether those 

products offered for clearing at DCOs 

were subject, or were likely to be 

subject, to a clearing requirement in 

another jurisdiction. For those products 

that were the subject of a clearing 

requirement rule or proposal outside of 

the U.S., the Commission reviewed the 

product specifications of the products 

and the processes used by non-U.S. 

regulators. In addition, the Commission 

reviewed data produced in connection 

with any rule proposals or final rules 

implementing a clearing requirement in 

non-U.S. jurisdictions. Finally, the 

Commission considered comments 

submitted in response to clearing 

determination rule proposals in nonU.S. jurisdictions and any subsequent 

changes that regulators made to final 

rules implementing a clearing 

requirement. The Commission was 

informed by its review of non-U.S. 

jurisdictions’ clearing requirement 

determinations and considered those 

determinations in preparing this 

proposed determination. 

Accordingly, the scope of the swaps 

included in this proposal reflects the 

Commission’s desire to harmonize with 

our counterparts abroad and is informed 

by the work of those regulators, as 

described below. In addition, the 

specifications of the swaps included in 

this proposed determination are 

intended to be consistent with those 

referenced in clearing requirements 

published by the Commission’s 

counterparts abroad. 

i. Australia 

The Australian Securities and 

Investments Commission (ASIC) has 

published regulations that will require 

certain Australian and non-Australian 

entities to clear AUD-, USD-, GBP-, 

EUR-, and JPY-denominated fixed-tofloating interest rate swaps, basis swaps, 

and FRAs, as well as AUD-, USD-, GBP- 

, and EUR-denominated OIS.11 The 

regulations’ swap classes are coextensive to those described in existing 

Commission regulation 50.4(a) except 

for the addition of AUD-denominated 

swaps. The Commission’s clearing 

requirement proposal would make its 

AUD-denominated swaps in the fixedto-floating interest rate swap, basis 

swap, FRA, and OIS classes consistent 

with the AUD-denominated swaps 

required to be cleared by ASIC. The 

Australian clearing requirement 

commenced for certain financial entities 

in April 2016.12

ii. Canada 

In 2015, the Canadian Office of the 

Superintendent of Financial Institutions 

(OSFI) issued a ‘‘guideline’’ requiring 

certain Canadian financial institutions, 

as well as Canadian branches of nonVerDate Sep<11>2014 19:27 Jun 15, 2016 Jkt 238001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 E:\FR\FM\16JNP5.SGM 16JNP5

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13 Derivatives Sound Practices Guideline, 

available at: http://www.osfi-bsif.gc.ca/Eng/fi-if/rgro/gdn-ort/gl-ld/Pages/b7.aspx#toc3. 14 Draft National Instrument 94–101 respecting 

Mandatory Central Counterparty Clearing of 

Derivatives. Summary available at: http://www.

albertasecurities.com/Regulatory%20Instruments/

5022685-v5-Proposed_NI_94-101_package.pdf. 15 Draft Regulation 94–101 respecting Mandatory 

Central Counterparty Clearing of Derivatives (2nd 

Publication). Summary available at: http://www.

lautorite.qc.ca/files/pdf/reglementation/

instruments-derives/reglements/94-101/2016-02-24/

2016fev24-94-101-avis-cons-en.pdf. 16European Commission press release 

announcing the European Clearing Obligation, 

available at: http://europa.eu/rapid/press-release_

IP-15-5459_en.htm. 17Regulation (EU) No. 648/2012. See Revised 

Opinion, Draft RTS on the Clearing Obligation on 

Interest Rate Swaps, Annex I, pages 24–25 (Mar. 6, 

2015), available at: https://www.esma.europa.eu/

sites/default/files/library/2015/11/2015-511_

revised_opinion_on_draft_rts_on_the_clearing_

obligation.pdf. 18 Id. at 21–23 (Articles 2–5). 

19https://www.esma.europa.eu/sites/default/

files/library/2015/11/esma-2015-1629_-final_

report_clearing_obligation_irs_other_currencies.pdf. 

20Poland and Sweden are members of the 

European Union, but Norway is not. 

21Consultation Conclusions and Further 

Consultation on Introducing Mandatory Clearing 

and Expanding Mandatory Reporting, available at: 

http://www.sfc.hk/edistributionWeb/gateway/EN/

consultation/conclusion?refNo=15CP4. 

22 Id. See also Securities and Futures (OTC 

Derivative Transactions—Clearing and Record 

Keeping Obligations and Designation of Central 

Counterparties) Rules, The Government of the Hong 

Kong Special Administrative Region Gazette, 

available at: http://www.gld.gov.hk/egazette/pdf/

20162005/es22016200528.pdf. 

23 Id. 

24Rules for Derivatives Transactions (Circular 4/ 

2012), Banco de Me ́xico, available at: http://www.

banxico.org.mx/disposiciones/circulares/%7

BD7250B17-13A4-B0B7-F4E5- 

04AF29F37014%7D.pdf. 

25See Financial Stability Board, Ninth Progress 

Report on Implementation, OTC Derivatives Market 

Reforms, Appendix D (Timetable for 

Implementation of Central Clearing Commitment) 

(July 24, 2015), available at: http://www.financial

stabilityboard.org/wp-content/uploads/OTCDerivatives-Ninth-July-2015-Progress-Report.pdf 

[hereinafter ‘‘Ninth Progress Report on 

Implementation’’], at Appendix D. 

26Summary published by MAS available at: 

http://www.mas.gov.sg/News-and-Publications/

Media-Releases/2015/MAS-Consults-on-ProposedRegulations-for-Mandatory-Clearing-of-OTCDerivatives.aspx. See also Ninth Progress Report on 

Implementation, at Appendix D. 

27See Ninth Progress Report on Implementation, 

at Appendix D. 

28Section 2(h)(2) of the CEA provides the 

Commission with authority to issue a determination 

that a swap is required to be cleared pursuant to 

two separate review processes. CEA section 

2(h)(2)(A) provides for a Commission-initiated 

review process whereby the Commission, on an 

Canadian financial institutions, to clear 

‘‘standardized derivatives where 

practicable.’’ 13 Also, in 2015, Canada’s 

provincial securities regulators 

published a draft rule that would 

require certain derivatives to be 

cleared.14 On February 24, 2016, the 

Canadian provincial securities 

regulators published a revised draft rule 

that proposes subjecting the following 

classes of interest rate swaps to a 

clearing mandate: CAD-, USD-, EUR-, 

and GBP-denominated fixed-to-floating 

interest rate swaps, basis swaps, and 

FRAs, as well as CAD-, USD-, EUR-, and 

GBP-denominated OIS.15 The Canadian 

provincial securities regulators’ revised 

rule is expected to be finalized in 2016. 

The CAD-denominated swaps included 

in the Commission’s proposal are 

covered by the Canadian provincial 

securities regulators’ revised rule. 

iii. European Union 

On August 6, 2015, the European 

Commission adopted an interest rate 

swap clearing requirement that the 

European Securities and Markets 

Authority (ESMA) developed pursuant 

to the European Market Infrastructure 

Regulation (EMIR).16 The European 

interest rate swap class is coextensive 

with current Commission regulation 

50.4(a), except that with respect to OIS, 

the European class covers OIS with a 

termination date range of up to three 

years instead of two. Like current 

regulation 50.4(a), the European class 

covers interest rate swaps denominated 

in USD, EUR, GBP, and JPY, not in any 

of the nine additional currencies.17

Compliance with the European clearing 

requirement will be phased in between 

2016 and 2018 depending on the type of 

counterparty.18

In November 2015, following the 

close of a comment period, ESMA 

recommended to the European 

Commission that the European Union 

Clearing Obligation be expanded to 

cover NOK-, PLN-, and SEKdenominated fixed-to-floating interest 

rate swaps and FRAs.19 The NOK-, PLN- 

, and SEK-denominated fixed-to-floating 

interest rate swaps and FRAs included 

in the Commission’s proposal are 

covered by ESMA’s recommendation to 

the European Commission.20

iv. Hong Kong 

On February 5, 2016, the Hong Kong 

Securities and Futures Commission and 

the Hong Kong Monetary Authority 

jointly published conclusions to a 

consultation paper proposing 

mandatory clearing for certain interest 

rate swaps.21 The regulators submitted 

draft rules to the Legislative Council to 

implement a clearing requirement 

covering fixed-to-floating interest rate 

swaps and basis swaps denominated in 

USD, GBP, EUR, JPY, and HKD, as well 

as OIS denominated in USD, GBP, and 

EUR.22 The legislative process has been 

completed, and the final rules are to 

take effect in September 2016.23 The 

HKD-denominated interest rate swaps 

included in the Commission’s proposal 

are covered by the Hong Kong Securities 

and Futures Commission and the Hong 

Kong Monetary Authority’s final rules. 

v. Mexico 

In 2015, Banco de Mexico, the 

Mexican central bank, published a 

clearing requirement mandating that 

certain Mexican financial institutions 

clear MXN-denominated fixed-tofloating interest rate swaps having a 

termination date range of approximately 

two months to 30 years and that 

reference the Mexican ‘‘Interbank 

Equilibrium Interest Rate’’ (TIIE).24 The 

clearing requirement became effective 

for certain Mexican counterparties on 

April 1, 2016. The clearing requirement 

will commence for certain non-Mexican 

counterparties executing swaps opposite 

Mexican counterparties during the 

second half of 2016.25 The MXNdenominated interest rate swaps 

included in the Commission’s proposal 

are covered by the Banco de Mexico’s 

clearing requirement. 

vi. Singapore 

In 2015, the Monetary Authority of 

Singapore (MAS) published proposed 

regulations that would require the 

clearing of SGD-denominated fixed-tofloating interest rate swaps referencing 

the Swap Offer Rate (SOR) and USDdenominated fixed-to-floating interest 

rate swaps referencing LIBOR.26 The 

SGD-denominated interest rate swaps 

included in the Commission’s proposal 

are covered by the MAS’s proposed 

regulations. 

vii. Switzerland 

In 2015, the Swiss parliament adopted 

legislation providing a framework for a 

swap clearing requirement. A clearing 

requirement is expected to be phased in 

during the second half of 2016. It is not 

yet known which products such a 

clearing requirement would cover.27

C. Regulatory Background 

Like the First Clearing Requirement 

Determination, the clearing requirement 

proposed herein would require the 

clearing of certain interest rate swaps 

pursuant to section 2(h) of the CEA. 

Under section 2(h)(1)(A) of the CEA, it 

is 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. A clearing requirement 

determination may be initiated by a 

swap submission from a registered 

DCO.28 Section 2(h)(2)(B)(i) of the CEA 


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ongoing basis, must review swaps (or a group, 

category, type or class of swaps) to make a 

determination as to whether a swap (or group, 

category, type or class of swaps) should be required 

to be cleared. The other process provided under 

section 2(h)(2)(B) of the CEA entails the 

Commission’s review of swaps that are submitted 

by DCOs. Specifically, CEA section 2(h)(2)(B)(i) 

requires that each DCO submit to the Commission 

each swap (or group, category, type or class of 

swaps) that it plans to accept for clearing. The 

swaps subject to this proposed determination were 

submitted by DCOs pursuant to CEA section 

2(h)(2)(B)(i) and Commission regulation 39.5. 

29Section 2(h)(2)(B)–(C) of the CEA describes the 

process pursuant to which the Commission is 

required to review swap submissions from DCOs to 

determine whether the swaps should be subject to 

the clearing requirement. 

30See section 6c of the CEA. 

31See section 6b of the CEA. 

32See section 5e 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. 

Regulation 39.5(b) implements the 

procedural elements of section 

2(h)(2)(B)–(C) by establishing the 

procedures for the submission of swaps 

by a DCO to the Commission for a 

clearing requirement determination.29

D. Commission Processes for Review 

and Surveillance of DCOs 

i. Part 39 Regulations Set Forth 

Standards for Compliance 

Section 5b(c)(2) of the CEA sets forth 

18 core principles with which DCOs 

must comply to be registered and to 

maintain registration. The core 

principles address numerous issues, 

including financial resources, 

participant and product eligibility, risk 

management, settlement procedures, 

default management, system safeguards, 

reporting, recordkeeping, public 

information, and legal risk. 

Each of the DCOs that submitted the 

interest rate swaps that are the subject 

of this proposed determination are 

registered with the Commission. The 

DCOs’ regulation 39.5(b) submissions 

discussed herein identify swaps that the 

DCOs are currently clearing. 

Consequently, the Commission has been 

reviewing and monitoring compliance 

by the DCOs with the core principles for 

clearing the submitted swaps. 

The primary objective of the 

Commission’s supervisory program is to 

ensure compliance with applicable 

provisions of the CEA and 

implementing regulations, and, in 

particular, the core principles 

applicable to DCOs. A primary concern 

of the program is to monitor and 

mitigate potential risks that can arise in 

derivatives clearing activities for the 

DCO, its members, and entities using 

the DCO’s services. Accordingly, the 

Commission’s supervisory program 

takes a risk-based approach. 

In addition to the core principles set 

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

section 5c(c) of the CEA governs the 

procedures for review and approval of 

new products, new rules, and rule 

amendments submitted to the 

Commission by DCOs. Part 39 of the 

Commission’s regulations implements 

sections 5b and 5c(c) of the CEA by 

establishing specific requirements for 

compliance with the core principles, as 

well as procedures for registration, for 

implementing DCO rules, and for 

clearing new products. Part 40 of the 

Commission’s regulations sets forth 

additional provisions applicable to a 

DCO’s submission of rule amendments 

and new products to the Commission. 

The Commission has means to enforce 

compliance, including the 

Commission’s ability to sue the DCO in 

federal court for civil monetary 

penalties,30 issue a cease and desist 

order,31 or suspend or revoke the 

registration of the DCO.32 In addition, 

any deficiencies or other compliance 

issues observed during ongoing 

monitoring or an examination are 

frequently communicated to the DCO 

and various measures are used by the 

Commission to ensure that the DCO 

appropriately addresses such issues, 

including escalating communications 

within the DCO management and 

requiring the DCO to demonstrate, in 

writing, timely correction of such 

issues. 

ii. Initial Registration Application 

Review and Periodic In-Depth Reviews 

Section 5b of the CEA requires a DCO 

to register with the Commission. In 

order to do so, an organization must 

submit an application demonstrating 

that it complies with the core 

principles. During the review period, 

the Commission generally conducts an 

on-site review of the prospective DCO’s 

facilities, asks a series of questions, and 

reviews all documentation received. 

The Commission may ask the applicant 

to make changes to its rules to comply 

with the CEA and the Commission’s 

regulations. 

After registration, the Commission 

conducts examinations of DCOs to 

determine whether the DCO is in 

compliance with the CEA and 

Commission regulations. The 

examination consists of a planning 

phase where staff reviews information 

the Commission has on hand to 

determine whether the information 

raises specific issues and to develop an 

examination plan. The examination 

team participates in a series of meetings 

with the DCO at its facility. Commission 

staff also communicates with relevant 

DCO staff, including senior 

management, and reviews 

documentation. Data produced by the 

DCO is independently tested. Finally, 

when relevant, walk-through testing is 

conducted for key DCO processes. 

Commission staff also reviews DCOs 

that are systemically important 

(SIDCOs) at least once a year. CME has 

been determined to be a SIDCO. 

iii. Commission Daily Risk Surveillance 

Commission risk surveillance staff 

monitors the risks posed to and by 

DCOs, clearing members, and market 

participants, including market risk, 

liquidity risk, credit risk, and 

concentration risk. The analysis 

includes review of daily, large trader 

reporting data obtained from market 

participants, clearing members, and 

DCOs, which is available at the trader, 

clearing member, and DCO levels. 

Relevant margin and financial resources 

information also is included within the 

analysis. 

Commission staff regularly conducts 

back testing to review margin coverage 

at the product level and follows up with 

the relevant DCO regarding any 

exceptional results. Independent stress 

testing of portfolios is conducted on a 

daily, weekly, and ad hoc basis. The 

independent stress tests may lead to 

individual trader reviews and/or futures 

commission merchant (FCM) risk 

reviews to gain a deeper understanding 

of a trading strategy, risk philosophy, 

risk controls and mitigants, and 

financial resources at the trader and/or 

FCM level. The traders and FCMs that 

have a higher risk profile are then 

reviewed during the Commission’s onsite review of a DCO’s risk management 

procedures. 

Given the importance of DCOs within 

the financial system and the heightened 

scrutiny as more transactions are moved 

into central clearing, the goal of the 

Commission risk surveillance staff is: (1) 

To identify positions in cleared 

products subject to the Commission’s 

jurisdiction that pose significant 

financial risk; and (2) to confirm that 

these risks are being appropriately 

managed. Commission risk surveillance 

staff undertakes these tasks at the trader 

level, the clearing member level, and the 

DCO level. That is, staff identifies both 

traders that pose risks to clearing 

members and clearing members that 

pose risks to the DCO. Staff then 

evaluates the financial resources and 

risk management practices of traders, 

clearing members, and DCOs in relation 

to those risks. Commission risk 


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33The § 39.5(b) submissions are available on the 

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

IndustryOversight/IndustryFilings/index.htm. 

Submission materials that a submitting DCO 

marked for confidential treatment are not available 

for public review, pursuant to regulations 39.5(b)(5) 

and 145.9(d). 

34A DCO is presumed eligible to accept for 

clearing swaps that are of the group, category, type, 

or class that the DCO already clears. See 17 CFR 

39.5(a)(1). 

surveillance staff routinely monitors 

conditions in assigned markets 

throughout the day. Because of the work 

done in identifying accounts of interest, 

analysts are able to focus their efforts on 

those traders whose positions warrant 

heightened scrutiny under current 

conditions. 

To gain insight into how markets 

operate during stressed market 

conditions, an essential technique in 

evaluating risk is the use of stress 

testing. Stress testing is the practice of 

determining the potential loss (or gain) 

to a position or portfolio based on a 

hypothetical price change or a 

hypothetical change in a price input 

such as option volatility. Commission 

risk surveillance staff conducts a wide 

array of stress tests. Some stress tests are 

based on the greatest price move over a 

specified period of time such as the last 

five years or the greatest historical price 

change. Another stress testing technique 

is the use of ‘‘event based’’ stress testing 

that replicates the price changes on a 

particular date in history, such as 

September 11, 2001, or Hurricane 

Katrina. Price changes can be measured 

as a dollar amount or a percentage 

change. This flexibility can be helpful 

when price levels have changed by a 

large amount over time. For example, 

the actual price changes in equity 

indices in October 1987 are not 

particularly large at today’s market 

levels but the percentage changes are 

meaningful. 

The general standard in designing 

stress tests is to use ‘‘extreme but 

plausible’’ market moves. After 

identifying accounts at risk and 

estimating the size of the risk, the third 

step is to compare that risk to the assets 

available to cover it. Because stress 

testing, by definition, involves extreme 

moves, hypothetical results will exceed 

initial margin requirements on a 

product basis, i.e., the price moves will 

be in the 1% tail. Many large traders, 

however, carry portfolios of positions 

with offsetting characteristics. In 

addition, many traders and clearing 

members deposit excess initial margin 

in their accounts. Therefore, even under 

stressed conditions, in many instances 

the total initial margin available may 

exceed potential losses or the shortfall 

may be relatively small. 

Each DCO maintains a financial 

resources package that protects the DCO 

against clearing member defaults. If a 

clearing member defaults on its 

obligations, the first layer of protection 

against a DCO default is the defaulting 

clearing member’s initial margin as well 

as the defaulting clearing member’s 

guaranty fund contribution. The second 

layer of protection against a DCO 

default, after the defaulting clearing 

member’s initial margin and guaranty 

fund contribution, is the DCO’s capital 

contribution. The third layer of 

protection against a DCO default is the 

DCO’s mutualized resources, which 

often include guaranty fund 

contributions of non-defaulting clearing 

members and assessments of nondefaulting clearing members. These 

layers of protection comprise the DCO’s 

financial resources package. 

Commission risk surveillance staff 

compares the level of risk posed by 

clearing members to a DCO’s financial 

resources package on an ongoing basis. 

Pursuant to Commission regulation 

39.11(a), a DCO must have sufficient 

financial resources to cover a default by 

the clearing member posing the largest 

risk to the DCO. Pursuant to 

Commission regulation 39.33(a), a 

systemically important DCO must have 

sufficient financial resources to cover 

defaults by the clearing members posing 

the two largest risks to the DCO. 

Commission risk surveillance staff 

periodically compares stress test results 

with DCOs to assess their financial 

capacity. 

Commission risk surveillance staff 

frequently discusses the risks of 

particular accounts or positions with 

relevant DCOs. For example, as a 

follow-up to a trader review, 

Commission risk surveillance staff 

might compare its stress test results 

with those of the DCO. As also noted 

above, in the case of FCMs, there have 

been instances where, as a result of 

Commission risk surveillance staff 

comments or inquiries, DCOs have 

taken action to revise their stress tests 

and/or financial resources package to 

align with Commission risk surveillance 

staff’s recommendations. 

II. Review of Swap Submissions 

A. General Description of Information 

Considered 

CME and LCH provided the 

Commission with regulation 39.5(b) 

submissions relating to: Fixed-tofloating interest rate swaps denominated 

in the nine additional currencies; AUDdenominated basis swaps; and USD-, 

EUR-, and GBP-denominated OIS with 

termination dates of up to 30 years. 

CME and LCH provided § 39.5(b) 

submissions pertaining to the FRAs and 

OIS listed in Table 1, below. CME and 

SGX provided submissions relating to 

MXN- and SGD-denominated fixed-tofloating interest rate swaps, 

respectively. Eurex provided a 

submission relating to CHFdenominated fixed-to-floating interest 

rate swaps and OIS denominated in 

USD, EUR, and GBP with terms up to 

30 years plus 10 business days.33 Based 

on representations made by LCH to the 

Commission, LCH will begin offering 

MXN-denominated fixed-to-floating 

interest rate swaps during 2016. CME, 

Eurex, LCH, and SGX are eligible to 

clear interest rate swaps.34

Table 1 summarizes the relevant 

interest rate swaps submitted by CME, 

Eurex, LCH, and SGX. 


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35LCH plans to offer clearing of MXNdenominated fixed-to-floating interest rate swaps in 

2016. 

36 In their submissions, CME and LCH stated that 

they had provided notice of the submissions to 

members as required by regulation 39.5(b)(3)(viii). 

SGX stated that its § 39.5(b) submission was 

published on its Web site. Eurex stated that it will 

forward its § 39.5(b) submission to its members so 

that they may comment. 

37The Commission notes that it also has access 

to data pursuant to part 45 of the Commission’s 

regulations (part 45 data) that is used in the cost 

benefit considerations in section V below. For the 

purposes of this proposal, the Commission decided 

to use the part 43 data in the determination analysis 

in section II.B below to enable commenters to 

review the same data that the Commission reviewed 

in making the determination. The Commission may 

in the future rely on aggregated, anonymized part 

45 data in making such determinations. 

38Semi-Annual OTC Derivatives Statistics at EndJune 2015, published December 2015 available at: 

https://www.bis.org/statistics/derstats.htm. The BIS 

data provides the broadest market-wide estimates of 

interest rate swap activity available to the 

Commission. The Commission receives swaps 

market information pursuant to Parts 43 and 45 of 

the Commission’s regulations. See also Swap Data 

Recordkeeping and Reporting Requirements, 77 FR 

2136 (Jan. 13, 2012); Real-Time Public Reporting of 

Swap Transaction Data, 77 FR 1182 (Jan. 9, 2012). 

However, this data only includes swaps subject to 

the Commission’s jurisdiction, i.e., those swaps 

subject to the Dodd-Frank Act. The BIS data 

represents the broader swaps market, some of 

which is not reportable to the Commission under 

the Dodd-Frank Act. 

TABLE 1—SUMMARY OF INTEREST RATE SWAP SUBMISSIONS UNDER REGULATION 39.5(b) 

Currency Floating rate index 

Maximum stated 

termination date 

(years) 

CME Eurex LCH SGX 

Fixed-to-Floating Interest Rate Swaps 

AUD ............................................ BBSW ........................................................................ 30 Yes ... No ..... Yes ... No 

CAD ............................................ CDOR ........................................................................ 30 Yes ... No ..... Yes ... No 

CHF ............................................ LIBOR ........................................................................ 30 Yes ... Yes ... Yes ... No 

HKD ............................................ HIBOR ........................................................................ 10 Yes ... No ..... Yes ... No 

MXN ........................................... TIIE–BANXICO .......................................................... 21 Yes ... No ..... No 35 No 

NOK ............................................ NIBOR ........................................................................ 10 Yes ... No ..... Yes ... No 

PLN ............................................ WIBOR ....................................................................... 10 Yes ... No ..... Yes ... No 

SGD ............................................ SOR–VWAP ............................................................... 10 Yes ... No ..... Yes ... Yes 

SEK ............................................ STIBOR ...................................................................... 30 Yes ... No ..... Yes ... No 

Basis Swap 

AUD ............................................ BBSW ........................................................................ 30 Yes ... No ..... Yes ... No 

Overnight Index Swaps 

USD ............................................ FedFunds ................................................................... 30 Yes ... Yes ... Yes ... No 

EUR ............................................ EONIA ........................................................................ 30 Yes ... Yes ... Yes ... No 

GBP ............................................ SONIA ........................................................................ 30 Yes ... Yes ... Yes ... No 

AUD ............................................ AONIA–OIS ................................................................ 5.5 No ..... No ..... Yes ... No 

CAD ............................................ CORRA–OIS .............................................................. 2 No ..... No ..... Yes ... No 

Forward Rate Agreements 

AUD ............................................ BBSW ........................................................................ 3 Yes ... No ..... No ..... No 

NOK ............................................ NIBOR ........................................................................ 2 Yes ... No ..... Yes ... No 

PLN ............................................ WIBOR ....................................................................... 2 Yes ... No ..... Yes ... No 

SEK ............................................ STIBOR ...................................................................... 3 Yes ... No ..... Yes ... No 

The Commission notes that these 

interest rate swaps are all single 

currency swaps without optionality, as 

defined by the applicable DCO. 

The submissions from CME, Eurex, 

LCH, and SGX provided the information 

required by regulation 39.5(b)(3)(i)– 

(viii), which, along with other 

information, has assisted the 

Commission in making a quantitative 

and qualitative assessment that these 

swaps should be subject to a clearing 

requirement determination.36 In making 

this proposed clearing requirement 

determination, the Commission 

considered the ability of CME, Eurex, 

LCH, and SGX to clear a given swap, as 

well as data supplied cumulatively from 

each DCO for these swaps. The 

Commission also reviewed the existing 

rule frameworks and risk management 

policies of each DCO. 

Additionally, the Commission 

considered industry data, as available, 

as well as other publicly available data 

sources, including information that has 

been made publicly available pursuant 

to part 43 of the Commission’s 

regulations (part 43 data).37 This notice 

of proposed rulemaking also reflects 

consultation with the staff of the 

Securities and Exchange Commission, 

U.S. prudential regulators, and 

international regulatory authorities. 

Finally, as regulation 39.5(b)(5) provides 

for a 30-day comment period for any 

clearing requirement determination, the 

Commission will consider public 

comment before making any final 

clearing requirement determination. 

B. Proposed Determination Analysis 

i. Background Information on Interest 

Rate Swaps 

Interest rate swaps generally 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. As of June 2015, 

according to an estimate by the Bank for 

International Settlements (BIS), there 

was approximately $435 trillion in 

outstanding notional of interest rate 

swaps, which represents approximately 

79% of the total outstanding notional of 

all derivatives.38

Section 2(h)(2)(A)(i) 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 the swap 

or group, category, type, or class of 

swaps should be required to be cleared. 

The proposed clearing requirement 

determination would amend the four 

classes of interest rate swaps that the 


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39The negative specifications are product 

specifications that are explicitly excluded from the 

clearing requirement. All specifications are listed in 

regulation 50.4. 

40The First Clearing Requirement Determination 

described the term ‘‘conditional notional amount’’ 

as ‘‘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.’’ See 77 

FR at 74302 n. 108. 

41The core principles address numerous issues, 

including financial resources, participant and 

product eligibility, risk management, settlement 

procedures, default management, system 

safeguards, reporting, recordkeeping, public 

information, and legal risk. See CEA section 

5b(c)(2)(A)–(R); 17 CFR part 39, subparts B and C. 

42Currently, CME is the only registered DCO 

clearing MXN-denominated fixed-to-floating 

interest rate swaps. LCH intends to file a § 39.5(b) 

submission regarding this swap in 2016. LCH does 

not anticipate that it will need to make a change 

to its risk management framework in order to 

commence clearing MXN-denominated fixed-tofloating interest rate swaps. 

43The factors are: 

(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. 

Commission defined in the First 

Clearing Requirement Determination: 

1. Fixed-to-floating swaps: Swaps in 

which the payment or payments owed 

for one leg of the swap is calculated 

using a fixed rate and the payment or 

payments owed for the other leg are 

calculated using a floating rate. 

2. Basis swaps: Swaps for which the 

payments for both legs are calculated 

using floating rates. 

3. Forward rate agreements: Swaps 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 Index Swaps: Swaps 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. 

Interest rate swaps within the classes 

described above are required to be 

cleared according to the First Clearing 

Requirement Determination if they meet 

certain specifications: (i) Currency in 

which notional and payment amounts of 

a swap are specified; (ii) floating rate 

index referenced in the swap; and (iii) 

stated termination date of the swap. The 

Commission also included the following 

three ‘‘negative’’ specifications: 39 (i) no 

optionality; (ii) no dual currencies; and 

(iii) no conditional notional amounts.40

The clearing requirement determination 

proposed today analyzes the additional 

interest rate swaps submitted by CME, 

Eurex, LCH, and SGX according to these 

classifications and specifications. 

ii. Consistency With Core Principles for 

Derivatives Clearing Organizations 

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

requires the Commission to determine 

whether a clearing requirement 

determination would be consistent with 

the core principles for registered DCOs 

set forth in section 5b(c)(2) of the CEA 

and implemented in part 39 of the 

Commission’s regulations.41 CME, 

Eurex, LCH, and SGX, each a registered 

DCO, already clear the swaps identified 

in the regulation 39.5(b) submissions 

described above.42 Accordingly, CME, 

Eurex, LCH, and SGX already are 

required to comply with the DCO core 

principles with respect to the interest 

rate swaps being considered by the 

Commission as part of this clearing 

requirement determination. Moreover, 

each of these DCOs is subject to the 

Commission’s review and surveillance 

procedures with respect to these swaps. 

For the purposes of reviewing 

whether the regulation 39.5(b) 

submissions are consistent with the 

DCO core principles, the Commission 

has relied on both the information 

received in the regulation 39.5(b) 

submissions and, as discussed above, its 

ongoing review and risk surveillance 

programs. 

The Commission believes that CME, 

Eurex, LCH, and SGX would be capable 

of maintaining compliance with the 

DCO core principles following a 

clearing requirement determination for 

the interest rate swaps that they 

currently clear. The Commission has not 

found any evidence to conclude that 

subjecting any of the interest rates 

swaps identified herein to a clearing 

requirement would alter compliance by 

CME, Eurex, LCH, or SGX with the DCO 

core principles. Accordingly, the 

Commission believes that each of the 

regulation 39.5(b) submissions 

discussed herein is consistent with 

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

Request for Comment 

The Commission requests comment as 

to whether the proposed clearing 

requirement determination would 

adversely affect CME’s, Eurex’s, LCH’s, 

or SGX’s ability to comply with the DCO 

core principles. 

iii. Consideration of the Five Statutory 

Factors for Clearing Requirement 

Determinations 

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

identifies five factors that the 

Commission must ‘‘take into account’’ 

in making a clearing requirement 

determination.43 In regulation 39.5(b), 

the Commission developed a process for 

reviewing DCO swap submissions to 

determine whether such swaps should 

be subject to a clearing requirement 

determination. The following is the 

Commission’s consideration of the five 

factors as they relate to (a) fixed-tofloating interest rate swaps denominated 

in the nine additional currencies, (b) 

AUD-denominated basis swaps, (c) 

AUD-, NOK-, PLN-, and SEKdenominated FRAs, (d) USD-, EUR-, and 

GBP-denominated OIS with termination 

dates of up to three years, and (e) AUDand CAD-denominated OIS, as 

submitted by CME, Eurex, LCH, and 

SGX pursuant to regulation 39.5(b). 

One particular topic that the 

Commission considered as it reviewed 

the five statutory factors for this clearing 

requirement is the effect a new clearing 

mandate would have on a DCO’s ability 

to withstand stressed market conditions. 

The post-financial crisis reforms that 

have increased the use of central 

clearing also have increased the 

importance of ensuring that central 

counterparties are resilient, particularly 

in times of stress. The Commission has 

been working with other domestic and 

international regulators to make sure 

that adequate measures are taken to 

address the potential financial stability 

risks posed by central counterparties. 

The Commission is focused on the 

financial stability of DCOs and is 

committed to monitoring all potential 

risks they face, including those related 

to increased clearing due to a new 

clearing requirement. Accordingly, how 

DCOs manage risk during times of 

market stress, as well as whether DCOs 

could manage the incremental risk in 

stressed market conditions that may 

result from the Commission mandating 

these products for clearing, are critical 

factors that the Commission considered 

in issuing this proposal. 


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44See CEA section 2(h)(2)(D)(ii). 

45See 77 FR 47170, 47193 and n. 100, Aug. 7, 

2012 (citing 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.bankof

england.co.uk/financialstability/Documents/fpc/

fspapers/fs_paper14.pdf.) As discussed above, the 

Commission receives data regarding swaps subject 

to its jurisdiction pursuant to parts 43 and 45 of the 

Commission’s regulations. The Commission also 

receives regular reporting from registered DCOs, as 

well as its registered entities. 

46The Commission reviews part 43 data, as well 

as data from CME, Eurex, LCH, and SGX, on an 

ongoing basis. Although the part 43 data that is 

included below in section II.B.iii.a is dated as of the 

Second Quarter 2015, Commission staff has not 

observed significant changes in the level of trading 

activity that would cause the Commission to change 

its finding that there is regular trading activity in 

these markets, as well as a measurable amount of 

data, leading the Commission to believe that there 

are significant outstanding notional exposures and 

trading liquidity in the products that are the subject 

of this proposal. In addition, although the data from 

DCOs presented below in section II.B.iii.a is dated 

as of the Second Quarter 2015, Commission staff 

has not observed significant changes in the notional 

amounts outstanding or the aggregate notional 

values of swaps being cleared that would cause the 

Commission to change its finding that there are 

significant outstanding notional exposures and 

trading liquidity in the interest rate swaps that are 

the subject of this proposal. 

47CME SDR and Bloomberg SDR, each a 

registered SDR, collect data regarding interest rate 

swaps but have not collected data relevant to this 

proposed determination. ICE Trade Vault, another 

registered SDR, does not accept interest rate swaps. 

48 In the First Clearing Requirement 

Determination, the Commission also considered (i) 

market data published weekly by TriOptima that 

covered swap trade information submitted 

voluntarily by 14 large derivatives dealers and (ii) 

trade-by-trade data provided voluntarily by the 14 

dealers to the OTC Derivatives Supervisors Group 

(ODSG). See 77 FR at 74307. The Commission is not 

using these sources for the determination proposed 

today because TriOptima no longer collects its data, 

and the ODSG data was a one-time exercise 

conducted between June and August 2010. 

49The data on notional amounts the Commission 

receives for interest rate swaps pursuant to part 43 

is subject to caps, which vary based on currency, 

reference rate, swap class (e.g., FRA vs. OIS), and 

maturity of the underlying swap. As a result, the 

data in Table 2 will underestimate the amount of 

notional outstanding for the reported trades, as 

around 25% of the trades contained capped 

notional amounts. See 17 CFR 43.4(h). According to 

the adopting release accompanying part 43, the 

Commission caps notional amounts to ensure the 

anonymity of the parties to a large swap and 

maintain the confidentiality of business 

transactions and market positions. See Real-Time 

Public Reporting of Swap Transaction Data, 77 FR 

1182, 1213 (Jan. 9, 2012). The rules were amended 

in May 2013 as they relate to caps. See Procedures 

to Establish Appropriate Minimum Block Sizes for 

Large Notional Off-Facility Swaps and Block 

Trades, 78 FR 32866, May 13, 2013. 

50Under the Commission’s general policy, neither 

part 43 reporting nor the clearing requirement apply 

to a swap where neither counterparty is a U.S. 

person (although these requirements generally 

would apply, with the possibility of substituted 

compliance, to certain swaps involving foreign 

branches of U.S. SDs or major swap participants 

(MSPs), or non-U.S. persons that are guaranteed by 

or affiliate conduits of U.S. persons). See 

Interpretive Guidance and Policy Statement 

Regarding Compliance With Certain Swap 

Regulations, 78 FR 45292, 45369–70 (July 26, 2013). 

51This table reflects data that was publically 

disseminated by DDR and reported to it by the 

reporting counterparty, a SEF, or designated 

contract market (DCM) pursuant to part 43. As such, 

the Commission did not independently verify the 

accuracy of the swap data. The transactions 

disseminated to the public were rounded pursuant 

to regulation 43.4(g). As a result, this table may 

underestimate the amount of notional outstanding 

for the reported trades. This table does not include 

cancelled and corrected swaps that counterparties 

reported under part 43. The Commission converted 

the notional amounts to USD according to the 

exchange rates of June 30, 2015. Two other SDRs 

provisionally registered with the Commission, CME 

SDR and Bloomberg SDR, also collect information 

pursuant to part 43. During the second quarter of 

2015, neither of those SDRs collected information 

pertaining to the interest rate swaps that are the 

subject of this proposed determination. 

a. Factor (I)—Outstanding notional 

exposures, trading liquidity, and 

adequate pricing data. 

The first of the five factors requires 

the Commission to consider ‘‘the 

existence of significant outstanding 

notional exposures, trading liquidity, 

and adequate pricing data’’ related to ‘‘a 

submission made [by a DCO].’’ 44 As 

explained in the proposal for the First 

Clearing Determination, there is no 

single source of data for notional 

exposures and trading liquidity for 

individual products within the global 

interest rate swap market.45 The 

Commission has considered multiple 

sources of data 46 on the interest rate 

swap market that provide the 

information the Commission needs to 

evaluate the first factor, including: (1) 

Publicly available real time data 

disseminated by DTCC Data Repository 

(DDR), a provisionally-registered swap 

data repository (SDR),47 pursuant to part 

43 data; (2) data from CME, Eurex, LCH, 

and SGX in their capacities as DCOs; (3) 

data from the BIS; (4) data from the 

International Swaps and Derivatives 

Association (ISDA); and (5) data from 

the Futures Industry Association 

(FIA).48

The Commission invites market 

participants to submit data from any 

available data sources that it has not 

considered. 

1. Outstanding notional exposures 

and trading liquidity: Fixed-to-floating 

interest rate swaps denominated in the 

nine additional currencies. 

In assessing the extent of outstanding 

notional exposures and trading liquidity 

for a particular swap, the Commission 

reviews various data series to ascertain 

whether there is an active market for the 

swap, including whether the swap is 

traded on a regular basis as reflected by 

trade count, and whether there is a 

measurable amount of notional 

exposures, such that a DCO can 

adequately risk manage the swap. In 

particular, the Commission reviewed 

the aggregate notional exposure and the 

trade count data from a number of 

sources for each swap subject to this 

proposal. While there is no defined 

standard for an active market, the 

Commission believes the data indicates 

that there are sufficient outstanding 

notional exposures and trading liquidity 

for fixed-to-floating interest rate swaps 

denominated in the nine additional 

currencies to support a clearing 

requirement determination. The part 43 

data presented in Table 2 generally 

demonstrates that there is significant 

activity in new fixed-to-floating interest 

rate swap trades denominated in each of 

the nine additional currencies. Table 2 

presents aggregate notional values and 

trade counts of fixed-to-floating interest 

rate swaps denominated in these 

currencies that were executed during 

the three-month period from April 1 to 

June 30, 2015.49

The Commission notes the market for 

any swap is global. Even if the bulk of 

the activity in a particular swap occurs 

between counterparties located in a 

single jurisdiction, Table 2 demonstrates 

that there is significant participation by 

U.S. persons in each of the swaps 

covered by this proposed 

determination.50

TABLE 2—PART 43 DATA FIXED-TOFLOATING INTEREST RATE SWAPS

AGGREGATE NOTIONAL AMOUNTS

AND TRADE COUNTS REPORTED

SECOND QUARTER 2015 51

Currency Notional reported 

(USD) 

Trade 

count 

MXN .............. 403,621,757,132 15,492 

CAD .............. 318,497,173,863 4,125 

AUD .............. 322,042,446,624 4,898 

SEK ............... 82,092,397,444 1,779 

PLN ............... 47,267,162,195 1,463 

NOK .............. 23,974,272,144 659 

SGD .............. 45,618,398,397 995 

CHF .............. 48,986,953,725 899 

HKD .............. 21,704,787,338 469 


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52As mentioned above, LCH intends to 

commence clearing fixed-to-floating interest rate 

swaps denominated in MXN in 2016. 

53 Data includes zero coupon swaps, variable 

notional swaps, and inflation swaps. Data excludes 

basis swaps, FRAs, and OIS. LCH converted values 

to USD. All data from LCH cited in this notice of 

proposed rulemaking is ‘‘single-sided’’ such that 

notional amounts correspond to the notional 

amounts of swaps submitted for clearing. LCH 

publishes outstanding notional amounts of the 

swaps it has cleared. See LCH’s Web site, available 

at: http://www.swapclear.com/what/clearingvolumes.html. 

54As mentioned above, LCH intends to 

commence clearing fixed-to-floating interest rate 

swaps denominated in MXN in 2016. 

55Like the outstanding notional data, this data 

includes zero coupon swaps, variable notional 

swaps, and inflation swaps. 

56The aggregate notional amounts cleared at LCH 

will appear to be greater than that reflected in the 

part 43 data because the part 43 data only captures 

swap data subject to the Dodd-Frank Act, while 

LCH, a UK entity, clears swaps for participants who 

may not be subject to the Commission’s 

jurisdiction. The fact that LCH’s notional amounts 

are higher supports this proposed clearing 

requirement determination because it suggests that 

there may be extensive liquidity in these swaps 

outside the U.S., of which DCOs could take 

advantage in order successfully to risk manage and 

price these swaps. 

57CME uses the term ‘‘open interest’’ to refer to 

notional outstanding. CME converted the values to 

USD. All data from CME cited in this notice of 

proposed rulemaking is ‘‘single-sided’’ such that 

notional amounts correspond to the notional 

amounts of swaps submitted for clearing. 

58 Data excludes basis swaps, FRAs, and OIS. 

CME publishes open interest amounts of the swaps 

it has cleared. See CME’s Web site, available at: 

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

cleared-otc/#data. 

Table 3.1 demonstrates the notional 

amounts outstanding of fixed-to-floating 

interest rate swaps, denominated in 

each of the nine additional currencies 

except for MXN, cleared at LCH as of 

July 17, 2015.52

TABLE 3.1—LCH DATA FIXED-TOFLOATING INTEREST RATE SWAPS

NOTIONAL AMOUNTS OUTSTANDING

AS OF JULY 17, 2015 53

Currency 

Outstanding 

notional 54

(USD) 

CAD .......................... $3,479,830,407,148 

AUD .......................... 3,311,898,621,627 

CHF .......................... 1,110,123,528,868 

SEK ........................... 942,508,451,280 

SGD .......................... 735,450,982,935 

PLN ........................... 500,992,688,256 

NOK .......................... 402,746,575,455 

HKD .......................... 385,067,416,327 

Table 3.2 describes the aggregate 

notional values and trade counts of 

fixed-to-floating interest rate swaps 

denominated in these currencies that 

were cleared at LCH during the threemonth period from April 1 to June 30, 

2015. 

TABLE 3.2—LCH DATA FIXED-TO-FLOATING INTEREST RATE SWAPS AGGREGATE NOTIONAL AMOUNTS CLEARED AND

TRADE COUNTS 55 SECOND QUARTER 2015 

Currency Aggregate notional 56

(USD) Trade count 

AUD ................................................................................................................................................. $747,580,867,222 11,675 

CAD ................................................................................................................................................. 591,935,914,049 8,097 

SEK .................................................................................................................................................. 192,434,187,521 5,827 

SGD ................................................................................................................................................. 188,573,379,738 4,872 

CHF .................................................................................................................................................. 175,203,370,522 3,659 

PLN .................................................................................................................................................. 99,184,390,887 4,249 

NOK ................................................................................................................................................. 72,569,065,080 2,855 

HKD ................................................................................................................................................. 65,655,762,520 1,868 

Table 4.1 demonstrates the notional 

amounts outstanding of fixed-to-floating 

interest rate swaps, denominated in 

each of the nine additional currencies, 

cleared at CME as of July 17, 2015. 

TABLE 4.1—CME DATA FIXED-TOFLOATING INTEREST RATE SWAPS— 

OPEN INTEREST 57 AS OF JULY 17, 

2015 58

Currency Open interest 

(USD) 

CAD .......................... $295,213,937,641 

MXN .......................... 283,989,842,748 

TABLE 4.1—CME DATA FIXED-TOFLOATING INTEREST RATE SWAPS— 

OPEN INTEREST 57 AS OF JULY 17, 

2015 58—Continued 

Currency Open interest 

(USD) 

AUD .......................... 192,208,979,188 

SEK ........................... 30,834,434,233 

NOK .......................... 25,396,100,018 

CHF .......................... 18,322,872,584 

PLN ........................... 4,157,627,521 

HKD .......................... 1,937,495,645 

SGD .......................... 1,014,201,616 

Table 4.2 describes the aggregate 

notional values of fixed-to-floating 

interest rate swaps denominated in 

these currencies that were cleared at 

CME during the three-month period 

from April 1 to June 30, 2015. 


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59SGX converted this value from SGD to USD. 

This figure is ‘‘single-sided’’ such that the notional 

amount corresponds to the notional amounts of 

swaps submitted for clearing. SGX publishes 

outstanding notional amounts on its Web site, 

available at: http://www.sgx.com. 

60BIS Triennial Central Bank Survey, Interest 

Rate Derivatives Market Turnover in 2013, Tables 

1 and 2.1–2.6 (December 2013), available at: http:// 

www.bis.org/publ/rpfxf13irt.pdf. 

61 Data as of April 2013. BIS converted the figures 

to USD. 

62 Interest rate derivatives by instrument, 

counterparty, and currency. Notional amounts 

outstanding, expressed in USD, at end June 2015, 

available at: http://stats.bis.org/statx/srs/table/

d7?p=20151&c=. This report does not provide data 

specific to interest rate swaps denominated in the 

rest of the nine additional currencies. 

63SwapsInfo provides data from DDR and 

Bloomberg SDR ‘‘required to be disclosed under 

U.S. regulatory guidelines.’’ SwapsInfo does not 

provide information specific to interest rate swaps 

denominated in the rest of the nine additional 

currencies. The SwapsInfo referenced in Table 6 

only includes information from DDR. See 

SwapsInfo Web site, available at: http://www.

swapsinfo.org/charts/derivatives/price-transaction. 

TABLE 4.2—CME DATA FIXED-TO-FLOATING INTEREST RATE SWAPS AGGREGATE NOTIONAL AMOUNTS CLEARED AND

TRADE COUNTS SECOND QUARTER 2015 

Currency Aggregate notional 

(USD) Trade count 

MXN ............................................................................................................................................................. $193,941,151,671 7,749 

AUD ............................................................................................................................................................. 51,591,005,387 1,194 

CAD ............................................................................................................................................................. 91,523,261,511 2,995 

SEK .............................................................................................................................................................. 9,712,957,726 998 

NOK ............................................................................................................................................................. 5,298,232,932 422 

CHF .............................................................................................................................................................. 2,665,840,791 173 

PLN .............................................................................................................................................................. 1,097,490,552 577 

SGD ............................................................................................................................................................. 355,136,534 32 

HKD ............................................................................................................................................................. 211,815,688 16 

As of July 17, 2015, the notional 

amount of SGD-denominated fixed-tofloating interest rate swaps cleared at 

SGX was $58.5 billion.59

As another data source, the 

Commission looked to BIS data. BIS’ 

most recent triennial central bank 

survey for interest rate swaps describes 

the daily average notional values of 

interest rate swaps, including fixed-tofloating interest rate swaps, on a 

worldwide basis, denominated in each 

of the nine additional currencies. 

TABLE 5—EXCERPT FROM BIS TRIENNIAL CENTRAL BANK SURVEY 2013 60 OVER-THE-COUNTER SINGLE CURRENCY

INTEREST RATE DERIVATIVES TURNOVER

Currency 

Daily average 

notional of swaps 

(including fixedto-floating), 

worldwide 

(USD) 61

AUD ............................................................................................................................................................................................... $62,854,000,000 

CAD ............................................................................................................................................................................................... 26,794,000,000 

SEK ................................................................................................................................................................................................ 14,618,000,000 

MXN ............................................................................................................................................................................................... 9,285,000,000 

CHF ................................................................................................................................................................................................ 5,335,000,000 

SGD ............................................................................................................................................................................................... 3,349,000,000 

NOK ............................................................................................................................................................................................... 2,560,000,000 

PLN ................................................................................................................................................................................................ 2,138,000,000 

HKD ............................................................................................................................................................................................... 1,992,000,000 

More recently, BIS has published 

statistics showing significant 

outstanding notional amounts for 

CAD-, CHF-, and SEK-denominated 

interest rate swaps: Approximately 

$10.3 trillion CAD-denominated, 

approximately $3.2 trillion CHFdenominated, and approximately $2.4 

trillion SEK-denominated.62

On a daily basis, using data collected 

from DDR, ISDA’s ‘‘SwapsInfo’’ report 

publishes the notional value and trade 

counts of fixed-to-floating interest rate 

swaps denominated in four of the nine 

additional currencies.63 For example, 

Table 6 shows the aggregate notional 

values and trade counts of such swaps 

entered into on September 15, 2015. 

TABLE 6—EXCERPT FROM ISDA SWAPSINFO INTEREST RATE DERIVATIVES—PRICE/TRANSACTION DATA FIXED-TOFLOATING INTEREST RATE SWAPS

Currency 

Approximate 

aggregate notional 

amount executed 

on September 15, 

2015 

(USD) 64

Aggregate trade 

count executed on 

September 15, 

2015 

AUD ............................................................................................................................................................. $2,143,376,093 51 

CAD ............................................................................................................................................................. 1,515,366,916 30 


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64The Commission converted the values to USD 

as of Sept. 18, 2015. ISDA SwapsInfo does not 

provide data for CHF-, HKD-, NOK-, SEK-, or SGDdenominated interest rate swaps. 

65SEF Tracker is published periodically on FIA’s 

Web site, available at: https://fia.org/sef-tracker. 

66The SEFs include: BGC; Bloomberg; DW; GFI; 

Javelin; ICAP; IGDL; LatAm; Tradition; trueEx; 

Tullet Prebon; and TW. The Commission recognizes 

that under section 2(h)(8) of the CEA and 

regulations 37.10 and 38.12, the adoption of the 

clearing requirement proposed herein could result 

in a trade execution requirement for some or all of 

the interest rate swaps discussed in this proposal. 

67The published report does not contain 

information for CHF-, HKD-, and NOK-denominated 

interest rate swaps. FIA provided figures for those 

swaps to the Commission. According to FIA, no 

SGD-denominated interest rate swaps were 

transacted on SEFs during the week of May 25, 

2015. During the week of July 26, 2015, the 

aggregate notional amount of SGD-denominated 

interest rate swaps executed on SEFs was 

$7,305,402. 

68May 2015 edition of FIA SEF Tracker, available 

at: https://fia.org/articles/fia-releases-sef-trackerreport-may. 

69FIA converted the values to USD. 

70This figure comes from data that was publically 

disseminated by DDR and reported to it by the 

reporting counterparty, a SEF, or designated 

contract market (DCM) pursuant to part 43. As such, 

the Commission did not independently verify the 

accuracy of the swap data. The transactions 

disseminated to the public were rounded pursuant 

to regulation 43.4(g). As a result, this figure may 

underestimate the amount of notional outstanding 

for the reported trades. This figure does not include 

cancelled and corrected swaps that counterparties 

reported under part 43. The Commission converted 

the aggregate notional amount to USD according to 

the exchange rates of June 30, 2015. 

TABLE 6—EXCERPT FROM ISDA SWAPSINFO INTEREST RATE DERIVATIVES—PRICE/TRANSACTION DATA FIXED-TOFLOATING INTEREST RATE SWAPS—Continued 

Currency 

Approximate 

aggregate notional 

amount executed 

on September 15, 

2015 

(USD) 64

Aggregate trade 

count executed on 

September 15, 

2015 

MXN ............................................................................................................................................................. 283,339,847 142 

PLN .............................................................................................................................................................. 141,249,743 19 

The Commission also reviewed data 

published by the FIA, in its ‘‘SEF 

Tracker’’ report,65 consisting of weekly 

aggregate notional values of interest rate 

swaps, including FRAs, denominated in 

various currencies, including five of the 

nine additional currencies, which have 

been transacted on 12 swap execution 

facilities (SEFs) that are now registered 

with the Commission.66 Table 7 shows 

the aggregate notional values of interest 

rate swaps denominated in AUD, CAD, 

MXN, PLN, and SEK executed on SEFs 

during the week of May 25, 2015, as 

well as such swaps denominated in 

CHF, HKD, and NOK.67

TABLE 7—FIA DATA WEEKLY NOTIONAL VOLUME OF INTEREST RATE SWAPS (INCLUDING FRAS) BY CURRENCY 68

Currency 

Aggregate weekly 

notional volume 

executed on SEFs 

Week of May 25, 

2015 

(USD) 69

AUD ............................................................................................................................................................................................... $36,194,670,000 

MXN ............................................................................................................................................................................................... 19,526,810,000 

CAD ............................................................................................................................................................................................... 12,527,450,000 

CHF ................................................................................................................................................................................................ 6,686,971,251 

SEK ................................................................................................................................................................................................ 5,958,000,000 

PLN ................................................................................................................................................................................................ 1,420,000,000 

NOK ............................................................................................................................................................................................... 1,403,918,860 

HKD ............................................................................................................................................................................................... 51,589,605 

In summary, the data indicates 

varying levels of activity, measured by 

outstanding notional amounts and trade 

counts, in fixed-to-floating interest rate 

swaps denominated in the nine 

additional currencies. The Commission 

also acknowledges that the data comes 

from various, limited periods of time 

that do not explicitly include periods of 

market stress. However, the Commission 

believes that the data demonstrates 

sufficient regular trading activity and 

outstanding notional exposures in the 

swaps to provide the liquidity necessary 

for DCOs to successfully risk manage 

these products and to support a clearing 

requirement. 

Request for Comment 

The Commission requests comment 

regarding whether there are sufficient 

outstanding notional exposures and 

trading liquidity in fixed-to-floating 

interest rate swaps denominated in any 

or all of the nine additional currencies, 

during both stressed and non-stressed 

market conditions, to support a clearing 

requirement. 

2. Outstanding notional exposures 

and trading liquidity: AUDdenominated basis swaps. 

The First Clearing Requirement 

Determination required the clearing of 

certain USD-, EUR-, GBP-, and JPYdenominated basis swaps. As part of the 

proposed clearing requirement 

determination, the Commission is 

proposing to amend the basis swap class 

to include AUD-denominated basis 

swaps. 

According to part 43 data, 366 new 

AUD-denominated basis swaps were 

executed during the three-month period 

from April 1 to June 30, 2015. The 

aggregate notional value of these swaps 

was $32,559,762,900.70 Also, during 

this period, there was no volume of 

AUD-denominated basis swaps cleared 

at CME, but the outstanding notional in 

such swaps cleared at CME as of June 

30, 2015 was $69,662,645,400. During 

the second quarter of 2015, 786 new 

AUD-denominated basis swaps were 

cleared at LCH. The aggregate notional 


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71CME and LCH converted these figures to USD. 

72This table reflects data that was publically 

disseminated by DDR and reported to it by the 

reporting counterparty, a SEF, or DCM pursuant to 

part 43. As such, the Commission did not 

independently verify the accuracy of the swap data. 

The transactions disseminated to the public were 

rounded pursuant to regulation 43.4(g). As a result, 

this table may underestimate the amount of 

notional outstanding for the reported trades. This 

table does not include cancelled and corrected 

swaps that counterparties reported under part 43. 

The Commission converted the notional amounts to 

USD according to the exchange rates of June 30, 

2015. 

value of these swaps was 

$74,012,261,949. As of July 17, 2015, 

the outstanding notional value of AUDdenominated basis swaps cleared at 

CME and LCH was $183,995,548,759 

and $443,819,944,145, respectively.71

While the data considered above 

comes from limited periods of time that 

do not explicitly include periods of 

market stress, the Commission believes 

that the data demonstrates sufficient 

regular trading activity and outstanding 

notional exposures in AUDdenominated basis swaps to provide the 

liquidity necessary for DCOs to 

successfully risk manage these products 

and to support a clearing requirement. 

Request for Comment 

The Commission requests comment 

regarding whether there are sufficient 

outstanding notional exposures and 

trading liquidity in AUD-denominated 

basis swaps, during both stressed and 

non-stressed market conditions, to 

support a clearing requirement. 

3. Outstanding notional exposures 

and trading liquidity: AUD, NOK-, 

PLN-, and SEK-denominated FRAs. 

The First Clearing Requirement 

Determination required the clearing of 

certain USD-, EUR-, GBP-, and JPYdenominated FRAs. As part of the 

proposed clearing requirement 

determination, the Commission is 

proposing to amend the FRA class to 

include AUD-, NOK-, PLN-, and SEKdenominated FRAs. 

Table 8 presents aggregate notional 

values and trade counts of AUD-, 

NOK-, PLN-, and SEK-denominated 

FRAs executed during the second 

quarter of 2015, collected by DDR. 

TABLE 8—PART 43 DATA FRAS AGGREGATE NOTIONAL AMOUNTS AND TRADE COUNT REPORTED SECOND QUARTER

2015 72

Currency 

Aggregate 

notional reported 

(USD) 

Trade count 

AUD ............................................................................................................................................................. $225,910,666,800 1,058 

SEK .............................................................................................................................................................. 183,646,587,508 514 

NOK ............................................................................................................................................................. 105,087,098,253 397 

PLN .............................................................................................................................................................. 14,455,487,594 103 

Table 9.1 presents the notional 

amounts outstanding of NOK-, PLN-, 

and SEK-denominated FRAs cleared at 

LCH as of July 17, 2015. 

TABLE 9.1—LCH DATA FRAS NOTIONAL OUTSTANDING AS OF JULY 17, 2015 

Currency Notional reported 

(USD) 

SEK ................................................................................................................................................................................................ $706,370,365,302 

NOK ............................................................................................................................................................................................... 544,670,239,925 

PLN ................................................................................................................................................................................................ 274,120,726,256 

Table 9.2 presents the aggregate 

notional values and trade counts of 

NOK-, PLN-, and SEK-denominated 

FRAs cleared at LCH during the second 

quarter of 2015. 

TABLE 9.2—LCH DATA FRAS AGGREGATE NOTIONAL AMOUNTS CLEARED AND TRADE COUNT SECOND QUARTER 2015 

Currency Notional reported 

(USD) Trade count 

SEK .............................................................................................................................................................. $369,900,226,814 1,600 

NOK ............................................................................................................................................................. 348,764,102,890 1,874 

PLN .............................................................................................................................................................. 232,246,791,831 1,029 

Table 10.1 presents the notional 

amounts outstanding of AUD-, NOK-, 

PLN-, and SEK-denominated FRAs 

cleared at CME as of July 17, 2015. 

TABLE 10.1—CME DATA FRAS OPEN INTEREST AS OF JULY 17, 2015 

Currency Notional reported 

(USD) 

SEK ................................................................................................................................................................................................ $1,448,168,085 

PLN ................................................................................................................................................................................................ 360,386,524 


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73Although there was no clearing activity in 

NOK- or PLN-denominated FRAs during the second 

quarter of 2015, CME continues to offer clearing of 

these products. During the fourth quarter of 2015, 

CME cleared an aggregate notional amount of $4.1 

billion in AUD-denominated FRAs. 

74See section I.B. 

75See discussion of the pending European Union 

Clearing Obligation in section I.B. 

76This table reflects data that was publically 

disseminated by DDR and reported to it by the 

reporting counterparty, SEF, or DCM pursuant to 

part 43. As such, the Commission did not 

independently verify the accuracy of the swaps. 

The transactions disseminated to the public were 

rounded pursuant to regulation 43.4(g). As a result, 

this table may underestimate the amount of 

notional outstanding for the reported trades. This 

table does not include cancelled and corrected 

swaps that counterparties reported under part 43. 

The Commission converted the notional amounts to 

USD according to the exchange rates of June 30, 

2015. 

77LCH converted the EUR and GBP values to 

USD. 

TABLE 10.1—CME DATA FRAS OPEN INTEREST AS OF JULY 17, 2015—Continued 

Currency Notional reported 

(USD) 

NOK ............................................................................................................................................................................................... 122,512,986 

AUD ............................................................................................................................................................................................... 0 

Table 10.2 presents the aggregate 

notional values and trade counts of 

AUD-, 

NOK-, PLN-, and SEK-denominated 

FRAs cleared at CME during the second 

quarter of 2015. 

TABLE 10.2—CME DATA FRAS AGGREGATE NOTIONAL AMOUNTS CLEARED AND TRADE COUNT SECOND QUARTER

2015 73

Currency Notional reported 

(USD) Trade count 

SEK .............................................................................................................................................................. $1,504,300,488 6 

AUD ............................................................................................................................................................. 0 0 

NOK ............................................................................................................................................................. 0 0 

PLN .............................................................................................................................................................. 0 0 

The Commission recognizes that the 

part 43 data provided in Table 8 comes 

from a limited period of time that does 

not explicitly include periods of market 

stress. The Commission also notes the 

absence of any clearing activity in AUDdenominated FRAs and the absence of 

clearing activity at CME in NOK, PLN, 

and SEK during the second quarter of 

2015. However, the Commission 

believes that the part 43 data provided 

in Table 8 demonstrates sufficient 

regular trading activity and outstanding 

notional exposures in AUD-, NOK-, 

PLN-, and SEK-denominated FRAs to 

provide the liquidity necessary for 

DCOs to successfully risk manage these 

products and to support a clearing 

requirement. Moreover, the Australian 

clearing requirement, which took effect 

in April 2016, covers AUD-denominated 

FRAs.74

Request for Comment 

The Commission requests comment 

regarding whether there are sufficient 

outstanding notional exposures and 

trading liquidity in AUD-, NOK-, PLN, 

and SEK-denominated FRAs, during 

both stressed and non-stressed market 

conditions, to support a clearing 

requirement. 

4. Outstanding notional exposures 

and trading liquidity: OIS with 

termination dates of up to three years. 

The First Clearing Requirement 

Determination required the clearing of 

certain USD-, EUR- and GBPdenominated OIS with a stated 

termination date range of seven days to 

two years. Interest rate swaps are often 

multi-year contracts with termination 

dates out to 50 years or more depending 

on the class and currency of the swap. 

As part of the proposed clearing 

requirement determination, the 

Commission is proposing to amend the 

maximum termination date to three 

years for USD-, EUR- and GBPdenominated OIS that have been 

required to be cleared pursuant to the 

First Clearing Requirement 

Determination. This would make the 

Commission’s OIS clearing requirement 

consistent with the one that will take 

effect in the European Union in 2016.75

Table 11 presents aggregate notional 

values and trade counts of USD-, 

EUR-, and GBP-denominated OIS with 

terms of two to three years executed 

during the second quarter of 2015, 

collected by DDR. 

TABLE 11—PART 43 DATA 2–3 YEAR OIS AGGREGATE NOTIONAL AMOUNTS AND TRADE COUNT REPORTED 76 SECOND

QUARTER 2015 

Currency Aggregate 

notional (USD) Trade count 

EUR ............................................................................................................................................................. $7,582,189,400 47 

USD ............................................................................................................................................................. 4,611,000,000 32 

GBP ............................................................................................................................................................. 1,377,942,400 15 

Tables 12 and 13 present the notional 

amounts outstanding, the aggregate 

notional values cleared and trade 

counts, of USD-, EUR-, and GBPdenominated OIS with terms of two to three years. 


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78CME converted the EUR and GBP values to 

USD. 

79See discussion of the Australian and proposed 

Canadian swap clearing requirements in section I.B. 

80This table reflects data that was publically 

disseminated by DDR and reported to it by the 

reporting counterparty, SEF, or DCM pursuant to 

part 43. As such, the Commission did not 

independently verify the accuracy of the swaps. 

The transactions disseminated to the public were 

rounded pursuant to regulation 43.4(g). As a result, 

this table may underestimate the amount of 

notional outstanding for the reported trades. This 

table does not include cancelled and corrected 

swaps that counterparties reported under part 43. 

The Commission converted the notional amounts to 

USD according to the exchange rates of June 30, 

2015. 

TABLE 12—LCH DATA 2–3 YEAR OIS NOTIONAL OUTSTANDING, AGGREGATE NOTIONAL CLEARED, AND TRADE COUNT 77

Currency 

Notional 

outstanding as 

of July 17, 2015 

(USD) 

Aggregate 

notional cleared 

second quarter 

2015 (USD) 

Trade count 

second quarter 

2015 

EUR ........................................................................................................................... $456,729,830,424 $369,018,669,593 1,252 

GBP ........................................................................................................................... 91,417,244,109 64,071,802,837 187 

USD ........................................................................................................................... 90,058,657,103 46,523,581,500 120 

TABLE 13—CME DATA 2–3 YEAR OIS OPEN INTEREST, AGGREGATE NOTIONAL CLEARED, AND TRADE COUNT 78

Currency 

Open interest as 

of July 17, 2015 

(USD) 

Aggregate 

notional cleared 

second quarter 

2015 

(USD) 

Trade count 

second quarter 

2015 

EUR ........................................................................................................................... $53,456,578,566 $6,888,346,279 12 

USD ........................................................................................................................... 151,923,747,195 9,334,544,737 6 

GBP ........................................................................................................................... 27,764,067,455 857,520,000 4 

As part of the proposed clearing 

requirement determination, the 

Commission also is proposing to add 

AUD- and CAD-denominated OIS to the 

OIS class included in regulation 50.4(a). 

This would make the Commission’s OIS 

clearing requirement consistent with the 

one that is in effect in Australia and that 

is expected to take effect in Canada in 

2017.79

Table 14 presents aggregate notional 

values and trade counts of AUD- and 

CAD-denominated OIS executed during 

the second quarter of 2015 collected by 

DDR. 

TABLE 14—PART 43 DATA AUD- AND CAD-OIS AGGREGATE NOTIONAL AMOUNTS AND TRADE COUNT REPORTED 80

SECOND QUARTER 2015 

Currency Aggregate 

notional (USD) Trade count 

AUD ............................................................................................................................................................. $307,048,016,016 537 

CAD ............................................................................................................................................................. 51,645,589,883 107 

Tables 15.1 and 15.2 present the 

notional amounts outstanding, as well 

as aggregate notional values cleared and 

trade counts, of AUD- and CADdenominated OIS cleared at LCH. 

TABLE 15.1—LCH DATA AUD-DENOMINATED OIS NOTIONAL OUTSTANDING, AGGREGATE NOTIONAL CLEARED, AND

TRADE COUNT 81

Currency 

Notional 

outstanding as of 

January 15, 

2016 82

(USD) 

Aggregate 

notional cleared 

January 4–15, 

2016 

(USD) 

Trade count 

January 4–15, 

2016 

AUD ........................................................................................................................... $25,739,497,700 $26,199,691,300 25 

TABLE 15.2—LCH DATA CAD-DENOMINATED OIS NOTIONAL OUTSTANDING, AGGREGATE NOTIONAL CLEARED, AND

TRADE COUNT 83

Currency 

Notional 

outstanding as of 

July 17, 2015 

(USD) 

Aggregate 

notional cleared 

second quarter 

2015 

(USD) 

Trade count 

second quarter 

2015 

CAD ........................................................................................................................... $506,221,411,997 $216,524,096,571 260 


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81LCH converted the AUD values to USD. 

82LCH began clearing AUD-denominated OIS on 

January 4, 2016. 

83LCH converted the CAD values to USD. 

84This information also appears in revised 

regulation 50.4(a). See section III. 

While the Commission recognizes that 

the data considered above comes from 

limited periods of time that do not 

explicitly include periods of market 

stress, the Commission believes that the 

data demonstrates sufficient regular 

trading activity and outstanding 

notional exposures in USD-, GBP-, and 

EUR-denominated OIS with a 

termination date range of two to three 

years, as well as AUD- and CADdenominated OIS, to provide the 

necessary liquidity for DCOs to 

successfully risk manage these products 

and to support a clearing requirement. 

Request for Comment 

The Commission requests comment 

regarding whether there are sufficient 

outstanding notional exposures and 

trading liquidity in the OIS covered by 

this proposed determination, during 

both stressed and non-stressed market 

conditions, to support a clearing 

requirement. 

5. Pricing data: Fixed-to-floating 

swaps denominated in the nine 

additional currencies; AUDdenominated basis swaps; AUD-, 

NOK-, PLN-, and SEK-denominated 

FRAs; USD-, GBP, and EUR-OIS with 

termination dates of up to three years; 

and AUD- and CAD-OIS. 

The Commission regularly reviews 

pricing data on the interest rate swaps 

that are the subject of this proposal and 

has determined that these swaps are 

capable of being priced off of deep and 

liquid markets. Commission staff 

receives and reviews margin model 

information from CME, Eurex, LCH, and 

SGX that addresses how such DCOs 

would follow particular procedures to 

ensure that market liquidity exists in 

order to exit a position in a stressed 

market, including the products subject 

to this proposal. In particular, 

Commission staff analyzes the level of 

liquidity in the specific product markets 

and assesses the time required to 

determine a price. Based on this 

information, the Commission staff has 

no reason to believe that there is, or will 

be, difficulty pricing the products 

subject to this proposal in a stressed 

environment. 

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 reliable. Therefore, 

the Commission believes that there is 

adequate pricing data to support a 

proposed clearing requirement 

determination. 

In addition, CME, Eurex, LCH, and 

SGX provided information that supports 

the Commission’s conclusion that there 

is adequate pricing data to warrant a 

clearing requirement determination in 

the products subject to this proposal. 

LCH and CME believe there is adequate 

pricing data for risk and default 

management. CME publicly represents 

that its interest rate swap valuations are 

fully transparent and rely on pricing 

inputs obtained from wire service feeds. 

In its § 39.5(b) submission, SGX asserted 

that the valuation rate sources it uses, 

and the manner in which it determines 

mark-to-market prices, are in alignment 

with industry practices. CME, Eurex, 

LCH, and SGX obtain daily prices from 

third-party data providers, clearing 

members, and/or major banks. 

As discussed above, the Commission 

reviews margin models and related 

pricing data submitted by CME, Eurex, 

LCH, and SGX. One source of 

information that they use to determine 

adequate pricing data is a regular survey 

of swap traders that asks the traders to 

estimate what it would cost to liquidate 

positions of different sizes in different 

currencies. The information obtained 

during these market participant surveys 

is incorporated into to each of CME, 

Eurex, LCH, and SGX’s internal margin 

models so that each is confident that it 

will be able to withstand stressed 

market conditions. Establishing accurate 

pricing data is one component of each 

of CME, Eurex, LCH, and SGX’s ability 

to risk manage their interest rate swaps 

offered for clearing. The Commission 

believes that the methods used by these 

DCOs provide information on pricing 

that is accurate and demonstrates the 

ability to price the products subject to 

this proposal successfully, now and if 

they are subject to a clearing 

requirement. 

Request for Comment 

The Commission requests comment 

regarding whether there is adequate 

pricing data for DCO risk and default 

management of the products subject to 

this proposal. 

Based on the existence of significant 

outstanding notional exposures, trading 

liquidity, and adequate pricing data, the 

Commission proposes to require that 

interest rate swaps with the 

specifications shown in Table 16 be 

cleared.84

TABLE 16—SPECIFICATIONS FOR INTEREST RATE SWAPS TO BE CLEARED IN § 50.4(a) 

Specification Fixed-to-floating swap class 

1. Currency .................................. Australian Dollar (AUD).Canadian Dollar 

(CAD).

Euro (EUR) ...... Hong Kong Dollar (HKD).Mexican Peso 

(MXN).

Norwegian 

Krone (NOK). 

2. Floating Rate Indexes ............. BBSW .............. CDOR .............. EURIBOR ........ HIBOR ............. TIIE .................. NIBOR. 

3. Stated Termination Date 

Range.

28 days to 30 

years.

28 days to 30 

years.

28 days to 50 

years.

28 days to 10 

years.

28 days to 21 

years.

28 days to 10 

years. 

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

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

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

Specification Fixed-to-floating swap class 

1. Currency .......................... Polish Zloty 

(PLN).

Singapore 

Dollar 

(SGD).

Swedish 

Krona 

(SEK).

Swiss Franc 

(CHF).

Sterling 

(GBP).

U.S. Dollar 

(USD).

Yen (JPY). 

2. Floating Rate Indexes ..... WIBOR ......... SOR-VWAP .. STIBOR ........ LIBOR ........... LIBOR ........... LIBOR ........... LIBOR. 

3. Stated Termination Date 

Range.

28 days to 10 

years.

28 days to 10 

years.

28 days to 15 

years.

28 days to 30 

years.

28 days to 50 

years.

28 days to 50 

years.

28 days to 30 

years. 

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

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


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85See section II.B.iii.a.1. Under the Commission’s 

general policy, the clearing requirement does not 

apply to a swap where neither counterparty is a 

U.S. person (although these requirements generally 

would apply, with the possibility of substituted 

compliance, to certain swaps involving foreign 

branches of U.S. swap dealers or major swap 

participants, or non-U.S. persons that are 

guaranteed by or affiliate conduits of U.S. persons). 

See Interpretive Guidance and Policy Statement 

Regarding Compliance With Certain Swap 

Regulations, 78 FR 45292, 45369–70 (July 26, 2013). 

86The exception and exemptions to the clearing 

requirement are codified in subpart C to part 50 of 

the Commission’s regulations. 

Specification 

6. Conditional Notional 

Amounts.

No ................. No ................. No ................. No ................. No ................. No ................. No. 

Specification Basis swap class 

1. Currency ......................................... Australian Dollar 

(AUD).

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

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

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

years.

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 ........................ No. 

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

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

Specification Forward rate agreement class 

1. Currency ..................................................... Australian Dollar 

(AUD).

Euro (EUR) ................ Polish Zloty (PLN) ...... Norwegian Krone 

(NOK). 

2. Floating Rate Indexes ................................ BBSW ........................ EURIBOR ................... WIBOR ....................... NIBOR. 

3. Stated Termination Date Range ................ 3 days to 3 years ....... 3 days to 3 years ....... 3 days to 2 years ....... 3 days to 2 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 ..................................................... Swedish Krona (SEK) Sterling (GBP) ............ U.S. Dollar (USD) ...... Yen (JPY). 

2. Floating Rate Indexes ................................ STIBOR ...................... LIBOR ........................ LIBOR ........................ LIBOR. 

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

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

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

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

Specification Overnight index swap class 

1. Currency ......................................... Australian Dollar 

(AUD).

Canadian Dollar 

(CAD).

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

2. Floating Rate Indexes ..................... AONIA–OIS .......... CORRA–OIS ........ EONIA .................. SONIA .................. FedFunds. 

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

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

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

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

Request for Comment 

The Commission requests comment as 

to whether it should consider other data 

to determine whether outstanding 

notional exposures, trading liquidity, or 

adequate pricing data are sufficient to 

support this proposed clearing 

requirement. If so, please provide or 

identify any additional data that may 

assist the Commission in this regard. 

The Commission also requests 

comment as to whether fixed-to-floating 

interest rate swaps denominated in 

certain of the nine additional currencies 

are more or less suitable for a clearing 

requirement in terms of outstanding 

notional values, trading liquidity, or 

pricing data. In addition, the 

Commission requests comment 

regarding whether other evidence or 

criteria should inform the Commission’s 

assessment that the swaps covered by 

this proposal are suitable for clearing. 

Finally, the Commission requests 

comment about the types of swap 

counterparties that would be affected by 

the proposed determination. For 

example, as noted above, under the 

Commission’s general policy the 

clearing requirement would not apply to 

swaps involving non-U.S. 

counterparties in certain situations.85

The Commission also notes that the 

exception and exemptions that currently 

apply to the existing swap clearing 

requirement would also apply to the 

proposed clearing requirement.86

b. Factor (II)—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 

believes that CME, Eurex, LCH, and 

SGX have developed rule frameworks, 

capacity, operational expertise and 

resources, and credit support 

infrastructure to clear the interest rate 

swaps they currently clear, including 

those products subject to this proposal, 

on terms that are consistent with the 

material terms and trading conventions 

on which those swaps are being traded. 

The Commission subjects CME, 

Eurex, LCH, and SGX to ongoing review 

and risk surveillance programs to ensure 

compliance with the core principles for 


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87Section 5c(c) of the CEA governs the 

procedures for review and approval of new 

products, new rules, and rule amendments 

submitted to the Commission by DCOs. Parts 39 and 

40 of the Commission’s regulations implement 

section 5c(c) by: (i) Establishing specific 

requirements for compliance with the core 

principles as well as procedures for registration, 

implementing DCO rules, and clearing new 

products; and (ii) establishing provisions for a 

DCO’s submission of rule amendments and new 

products to the Commission. 

88Each of CME, Eurex, LCH, and SGX has 

published a document outlining its compliance 

with the Principles for Financial Market 

Infrastructures (‘‘PFMIs’’) published by the 

Committee on Payments and Market Infrastructures 

(‘‘CPMI’’ formerly CPSS) and the International 

Organization of Securities Commissions (‘‘IOSCO’’). 

See CME Clearing: Principles for Financial Market 

Infrastructures Disclosure, available at: http://www.

cmegroup.com/clearing/risk-management/files/

cme-clearing-principles-for-financial-marketinfrastructures-disclosure.pdf. See Assessment of 

Eurex Clearing AG’s compliance against the CPSS– 

IOSCO Principles for financial market 

infrastructures (PFMI) and disclosure framework 

associated to the PFMIs, available at: http://www.

eurexclearing.com/blob/148684/58e6fe89e3f54

ebe169e530ac2235b43/data/cpss-iosco-pfmi_

assessment_2014_en.pdf. See LCH’s CPMI–IOSCO 

Self Assessment 2014, available at: http://www.

lchclearnet.com/documents/731485/762558/CPMI_

IOSCO_Assessment_of_LCH+ClearnetLtd+2014.pdf/

45876bd6-3818-4b76-a463-2952a613c326. See SGX 

PFMI Disclosure Documents, available at: http://

www.sgx.com/wps/portal/sgxweb/home/clearing/

derivatives/pfmi_disclosure. 

89For example, CME, Eurex, LCH, and SGX may 

use scenarios for stress testing and reverse stress 

testing that capture, among other things, historical 

price volatilities, shifts in price determinants and 

yield curves, multiple defaults over various time 

horizons, and simultaneous pressures in funding 

and asset markets. 

the submitted swaps.87 As discussed 

above, as part of a registered DCO’s 

initial registration review and periodic 

in-depth reviews thereafter, the 

Commission reviews the DCO’s rule 

framework, capacity, and operational 

expertise and resources to clear the 

submitted swaps. The Commission may 

request that the DCO or DCO applicant 

change its rules to comply with the CEA 

and Commission regulations. 

After registration, the Commission 

conducts examinations of DCOs to 

determine whether the DCO is in 

compliance with the CEA and 

Commission regulations. Moreover, 

Commission risk surveillance staff 

monitors the risks posed to and by the 

DCO, in ways that include regularly 

conducting back testing to review 

margin coverage at the product level 

and following up with the DCO and its 

clearing members regarding any 

exceptional results. 

CME, Eurex, LCH, and SGX have 

procedures pursuant to which they 

regularly review their clearing of the 

interest rate swaps subject to this 

proposal in order to confirm, or make 

adjustments to, margins and other risk 

management tools. When reviewing 

CME, Eurex, LCH, and SGX’s risk 

management tools, the Commission 

considers whether the DCO is able to 

manage risk during stressed market 

conditions to be one of the most 

significant considerations. 

CME, Eurex, LCH, and SGX have 

developed detailed risk-management 

practices, including a description of the 

risk factors considered when 

establishing margin levels such as 

historical volatility, intraday volatility, 

seasonal volatility, liquidity, open 

interest, market concentration, and 

potential moves to default, among other 

risks.88 The Commission reviews and 

oversees CME’s, Eurex’s, LCH’s, and 

SGX’s risk management practices and 

development of margin models. Margin 

models are further refined by stress 

testing and daily back testing. When 

assessing whether CME, Eurex, LCH, 

and SGX can clear swaps safely during 

stressed market conditions, stress 

testing and back testing are key tools the 

Commission considers as well. 

CME, Eurex, LCH, and SGX design 

stress tests to simulate ‘‘extreme but 

plausible’’ market conditions based on 

historical analysis of product 

movements and/or based on 

hypothetical forward-looking scenarios 

that are created with the assistance of 

market experts and participants. 

Commission staff monitors and oversees 

the use and development of these stress 

tests. CME, Eurex, LCH, and SGX 

conduct stress tests daily. In addition, 

CME, Eurex, LCH, and SGX conduct 

reverse stress testing to ensure that their 

default funds are sized appropriately. 

Reverse stress testing uses plausible 

market movements that could deplete 

guaranty funds and cause large losses 

for top clearing members.89 These four 

DCOs analyze the results of stress tests 

and reverse stress tests to determine if 

any changes to their financial resources 

or margin models are necessary. 

Commission risk surveillance staff also 

monitors markets in real-time and also 

performs stress tests against the DCOs’ 

margin models as an additional level of 

oversight, and may recommend changes 

to a margin model. 

CME, Eurex, LCH, and SGX conduct 

back testing on a daily basis to ensure 

that the margin models capture market 

movements for member portfolios. Back 

testing serves two purposes: it tests 

margin models to determine whether 

they are performing as intended and it 

checks whether the margin models 

produce margin coverage levels that 

meet the DCO’s established standards. 

CME conducts daily back testing for 

each major asset class, and SGX 

performs daily back testing on a contract 

level to examine margin models in more 

detail. LCH may call additional margin 

from clearing members if back testing 

demonstrates margin erosion. The back 

testing process helps CME, Eurex, LCH, 

and SGX determine whether their 

clearing members satisfy the required 

margin coverage levels and liquidation 

time frame. 

Before offering a new product for 

clearing, such as the interest rate swaps 

subject to this proposal, CME, Eurex, 

LCH, and SGX take stress tests and back 

testing results into account to determine 

whether the clearinghouse has sufficient 

financial resources to offer new clearing 

services. In addition, the Commission 

reviews margin models and default 

resources to ensure that the DCOs can 

risk manage their portfolio of products 

offered for clearing. The Commission 

believes that this combination of stress 

testing and back testing in anticipation 

of offering new products for clearing 

provides CME, Eurex, LCH, and SGX 

with greater certainty that new product 

offerings will be risk-managed 

appropriately. The process of stress 

testing and back testing also gives the 

DCOs practice incorporating the new 

product into their models. 

In addition to the Commission’s 

surveillance and oversight, CME, Eurex, 

LCH, and SGX continue to monitor and 

test their margin models over time so 

that they can operate effectively in 

stressed and non-stressed market 

environments. CME, Eurex, LCH, and 

SGX review and validate their margin 

models regularly and in the case of CME 

and SGX, no less than annually. CME 

and LCH use the following additional 

measures to risk manage their margin 

coverage levels for interest rate swaps 

denominated in various currencies, 

including: Regularly surveying traders 

to estimate what it would cost to 

liquidate positions of different sizes in 

different currencies and then 

incorporating those costs into the 

amount of initial margin that a clearing 

member is required to post, and 

tailoring their margin models to account 

for several attributes specific to various 

currencies. 

Finally, aside from margin coverage 

requirements, CME, Eurex, LCH, and 

SGX can monitor and manage credit risk 

exposure by asset class, clearing 

member, account, or even by individual 

customers. They manage credit risk by 

establishing position and concentration 

limits based on product type or 

counterparty. The Commission 

recognizes that these limits reduce 

potential market risks so that DCOs are 

better able to withstand stressed market 

conditions. CME, Eurex, LCH, and SGX 


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90See definition of SD, codified in Commission 

regulation 1.3(ggg). 

91 In its § 39.5(b) submission, SGX asserts that 

central clearing reduces counterparty credit risk 

because the central counterparty interposes itself 

between the initial buyer and seller and because 

clearing creates efficiencies through the 

consolidation of collateral management. 

92Margin Requirements for Uncleared Swaps for 

SDs and MSPs (final rule), 81 FR 636 (Jan. 6, 2016) 

(codified in subpart E of part 23 of the 

Commission’s regulations). 

93The exception and exemptions to the clearing 

requirement are codified in subpart C to part 50 of 

the Commission’s regulations. 

94Regulations 23.152 and 23.153. 

monitor exposure concentrations and 

may require additional margin deposits 

for clearing members with weak credit 

scores, with large or concentrated 

positions, with positions that are 

illiquid or exhibit correlation with the 

member itself, and/or where the 

member has particularly large exposures 

under stress scenarios. The ability to 

call for any additional margin, on top of 

collecting initial and variation margin, 

to meet the current DCO exposure is 

another tool that CME, Eurex, LCH, and 

SGX may use to protect against stressed 

market conditions. 

In support of its ability to clear the 

products subject to this proposal, CME’s 

§ 39.5(b) submission cites to its rulebook 

to demonstrate the availability of rule 

framework, capacity, operational 

expertise and resources, and credit 

support infrastructure to clear interest 

rate swap contracts on terms that are 

consistent with the material terms and 

trading conventions on which the 

contracts are then traded. LCH’s 

submissions state that LCH has the 

capability and expertise not only to 

manage the risks inherent in the current 

book of interest rate swaps cleared, but 

also to manage the increased volume 

that a clearing requirement for 

additional currently clearable products 

could generate. SGX’s submission states 

that SGD-denominated fixed-to-floating 

interest rate swaps are cleared under an 

established rule framework and 

operational infrastructure that has been 

accepted by SGX’s clearing members. 

SGX asserted further that it has the 

appropriate risk management, 

operations, and technology capabilities 

in place to ensure that it is able to 

liquidate positions in these swaps in an 

orderly manner should a default occur. 

Similarly, Eurex’s submission states that 

it clears interest rate swaps pursuant to 

its well-developed rule framework and 

support infrastructure. 

Importantly, the Commission notes 

that CME, Eurex, LCH, and SGX 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, CME’s, Eurex’s, LCH’s, and 

SGX’s clearing services are designed to 

be consistent with the material terms 

and trading conventions of a bilateral, 

uncleared market. 

When assessing whether CME, Eurex, 

LCH, and SGX can clear the swaps 

subject to this proposed clearing 

requirement determination safely during 

times of market stress, the Commission 

reviewed the public disclosures 

published by CME, Eurex, LCH, and 

SGX. In addition, the Commission 

reviewed the risk management practices 

used by these DCOs, and the 

Commission has determined that the 

application of such practices to the 

products subject to this proposed 

clearing requirement determination 

should ensure that the products can be 

cleared safely during times of market 

stress. 

Therefore, the Commission is 

proposing this clearing requirement 

determination. 

Request for Comment 

The Commission requests comments 

concerning all aspects of this factor, 

including whether commenters agree 

that CME, Eurex, LCH, and SGX can 

satisfy the factor’s requirements. In 

particular, the Commission seeks 

comment regarding whether CME, 

Eurex, LCH, and SGX have the ability to 

clear the swaps subject to this proposed 

clearing requirement during times of 

market stress. 

c. Factor (III)—Effect on the 

mitigation of systemic risk. 

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

requires the Commission to take into 

account the effect of the clearing 

requirement 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. The Commission 

believes that the market for the swaps 

covered by this proposed determination 

is significant and that mitigating 

counterparty risk through clearing likely 

would reduce systemic risk in that 

market generally. Data collected by 

SDRs demonstrates that Commissionregistered SDs are counterparties to an 

overwhelming majority of swaps 

reported to the Commission. Because 

only SDs with a significant volume of 

swaps activity are required to register 

with the Commission,90 by expanding 

the swap clearing requirement, a greater 

percentage of an SD’s swap activity will 

be centrally cleared and risk managed. 

For example, central clearing reduces 

the interconnectedness of the swap 

positions of SDs, and other swap market 

participants, because the DCO, an 

independent third party that takes no 

market risk, guarantees the 

collateralization of swap counterparties’ 

exposures. Mitigating counterparty 

credit risk for SDs with systemically 

important swap positions through 

clearing likely would reduce systemic 

risk in the swap market and the 

financial system as a whole.91

In addition to managing counterparty 

credit risk, centrally clearing the swaps 

covered by this proposal through a DCO 

will reduce systemic risk through the 

following means: Providing 

counterparties with daily mark-tomarket valuations and exchange of 

variation margin pursuant to a risk 

management framework; requiring 

posting of initial margin to cover 

potential future exposures in the event 

of a default; offering multilateral netting 

to substantially reduce the number and 

notional amount of outstanding bilateral 

positions; reducing swap counterparties’ 

operational burden by consolidating 

collateral management and cash flows; 

eliminating the need for novations or 

tear-ups because clearing members may 

offset opposing positions; and 

increasing transparency. 

The Commission recognizes that the 

recently issued margin requirements for 

uncleared swaps for SDs and MSPs will 

require some market participants to post 

and collect margin for those swaps not 

subject to the Commission’s clearing 

requirement.92 This margin requirement 

was not finalized at the time the 

Commission issued the First Clearing 

Requirement Determination. As a result, 

the Commission considered the clearing 

requirement in light of existing market 

practice. Going forward, the 

requirement to margin uncleared swaps 

in certain instances will mitigate the 

accumulation of risk between 

counterparties in a manner similar to 

that of central clearing. However, the 

Commission believes that central 

clearing, including required clearing 

such as that proposed herein, offers 

greater risk mitigation than bilateral 

margining for swaps that are sufficiently 

standardized and meet the 

Commission’s other requirements for 

suitability. First, absent any applicable 

exception or exemption,93 this clearing 

requirement would apply to all 

transactions in the swaps covered by 

this proposal, whereas the uncleared 

margin requirements apply only to 

swaps executed by SDs, MSPs, and 

certain ‘‘financial end-users.’’ 94 Second, 

this clearing requirement would require 

all swap counterparties to post initial 

margin with a DCO, whereas under the 

uncleared swap margin requirements, 

for certain swaps, specifically those 


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95Regulation 23.152. 

96For further discussion of treatment of customer 

and swap counterparty positions, funds and 

property in the event of a the insolvency of a DCO 

or one or more of its clearing members, please see 

Factor (V)—Legal certainty in the event of 

insolvency. See section II.B.iii.e. 

between an SD or MSP and a financial 

end-user, initial margin is required to be 

posted and collected only if the 

financial end-user (together with its 

affiliates) has over $8 billion in gross 

notional exposures for uncleared 

swaps.95 Third, swaps transacted 

through a DCO are secured by the DCO’s 

guaranty fund and other available 

financial resources, which are intended 

to cover extraordinary losses that would 

not be covered by initial margin (‘‘tail 

risk’’), whereas swaps subject to the 

uncleared margin requirements are not 

secured by a guaranty fund or other 

financial resources available to the DCO 

but covered by unencumbered assets of 

the counterparty. 

In their § 39.5(b) submissions, CME, 

Eurex, and LCH submit that subjecting 

interest rate swaps to central clearing 

helps mitigate systemic risk. According 

to LCH, if all clearable swaps are 

required to be cleared, then from a 

systemic risk perspective there will be 

a less disparate marketplace. CME 

believes that the 2008 financial crisis 

demonstrated the potential for systemic 

risk arising from the interconnectedness 

of over-the-counter (OTC) derivatives 

market participants and believes that 

centralized clearing will reduce 

systemic risk. 

While a clearing requirement removes 

a large portion of the 

interconnectedness of current OTC 

markets that leads to systemic risk, the 

Commission notes that central clearing, 

by its very nature, concentrates risk in 

a handful of entities. Similarly, SGX 

noted that the risk reducing and other 

benefits of central clearing must be 

weighed against the concentration of 

risk in a few clearinghouses. However, 

the Commission observes that central 

clearing was developed and designed to 

handle such concentration of risk. 

Moreover, as discussed at length above, 

the Commission’s review and risk 

surveillance programs monitor and 

attempt to mitigate potential risks that 

can arise in derivatives clearing 

activities for the DCO, its members, and 

other entities using the DCO’s services. 

Part of a DCO’s risk management 

framework includes procedures for 

responding in stressed circumstances, 

such as a clearing member’s default on 

its obligations. As discussed below, 

each of CME, Eurex, LCH, and SGX has 

a procedure for closing out and/or 

transferring a defaulting clearing 

member’s positions and collateral.96

Transferring customer positions to 

solvent clearing members in the event of 

a default is critical to reducing systemic 

risk. DCOs are designed to withstand 

defaulting positions and to prevent a 

defaulting clearing member’s loss from 

spreading further and triggering 

additional defaults. If the introduction 

of this clearing requirement for interest 

rate swaps increases the number of 

clearing members and market 

participants in the swap market, then 

DCOs may find it easier to transfer 

positions from defaulting clearing 

members if there is a larger pool of 

potential clearing members to receive 

the positions. If this were to occur, then 

the Commission’s interest rate swap 

clearing requirement proposal would 

reduce systemic risk by increasing the 

number of clearing members and market 

participants in these swaps, which is 

expected to provide DCOs with 

additional recipients for defaulting 

clearing members’ positions in the event 

of a default. 

Each DCO has experience risk 

managing interest rate swaps, and the 

Commission has determined that each 

of CME, Eurex, LCH, and SGX has the 

necessary resources available to clear 

the swaps that are the subject of its 

submission. 

Accordingly, the Commission believes 

that CME, Eurex, LCH, and SGX would 

be able to manage the risk posed by 

clearing the additional swaps that 

would be required to be cleared by 

virtue of this expanded clearing 

requirement. In addition, the 

Commission believes that the central 

clearing of the interest rate swaps that 

are the subject of this proposal would 

serve to mitigate counterparty credit 

risk, and might increase the number of 

clearing members and market 

participants in these swaps, thereby 

potentially reducing systemic risk. 

Having taken into account the likely 

effect on the mitigation of systemic risk, 

the Commission is proposing this 

clearing requirement. 

Request for Comment 

The Commission requests comments 

concerning the proposed clearing 

requirement’s effect on reducing 

systemic risk. Would the proposed 

clearing requirement increase the risk to 

CME, Eurex, LCH, SGX, or any other 

entity? If so, please explain why. The 

Commission also requests comment on 

whether CME, Eurex, LCH, and SGX are 

each capable of handling any increased 

risk that would result from the proposed 

clearing requirement, including in 

stressed market conditions. 

d. Factor (IV)—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. As discussed above, 

of particular concern to the Commission 

is whether this proposed 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. 

The Commission has identified one 

putative service market as potentially 

affected by this proposed clearing 

determination: A DCO service market 

encompassing those clearinghouses that 

currently clear the interest rate swaps 

subject to this proposal, i.e., CME, 

Eurex, LCH, and SGX. Without defining 

the precise contours of this market at 

this time, the Commission recognizes 

that, depending on the interplay of 

several factors, this proposed clearing 

requirement potentially could impact 

competition within the affected market. 

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 interest rate swap products 

and DCO clearing services would 

substitute other clearing services coexisting in the same market(s); and (2) 

the potential for new entry into this 

market. The availability of substitute 

clearing services to compete with those 

encompassed by this proposed 

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. 

Any competitive import likely would 

stem from the fact that the proposed 

determination would remove the 

alternative of not clearing for interest 

rate swaps subject to this proposal. The 

proposed determination would not 

specify who may or may not compete to 

provide clearing services for the interest 

rate swaps subject to this proposal (as 

well as those not required to be cleared). 

Removing the uncleared option 

through this proposed rulemaking is not 

determinative of negative competitive 

impact. Other factors—including the 

availability of other substitutes within 


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97That said, the Commission recognizes that (1) 

to the extent the clearing services market for the 

interest rate swaps identified in this proposal, after 

foreclosing uncleared swaps, would be limited to a 

concentrated few participants with highly aligned 

incentives, and (2) the clearing services market is 

insulated from new competitive entry through 

barriers—e.g., high sunk capital cost requirements; 

high switching costs to transition from embedded 

incumbents; and access restrictions—the proposed 

determination could have a negative competitive 

impact by increasing market concentration. 

98See, e.g., U.S. Dep’t. of Justice & Fed. Trade 

Comm’n., Horizontal Merger Guidelines (2010) 

section 9.2 (entry likely if it would be profitable 

which is in part a function of ‘‘the output level the 

entrant is likely to obtain’’). In addition, the 

Commission notes that there are clearing 

organizations that clear the products subject to the 

determination proposed today that are not 

Commission-registered DCOs: (1) OTC Clearing 

Hong Kong Ltd., which the Commission has 

exempted from DCO registration and clears HKDdenominated interest rate swaps; (2) ASX Clear 

(Futures) Pty Ltd. (Australia), which the 

Commission has also exempted from DCO 

registration and clears AUD-denominated interest 

rate swaps; and (3) Asigna (Mexico), which clears 

MXN-denominated interest rate swaps. 

99The Commission is not discussing Eurex in 

terms of this factor because Eurex’s DCO 

registration order does not currently permit Eurex 

to clear for customers. See Eurex DCO registration 

order, available at: http://www.cftc.gov/idc/groups/ 

public/@otherif/documents/ifdocs/

orgdcoeurexclrorder212016.pdf. 

100The Commission observes that a 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). Under Title II, 

different rules would apply to the resolution of an 

FCM or DCO. Discussion in this section relating to 

what might occur in the event an FCM or DCO 

defaults or becomes insolvent describes procedures 

and powers that exist in the absence of a Title II 

receivership. 

101 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. 

102Claims seeking payment for the administration 

of customer property would share this priority. 

103The U.K. is bound by European Union 

legislation, including the Settlement Finality 

Directive (Council Directive 98/26/EC). The U.K.’s 

implementing legislation (The Financial Markets 

and Insolvency (Settlement Finality) Regulations 

1999) acts to disapply, in certain instances, national 

U.K. insolvency law in favor of the rules of a 

designated system, and LCH has been so 

designated. 

the market or potential for new entry 

into the market—may constrain market 

power. The Commission does not 

foresee that the proposed determination 

constructs barriers that would deter or 

impede new entry into a clearing 

services market.97 Indeed, there is some 

basis to expect that the determination 

could foster an environment conducive 

to new entry. For example, the proposed 

clearing determinations, and the 

prospect that more may follow, is likely 

to reinforce, if not encourage, growth in 

demand for clearing services. Demand 

growth, in turn, can enhance the sales 

opportunity, a condition hospitable to 

new entry.98

Request for Comment 

The Commission requests comment 

on the extent to which: (1) Entry barriers 

currently do or do not exist with respect 

to a clearing services market for the 

interest rate swaps subject to this 

proposal; (2) the proposed 

determinations may lessen or increase 

these barriers; and (3) the proposed 

determinations otherwise may 

encourage, discourage, facilitate, and/or 

dampen new entry into the market. In 

addition to what is noted above, the 

Commission requests comment, and 

quantifiable data, on whether the 

required clearing of any or all of these 

swaps will create conditions that create, 

increase, or facilitate an exercise of: (1) 

Clearing services market power in CME, 

Eurex, LCH, SGX, and/or any other 

clearing service market participant, 

including conditions that would 

dampen competition for clearing 

services and/or increase the cost of 

clearing services; and/or (2) market 

power in any product markets for 

interest rate swaps, including 

conditions that would dampen 

competition for these product markets 

and/or increase the cost of interest rate 

swaps identified in this proposal. The 

Commission seeks comment, and 

quantifiable data, on the likely cost 

increases associated with clearing, 

particularly those fees and charges 

imposed by DCOs, and the effects of 

such increases on counterparties 

currently participating in the market. 

The Commission also seeks comment 

regarding the effect of competition on 

DCO risk management. The Commission 

also welcomes comment on any other 

aspect of this factor. 

e. Factor (V)—Legal certainty in the 

event of 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 is proposing 

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 fixed-to-floating interest rate swaps, 

basis swap, OIS, and FRAs subject to 

this proposal, in the event of the 

insolvency of the relevant DCO (CME, 

LCH, or SGX) or one or more of the 

DCO’s clearing members.99

The Commission concludes that, in 

the case of a clearing member 

insolvency at CME, where the clearing 

member is the subject of a proceeding 

under the U.S. Bankruptcy Code, 

subchapter IV of Chapter 7 of the U.S. 

Bankruptcy Code (11 U.S.C. 761–767) 

and parts 22 and 190 of the 

Commission’s regulations would govern 

the treatment of customer positions.100

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.’’ 101 As a 

result, neither a clearing member’s 

bankruptcy nor any order of a 

bankruptcy court could prevent CME 

from closing out/liquidating such 

positions. 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 subject to this proposal.102 Thus, 

customer claims would have priority 

over proprietary claims and general 

creditor claims. Customer funds would 

be distributed to swap customers, 

including interest rate swap customers, 

in accordance with Commission 

regulations and section 766(h) of the 

Bankruptcy Code. Moreover, the 

Bankruptcy Code and the Commission’s 

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

764(b) and 17 CFR 190.06) permit the 

transfer of customer positions and 

collateral to solvent clearing members. 

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

190 would govern the bankruptcy of a 

DCO where the DCO is the subject of a 

proceeding under the U.S. Bankruptcy 

Code, 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 pursuant to 

European Union law, LCH’s rules would 

supersede English insolvency laws.103

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 


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104Letters of counsel on file with the 

Commission. 

105Letter of counsel on file with the Commission. 

106Clearing Requirement Determination Under 

Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 

2012). 

107 Id. 

108See discussion of clearing requirements in 

other jurisdictions in section I.B. 

109See Swap Transaction Compliance and 

Implementation Schedule: Clearing Requirement 

Under Section 2(h) of the CEA, 77 FR 44441 (July 

30, 2012). 

110 Id. at 44442. 111See section I.B describing existing and 

potential clearing requirements in other 

jurisdictions. 

governed by English insolvency law, 

which protects the enforceability of the 

default-related provisions of LCH’s 

rulebook, including in respect of 

compliance with applicable provisions 

of the U.S. Bankruptcy Code and part 

190 of the Commission’s regulations. 

LCH has obtained, and shared with the 

Commission, 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.104

With regard to SGX, the Commission 

understands that the default of an SGX 

clearing member, or SGX itself, would 

be governed by Singapore law, except 

for certain SGX rules relating to cleared 

swaps customer collateral, as part 22 of 

the Commission’s regulations defines 

that term, which are governed by U.S. 

law. Like LCH, SGX has obtained, and 

shared with the Commission, a legal 

opinion that support the existence of 

such legal certainty.105

Request for Comment 

The Commission requests comment as 

to whether there is reasonable legal 

certainty, in the event of an insolvency 

of CME, LCH, SGX, or one or more of 

any of these DCO’s clearing members, 

with regard to the treatment of customer 

and swap counterparty positions, funds, 

and property. Specifically, the 

Commission requests comment on 

whether U.S. swap counterparties have 

concerns about the applicability of 

English or Singapore law to U.S. 

persons clearing swaps at LCH or SGX. 

III. Proposed Amended Regulation 

50.4(a) 

The Commission promulgated 

regulation 50.4 as part of the First 

Clearing Requirement Determination.106

Regulation 50.4 sets forth the basic 

specifications of the classes of swaps 

that the Commission has required to be 

cleared in order to allow counterparties 

contemplating entering into a swap to 

quickly determine whether or not the 

particular swap may be subject to a 

clearing requirement.107 Paragraph (a) of 

regulation 50.4 sets forth the four 

classes of interest rate swaps that are 

currently required to be cleared 

pursuant to the First Clearing 

Requirement Determination. 

For the reasons discussed above, the 

Commission is proposing to amend 

regulation 50.4(a) as follows: (i) Adding 

fixed-to-floating interest rate swaps 

denominated in the nine additional 

currencies; (ii) adding AUDdenominated basis swaps; (iii) adding 

AUD-, NOK-, PLN-, and SEKdenominated FRAs; (iv) changing the 

maximum stated termination date for 

USD-, GBP-, and EUR-denominated OIS 

to three years from two years; and (v) 

adding AUD- and CAD-denominated 

OIS. The specifications of the swaps set 

forth in revised regulation 50.4(a) are 

consistent with those that are the 

subject of clearing requirements 

proposed or issued by other 

jurisdictions.108

IV. Proposed Implementation Schedule 

The Commission phased in 

compliance with the First Clearing 

Requirement Determination according 

to the schedule contained in regulation 

50.25.109 Under this schedule, 

compliance was phased in by the type 

of market participant entering into a 

swap subject to the new determination. 

The phase-in took place during a period 

of 270 days following publication of the 

final version of the clearing requirement 

determination in the Federal Register. 

The Commission proposes not to phase 

in compliance with the proposed 

expanded fixed-to-floating swap, basis 

swap, FRA, and OIS classes. 

Regulation 50.25 provides the 

Commission with the discretion to 

phase in compliance. Regulation 

50.25(b) provides that upon issuing a 

clearing requirement determination 

under section 2(h)(2) of the Act, the 

Commission may determine, based on 

the group, category, type, or class of 

swaps subject to such determination, 

that the specified schedule for 

compliance with the requirements of 

section 2(h)(1)(A) of the Act shall apply. 

The Commission believes that most 

market participants that would be 

subject to the proposed clearing 

requirement already clear the types of 

interest rate swaps subject to the 

existing clearing requirement. The 

Commission does not expect that these 

market participants would need to 

connect to DCOs, document new client 

clearing arrangements, or otherwise 

prepare themselves and their customers 

in order to comply with the proposed 

clearing requirement as they may have 

needed to do in order to comply with 

the First Clearing Requirement 

Determination. 

In addition, whereas upon publication 

of the First Clearing Requirement 

Determination, the Commission was 

uncertain as to whether various types of 

market participants were ready to 

submit swaps for clearing,110 currently 

a cross-section of market participants 

clear swaps. Therefore, the Commission 

believes that it would be reasonable to 

expect market participants to comply 

with the proposed clearing requirement 

60 days after the final determination is 

published in the Federal Register. That 

would be consistent with the effective 

date of most Commission regulations. 

As described above, the Commission 

recognizes that multiple non-U.S. 

jurisdictions have taken steps to 

promulgate clearing requirements for 

the interest rate swaps covered by this 

proposal.111 The Commission also 

understands that most of the other nonU.S. clearing requirements discussed in 

this proposal will take effect before the 

end of 2016. However, given that each 

jurisdiction must follow its own law 

and practice, the Commission cannot be 

certain precisely when some non-U.S. 

clearing requirements will take effect. 

Due to the fact that each of those other 

clearing requirements is being 

implemented on a different schedule, 

and each schedule involves multiple 

steps, the Commission is considering 

two alternative implementation 

scenarios. The Commission seeks to 

create an implementation schedule that 

results in workable adoption of the 

swaps clearing requirements discussed 

in this proposal and is requesting 

comment and feedback on each of the 

proposed scenarios below. 

A. Implementation Scenario I— 

Simultaneous Effective Date 

First, the Commission is considering 

publishing a final rule to implement the 

clearing requirement for all products 

discussed in this proposal at the same 

time. Market participants subject to the 

Commission’s jurisdiction would be 

required to comply with the clearing 

requirement for these interest rate swaps 

products 60 days after the Commission’s 

final rule is published in the Federal 

Register. Under this scenario, some 

interest rate swaps products could be 

subject to a clearing requirement in the 

U.S. before there is an analogous 

clearing requirement in a non-U.S. 

jurisdiction. 

As noted earlier, for all swaps subject 

to this proposal, the Commission 


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112Section 2(h)(2)(D) of the CEA. 

113Regulation 39.5(b)(3)(ii). 

expects that a similar clearing 

requirement in the non-U.S. jurisdiction 

will be forthcoming. As of the date of 

this proposal, the clearing requirements 

have become effective for the (i) AUDdenominated fixed-to-floating, basis, 

FRA, and OIS swaps, and (ii) MXNdenominated fixed-to-floating swaps. 

For these categories of swaps, there will 

be an analogous swap clearing 

requirement in at least one non-U.S. 

jurisdiction that is in effect at the time 

the Commission’s mandate would take 

effect. For the other categories of swaps, 

effective dates have been proposed in 

some but not all cases, and the proposed 

effective dates could change. In 

addition, it is likely to be a few months 

before the Commission could finalize a 

rule. Thus, for each other category, it is 

possible that a Commission rule could 

take effect before or after the effective 

date in the specified jurisdiction. The 

Commission currently expects that if it 

finalizes this rule later this year, the 

effective date for the expanded 

termination date range for the OIS 

swaps denominated in EUR, GBP, and 

USD, would probably coincide with or 

lag behind the European Union’s 

implementation by a short time period. 

By contrast, the effective date for a 

Commission clearing requirement for 

the fixed-to-floating swaps denominated 

in CAD, HKD-, NOK, PLN, SEK, SGD, 

and CHF, as well as the FRA 

denominated in NOK-, PLN, and SEK, 

and the CAD-denominated OIS, could 

precede the effective date of the 

analogous clearing requirement in the 

relevant non-U.S. jurisdiction. 

The primary benefit of implementing 

the clearing requirement for all products 

subject to this proposal on a single date 

is that it provides market participants 

with certainty and makes it easier for 

industry members to update relevant 

policies and procedures at one time. 

B. Implementation Scenario II— 

Alternative Compliance Dates To 

Coordinate Implementation With NonU.S. Jurisdictions 

Second, the Commission is 

considering proposing a compliance 

date for the clearing requirement that 

will take place on the earlier of (i) the 

date 60 days after the effective date of 

an analogous clearing requirement that 

has been adopted by a regulator in a 

non-U.S. jurisdiction, provided that any 

such date for any swap covered by the 

final rule shall not be earlier than the 

date which is 60 days after the 

Commission’s final rule is published, or 

(ii) the date two years after the 

Commission’s final rule is published in 

the Federal Register. Under this 

scenario, compliance with the 

Commission’s clearing requirement will 

be required for certain interest rate 

swaps products as non-U.S. 

jurisdictions make analogous clearing 

requirements effective, but in all cases 

compliance with the Commission’s 

clearing requirements will be required 

no later than two years after the final 

rule is published. 

This implementation scenario blends 

flexibility with certainty by giving 

market participants the opportunity to 

implement clearing for these interest 

rate swap products over time, while 

providing a date certain by which 

market participants will be expected to 

clear all products subject to this 

proposal. 

The Commission notes that under this 

scenario, the compliance date for the (i) 

AUD-denominated fixed-to-floating, 

basis, FRA, and OIS swaps, and (ii) 

MXN-denominated fixed-to-floating 

swaps, would be 60 days after the 

publication of the final rule in the 

Federal Register because the clearing 

requirements for these swaps products 

are effective in non-U.S. jurisdictions 

currently. Market participants subject to 

the Commission’s jurisdiction would 

not be required to comply with the swap 

clearing requirements for the expanded 

termination dates for the OIS swaps 

denominated in EUR, GBP, and USD, 

until 60 days after the later of (i) June 

21, 2016 (or such later date when the 

European Union’s clearing requirement 

for these products first becomes 

effective) or (ii) the publication date of 

the final rule in the Federal Register, 

but in no event would the compliance 

date be later than two years after 

publication of the final rule in the 

Federal Register. 

In order to manage expectations for 

implementation under the second 

scenario, the Commission proposes to 

wait no longer than two years after the 

final rule is adopted to require clearing 

for all of the swaps products subject to 

this proposal. 

Request for Comment 

The Commission requests comment 

on not using regulation 50.25 to phase 

in compliance with the proposed 

clearing requirement. In addition, the 

Commission requests comment on the 

two proposed implementation 

scenarios, the advantages and 

disadvantages of each of the options 

discussed above and whether market 

participants have a preference for one 

over the other. In particular, the 

Commission is seeking feedback on 

whether all proposed clearing 

requirements should become effective at 

the same time or whether the 

compliance date for a clearing 

requirement should be related to the 

date that an analogous clearing 

requirement becomes effective in a nonU.S. jurisdiction. 

V. Cost Benefit Considerations 

A. Statutory and Regulatory Background 

Proposed revised regulation 50.4(a) 

identifies certain swaps that would be 

required to be cleared under section 

2(h)(1)(A) of the CEA in addition to 

those currently required to be cleared by 

existing regulations 50.2 and 50.4(a). 

The clearing requirement proposed 

herein is designed 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 Commission 

believes this proposal is consistent with 

one of the fundamental premises of the 

Dodd-Frank Act and the 2009 

commitments by G20 nations: The use 

of central clearing can reduce systemic 

risk. 

Regulation 39.5 provides an outline 

for the Commission’s review of swaps 

for required clearing. Regulation 39.5 

allows the Commission to review swaps 

submitted by DCOs. Under section 

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

swaps for a clearing requirement 

determination, 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 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; (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.112 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.113 This information is 

designed to assist the Commission in 

identifying those swaps that are 

required to be cleared. 


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114See CME comment letter of Sept. 16, 2013 in 

response the Commission’s notice of proposed 

rulemaking concerning DCOs and International 

Standards, 78 FR 50260, Aug. 16, 2013. The CME 

comment letter is available on the Commission’s 

Web site at: http://comments.cftc.gov/

PublicComments/CommentList.aspx?id=1391. 

115 It is also possible that some market 

participants would respond to the proposed rule’s 

requirement that certain interest rate swaps be 

cleared by decreasing their use of such swaps. This 

possibility contributes to the uncertainty regarding 

how the proposed rule will affect the quantity of 

swaps that are cleared. 

The following discussion is a 

consideration of the costs and benefits 

of the Commission’s proposed actions 

pursuant to the regulatory requirements 

above. 

B. Overview of Swap Clearing 

i. How Clearing Reduces Risk 

When a bilateral swap is cleared, the 

DCO becomes the counterparty to each 

original participant to the swap. This 

arrangement mitigates counterparty risk 

to the extent that the clearinghouse may 

be a more creditworthy counterparty 

than the original swap participants. 

Central clearing reduces the 

interconnectedness of the swap 

positions of SDs, and other swap market 

participants, because the DCO, an 

independent third party that takes no 

market risk, guarantees the 

collateralization of swap counterparties’ 

exposures. DCOs have demonstrated 

resilience in the face of past market 

stress. DCOs remained financially sound 

and effectively settled positions in the 

midst of turbulent financial conditions 

in 2007–2008 that threatened the 

financial health and stability of many 

other types of entities. 

The Commission believes that DCOs 

will continue to be some of the most 

creditworthy counterparties in the swap 

markets because DCOs have various 

tools available that are effective in 

monitoring and managing counterparty 

risk. 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 multiple 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 product; and 

(4) close out the swap positions of a 

customer that does not meet margin 

calls within a specified period of time. 

Moreover, in the event that a clearing 

member defaults on its obligations to 

the DCO, the DCO has numerous 

remedies available to manage risk, 

including transferring the swap 

positions of the defaulted member to 

another clearing member, and covering 

any losses that may have accrued with 

the defaulting member’s margin on 

deposit. In order to transfer the swap 

positions of a defaulting member and 

manage the risk of those positions, the 

DCO has the ability to take a number of 

steps, including: (1) Hedge the portfolio 

of positions of the defaulting member to 

limit future losses; (2) partition the 

portfolio into smaller pieces; and (3) 

auction off the pieces of the portfolio, 

together with their corresponding 

hedges, to other members of the DCO. In 

order to cover the losses associated with 

such a default, the DCO would typically 

draw from: (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 contributions 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 clearing members default or 

there are stressed market circumstances. 

ii. The Clearing Requirement and Role 

of the Commission 

With the passage of the Dodd-Frank 

Act, Congress gave the Commission the 

responsibility for determining which 

swaps would be required to be cleared 

pursuant to section 2(h)(1)(A) of the 

CEA. Therefore, the costs and benefits 

associated with a clearing requirement 

are attributable to both the CEA, as 

amended by the Dodd-Frank Act, and 

the Commission acting in accordance 

with the CEA. As a result, it is difficult 

to distinguish between the costs 

associated with the Dodd-Frank Act 

itself, and the costs associated with the 

Commission exercising the authority 

granted to it by the Dodd-Frank Act. 

There also is evidence that the 

interest rate swaps market has been 

migrating into clearing for multiple 

years in response to market incentives, 

in anticipation of the Dodd-Frank Act’s 

clearing requirement, and as a result of 

the First Clearing Requirement 

Determination. This shift can be seen in 

the volumes of interest rate swaps 

currently being cleared by CME and 

LCH, the two DCOs that submitted a 

significant portion of the information 

contained in this proposal. The open 

notional value of interest rate swaps 

cleared at CME has increased from 

approximately $2.2 trillion to over $5.5 

trillion between June 10, 2013 and 

September 10, 2013, two 

implementation dates for the First 

Clearing Requirement Determination.114

Because the volume of interest rate 

swaps being cleared also has increased 

voluntarily, it is impossible to precisely 

determine the extent to which any 

increased use of clearing would result 

from statutory or regulatory 

requirements, as compared to the desire 

of swap market participants to clear 

swaps for the risk-mitigating benefits.115

For these reasons, the Commission 

has determined that the costs and 

benefits related to the required clearing 

of the interest rate swaps subject to this 

proposal are attributable, in part to (1) 

Congress’s stated goal of reducing 

systemic risk by, among other things, 

requiring clearing of swaps and (2) the 

Commission’s exercise of its discretion 

in selecting swaps or classes of swaps to 

achieve those ends. The Commission 

will discuss the costs and benefits of the 

overall move from voluntary clearing to 

required clearing for the swaps subject 

to this proposal below. 

Request for Comment 

The Commission requests comment 

concerning its assumption that a shift 

towards clearing may be due to the 

Dodd-Frank Act’s general clearing 

requirement or other motivations 

including independent business reasons 

and incentives from other regulators, 

such as prudential authorities. 

C. Consideration of the Costs and 

Benefits of the Commission’s Action 

i. CEA Section 15(a) 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of the 

following five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations (collectively referred to 

herein as the Section 15(a) Factors.) 

Accordingly, the Commission considers 

the costs and benefits associated with 

the proposed clearing requirement 

determination in light of the Section 

15(a) Factors. 

In the sections that follow, the 

Commission considers: (1) The costs 

and benefits of required clearing for the 

swaps identified in this proposed rule; 

(2) the alternatives contemplated by the 


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116The Commission’s margin requirements for 

uncleared swaps are codified in subpart E of part 

23 of the Commission’s regulations. 

117See section II.B.iii.a.1 discussing how the 

Commission has considered the swap clearing 

requirement to apply in a cross-border context. 

118The Commission does not have current 

information regarding such fees; commenters are 

requested to provide the necessary data where 

available. In the First Clearing Requirement 

Determination (77 FR 74284 at 74324), the 

Commission noted that it had been estimated that 

it would cost smaller financial institutions between 

$2,500 and $25,000 to review and negotiate legal 

agreements to establish a new business relationship 

with an FCM (citing comment letters from Chatham 

Financial and Webster Bank submitted to the 

Commission in 2012 in response to the 

Commission’s request for comment concerning the 

cost benefit analysis regarding a potential clearing 

exception for certain small financial institutions 

under the end-user exception, available at: http:// 

comments.cftc.gov/PublicComments/

ViewComment.aspx?id=58077 and http://

comments.cftc.gov/PublicComments/

ViewComment.aspx?id=58076). 

119The Commission does not have current 

information regarding such fees; commenters are 

requested to provide the necessary data where 

available. In the First Clearing Requirement 

Determination (77 FR 74284 at 74325), the 

Commission noted that customers that occasionally 

transact in swaps are typically required to pay a 

monthly or annual fee to each FCM that ranges from 

$75,000 to $125,000 per year (citing comment 

letters from Chatham Financial and Webster Bank). 

Commission and their costs and 

benefits; (3) the impact of required 

clearing for the proposed swaps on the 

Section 15(a) Factors. 

ii. Costs and Benefits of Required 

Clearing Under the Proposed Clearing 

Requirement Determination 

Market participants may incur certain 

costs in order to clear the interest rate 

swaps included in the proposed rule. 

For example, market participants that 

are not already clearing interest rate 

swaps either voluntarily or pursuant to 

the First Clearing Requirement 

Determination may incur certain startup 

and ongoing costs related to developing 

technology and infrastructure, updating 

or creating new legal agreements, 

service provider fees, and 

collateralization of the cleared 

positions. The per-entity costs described 

above are likely to vary widely 

depending on the needs of each market 

participant. Such costs likely will be 

lower for the market participants who 

have used the interest rate swaps 

covered by this proposal in the past and 

who currently execute and clear the 

interest rate swaps covered by the First 

Clearing Requirement Determination. 

The opposite likely would be true for 

market participants that start clearing 

because of the proposed clearing 

requirement. The costs of 

collateralization, on the other hand, are 

likely to vary depending on whether or 

not an entity is subject to the margin 

requirements for uncleared swaps,116

whether or not an entity is subject to 

capital requirements, and the 

differential between the cost of capital 

for the assets they use as collateral, and 

the returns realized on those assets. 

Market participants that would begin 

clearing the interest rate swaps subject 

to this proposal also would obtain the 

benefits associated with clearing. These 

benefits include reduced and 

standardized counterparty risk, 

increased transparency, and easier 

access to the swap markets. Together, 

these benefits will contribute 

significantly to the stability and 

efficiency of the financial system. 

However, these benefits are difficult to 

quantify with any degree of precision, 

and market participants already clearing 

these swaps already realize the benefits 

of clearing. 

Request for Comment 

The Commission requests comment 

concerning the costs of clearing 

described above for various market 

participants. The Commission requests 

comment from both U.S. and non-U.S. 

swap counterparties that may be 

affected by the proposed 

determination.117 The Commission also 

requests comment as to the benefits that 

market participants could realize as a 

result of the proposed rule. 

a. Technology, Infrastructure, and Legal 

Costs 

Market participants already clearing 

their swaps may incur costs in making 

necessary changes to technology 

systems to support the clearing required 

by the proposed rule. Market 

participants that are not currently 

clearing swaps may incur costs if they 

need to implement middleware 

technology to connect to FCMs that will 

clear their transactions. Similarly, legal 

costs will vary depending on the extent 

to which a market participant is already 

clearing swaps. The Commission does 

not have the information necessary to 

determine either the costs associated 

with entities that need to establish 

relationships with one or more FCMs or 

the costs associated with entities that 

already have relationships with one or 

more FCMs but need to revise their 

agreements.118 The costs are likely to 

depend on the specific business needs 

of each entity and would therefore vary 

widely among market participants. As a 

general matter, the Commission would 

expect that most market participants 

already will have undertaken the steps 

necessary to accommodate the clearing 

of required swaps, and that the burden 

associated with these additional interest 

rate swap products should be minimal. 

Request for Comment 

The Commission requests comment, 

including any quantifiable data and 

analysis, on the changes that market 

participants will have to make to their 

technological and legal infrastructures 

in order to clear the interest rate swaps 

that are subject to the proposed clearing 

requirement. In particular, the 

Commission requests comment 

concerning the following questions: 

How many market participants may 

have to establish new relationships with 

FCMs, or significantly upgrade those 

relationships based on the inclusion of 

these additional products to the clearing 

requirement? 

b. Ongoing Costs Related to FCMs and 

Other Service Providers 

In addition to costs associated with 

technological and legal infrastructures, 

market participants transacting in swaps 

subject to the proposed clearing 

requirement will face ongoing costs 

associated with fees charged by FCMs. 

DCOs typically charge FCMs an initial 

transaction fee for each cleared interest 

rate swap its customers enter, as well as 

an annual maintenance fee for each 

open position. In addition, the 

Commission understands that customers 

that occasionally transact in swaps are 

typically required to pay a monthly or 

annual fee to each FCM.119

As discussed above, it is difficult to 

predict precisely how the proposed 

requirement to clear the additional 

swaps covered by this proposed rule 

will increase the use of swap clearing, 

as compared to the use of clearing that 

would occur in the absence of the 

requirement. The Commission expects 

that the proposed clearing requirement 

generally would increase the use of 

clearing, leading in most cases to an 

incremental increase in the transaction 

costs noted above. However, the 

Commission would expect that most 

market participants already will have 

undertaken the steps necessary to 

accommodate the clearing of required 

swaps, and that the burden associated 

with the additional interest rate swap 

products should be minimal. 

Request for Comment 

The Commission requests additional 

comment, data, and analysis regarding 

the fee structures of FCMs in general, 

and in particular as they relate to the 

clearing of the types of swaps covered 

by the proposed rule. 


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120The Commission used part 45 data to make 

these estimates based on swap activity occurring 

during the second quarter of 2015. The data set does 

not include swaps entered into by affiliated 

counterparties. Data from the third and fourth 

quarters of 2015 were used to calculate the 

estimates for EUR-, GBP-, and USD-denominated 

OIS with terms of two to three years. Data from 

January 2016 was used to calculate the estimates for 

AUD- and CAD-denominated OIS. 

121The Commission made these calculations 

using the following formula: 

X/Y¥X. 

X = Current value of margin on deposit at DCOs 

for an interest rate swap denominated in a 

particular currency. 

Y = Percentage of the market for that swap that 

is currently cleared. 

122The amount of additional margin required for 

AUD-denominated FRAs cannot currently be 

estimated. 

123See ISDA Margin Survey 2015 at page 12, 

Table 6, available at: http://www2.isda.org/

functional-areas/research/surveys/margin-surveys/. 

c. Costs Related to Collateralization of 

Cleared Swap Positions 

Market participants that enter into the 

interest rate swaps subject to the 

proposed rule will be required to post 

initial margin at a DCO. The 

Commission understands that some of 

the swaps subject to this proposal are 

currently being cleared on a voluntary 

basis. Specifically, the Commission 

estimates the following. 

TABLE 17—PART 45 DATA ESTIMATED

PERCENTAGES OF THE INTEREST

RATE SWAP MARKET CLEARED VOLUNTARILY SECOND QUARTER

2015 120

Product Percentage of 

market cleared 

AUD-denominated fixed-tofloating interest rate swap 65 

CAD-denominated fixed-tofloating interest rate swap 72 

CHF-denominated fixed-tofloating interest rate swap 83 

HKD-denominated fixed-tofloating interest rate swap 49 

TABLE 17—PART 45 DATA ESTIMATED

PERCENTAGES OF THE INTEREST

RATE SWAP MARKET CLEARED VOLUNTARILY SECOND QUARTER

2015 120—Continued 

Product Percentage of 

market cleared 

MXN-denominated fixed-tofloating interest rate swap 25 

NOK-denominated fixed-tofloating interest rate swap 40 

PLN-denominated fixed-tofloating interest rate swap 66 

SEK-denominated fixed-tofloating interest rate swap 45 

SGD-denominated fixed-tofloating interest rate swap 24 

AUD-denominated basis 

swap .................................. 28 

AUD-denominated FRA ........ 0 

NOK-denominated FRA ........ 94 

PLN-denominated FRA ........ 32 

SEK-denominated FRA ........ 25 

EUR-denominated OIS (2–3 

year term) .......................... 100 

GBP-denominated OIS (2–3 

year term) .......................... 100 

TABLE 17—PART 45 DATA ESTIMATED

PERCENTAGES OF THE INTEREST

RATE SWAP MARKET CLEARED VOLUNTARILY SECOND QUARTER

2015 120—Continued 

Product Percentage of 

market cleared 

USD-denominated OIS (2–3 

year term) .......................... 100 

AUD-denominated OIS ......... 18 

CAD-denominated OIS ......... 88 

With information provided by CME, 

LCH, and SGX, the Commission has 

estimated the amounts of initial margin 

currently on deposit at these three DCOs 

with respect to the swaps that are the 

subject of this proposed determination. 

Using this information, the Commission 

estimates that this clearing requirement 

determination would require market 

participants to post the following 

amounts of additional initial margin for 

each of the interest rate swaps covered 

by this proposed determination.121

TABLE 18—ESTIMATED ADDITIONAL AMOUNTS OF INITIAL MARGIN DUE TO PROPOSED CLEARING REQUIREMENT

Swap Amount of margin 

USD equivalent 

AUD-denominated Fixed-to-floating interest rate swap ................................................................................................................ $1,107,287,108 

CAD-denominated Fixed-to-floating interest rate swap ................................................................................................................ 419,208,078 

CHF-denominated Fixed-to-floating interest rate swap ................................................................................................................. 105,963,972 

HKD-denominated Fixed-to-floating interest rate swap ................................................................................................................ 216,677,823 

MXN-denominated Fixed-to-floating interest rate swap ................................................................................................................ 1,867,370,001 

NOK-denominated Fixed-to-floating interest rate swap ................................................................................................................ 241,288,835 

PLN-denominated Fixed-to-floating interest rate swap ................................................................................................................. 84,789,768 

SEK-denominated Fixed-to-floating interest rate swap ................................................................................................................. 603,185,677 

SGD-denominated Fixed-to-floating interest rate swap ................................................................................................................ 1,113,041,264 

AUD-denominated basis swap ...................................................................................................................................................... 612,166,597 

AUD-denominated FRA ................................................................................................................................................................. 122 N/A 

NOK-denominated FRA ................................................................................................................................................................. 10,746,747 

PLN-denominated FRA .................................................................................................................................................................. 186,238,075 

SEK-denominated FRA ................................................................................................................................................................. 942,845,508 

EUR-denominated OIS with terms of 2–3 years ........................................................................................................................... 0 

GBP-denominated OIS with terms of 2–3 years ........................................................................................................................... 0 

USD-denominated OIS with terms of 2–3 years ........................................................................................................................... 0 

AUD-denominated OIS .................................................................................................................................................................. 84,254,007 

CAD-denominated OIS .................................................................................................................................................................. 6,630,342 

Total ........................................................................................................................................................................................ 7,601,693,801 

The Commission believes that these 

estimates may be higher than the actual 

amounts of initial margin that would 

need to be posted as a result of this 

proposed rule because these estimates 

are based on several assumptions. First, 

the estimates assume that none of the 

swaps that are currently executed on an 

uncleared basis are currently 

collateralized. By contrast, an ISDA 

survey reported that as of December 31, 

2014, 88.9% of all uncleared fixed 

income derivative transactions are 

subject to a credit support annex.123


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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. 

124Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants; Final 

Rule, 81 FR 636 (Jan. 6, 2016) (hereinafter 

‘‘uncleared swap margin regulations’’). The U.S. 

prudential regulators finalized similar regulations 

in Oct. 2015. 

125See subpart C of part 50 (Exceptions and 

Exemptions to the Clearing Requirement). There 

also is a possibility that the estimates listed in Table 

18 are lower than the actual figures because certain 

market participants with directional portfolios may 

be unable to benefit from margin offsets that could 

come from clearing. However, the Commission 

believes that the estimates listed in Table 18 are 

more likely to overstate the required additional 

margin amounts than to underestimate them. 

126Bank of America Merrill Lynch U.S. Corporate 

BBB effective yield for December 2015. 

127 In December 2015, a 5-year U.S. treasury bond 

yielded 1.8%. 

128See subpart E of part 23 of the Commission’s 

regulations. Swap clearing requirements under part 

50 of the Commission’s regulations apply to a 

broader scope of market participants than the 

uncleared swap margin regulations. For example, 

under subpart E of part 23, a financial end-user that 

does not have ‘‘material swaps exposure’’ (as 

defined by regulation 23.151) is not required to post 

initial margin, but such an entity may be subject to 

the swap clearing requirement. 

129Commission regulation 39.13(g)(2)(ii)(C). 130Commission regulations 23.154(b)(2)(i) and 

23.159. See also Margin and Capital Requirements 

for Covered Swap Entities, 80 FR 77840 (Nov. 30, 

2015). 131See Antonio S. Mello and John E. Parsons, 

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

Center for Energy and Environmental Policy 

Research, May 2012, available at: http://

dspace.mit.edu/bitstream/handle/1721.1/70896/

2012-005.pdf?sequence=1. 

Moreover, uncleared swaps between 

certain SDs, MSPs, and ‘‘financial endusers,’’ will be subject to initial and 

variation margin requirements pursuant 

to the Commission’s margin regulations 

for uncleared swaps, as discussed 

further below.124 Second, the estimates 

listed in Table 18 are based on the 

assumption that none of the swaps, 

when entered into on an uncleared 

basis, are priced to include implicit 

contingent liabilities and counterparty 

risk borne by the counterparty to the 

swap. Third, not all swaps having the 

additional denominations or maturities 

proposed herein will necessarily be 

eligible for clearing if they are not 

otherwise covered by the clearing 

requirement (i.e., the specifications set 

forth in proposed revised regulation 

50.4(a)) or if the swaps have terms 

which prevent them from being cleared. 

Finally, certain entities may elect an 

exception or exemption from the 

clearing requirement, which would not 

require such an entity to clear the swaps 

covered by this proposal.125

The amounts of initial margin that the 

Commission estimates would be 

required to be posted due to this 

proposed rule (listed in Table 18) do not 

include the costs that some market 

participants may incur to obtain this 

collateral. Some entities may have to 

raise funds to acquire assets that a DCO 

accepts as initial margin. The greater the 

funding cost relative to the rate of return 

on the asset used as initial margin, the 

greater the cost of procuring this asset. 

Quantifying this cost with any precision 

is challenging because different entities 

may have different funding costs and 

may choose assets with different rates of 

return. One way to estimate the funding 

cost of procuring assets to be used as 

initial margin is to compare the rate of 

return, or yield, on an asset that is 

usually accepted by a DCO for initial 

margin with the cost of funding the 

asset with debt financing. Based on the 

Commission’s experience and 

understanding, the Commission has 

decided to estimate this cost using an 

average borrowing cost of 4.4% 126 and 

then subtracting the 1.8% return that a 

5-year U.S. Treasury bond yields.127

This calculation produces an estimated 

funding cost of 2.6%. By multiplying 

the total estimated initial margin 

amount of $7,601,693,801 (Table 18) by 

2.6%, the Commission estimates that 

the cost of funding the total initial 

margin that would be required to be 

posted due to this proposed rule is 

approximately $197,644,039. It also 

should be noted that some entities, such 

as pension funds and asset managers, 

may use as initial margin assets that 

they already own. In these cases, the 

market participants would not incur a 

funding cost in order to post initial 

margin. 

The Commission requests comments 

on all aspects of quantifying the cost of 

funding initial margin that would be 

required to be posted pursuant to this 

proposed rule. In particular, the 

Commission requests comment on 

funding costs that market participants 

may face due to interest rates on bonds 

issued by a sovereign nation that also 

issues the currency in which a swap 

subject to this proposed determination 

is denominated. The Commission 

recognizes that CME and LCH accept as 

initial margin bonds issued by several 

sovereigns and that market participants 

may post such bonds as initial margin 

if the Commission adopted this 

proposed rule. 

The Commission recognizes further 

that the new initial margin amounts that 

would be required to be posted as a 

result of this proposed clearing 

requirement will, for entities required to 

post initial margin under both the 

clearing requirement and the uncleared 

swap margin regulations, replace the 

initial margin amount that will be 

required pursuant to the uncleared swap 

margin regulations. The uncleared swap 

margin regulations require SDs, MSPs, 

and certain ‘‘financial end-users’’ to 

post and collect initial and variation 

margin for uncleared swaps, subject to 

various conditions and limitations.128

The Commission expects that the initial 

margin that would be required to be 

posted for a cleared swap subject to this 

proposed determination would typically 

be less than the initial margin that 

would be required to be posted for 

uncleared swaps pursuant to the 

uncleared swap margin regulations. 

Whereas the initial margin requirement 

for cleared swaps must be established 

according to a margin period of risk of 

at least five days,129 under the 

uncleared swap margin regulations, the 

minimum initial margin requirement is 

set with a margin period of risk of 10- 

days or, under certain circumstances, 

less or no initial margin for interaffiliate transactions.130 The uncleared 

swap margin regulations will be phased 

in between September 1, 2016 and 

September 1, 2020. 

With respect to swaps that would be 

subject to this proposed clearing 

requirement determination, but not 

subject to the uncleared swap margin 

regulations, the Commission believes 

that the new initial margin amounts that 

would be deposited would be a 

displacement of a cost that is currently 

embedded in the prices and fees for 

transacting the swaps on an uncleared 

and uncollateralized basis rather than a 

new cost. 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, SD, MSP, or other market 

participant. When a market participant 

faces the DCO, the DCO accounts for 

that counterparty credit risk by 

requiring collateral to be posted, and the 

cost of capital for the collateral is part 

of the cost that is necessary to maintain 

the swap position. When a market 

participant faces an SD or other 

counterparty in an uncleared swap, 

however, the uncleared swap contains 

an implicit line of credit upon which 

the market participant effectively draws 

when its swap position is out of the 

money. Counterparties charge for this 

implicit line of credit in the spread they 

offer on uncollateralized, uncleared 

swaps. It has been argued 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.131

And because the counterparty credit 

risk created by the implicit line of credit 


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132See id., Mello and Parsons state in their paper: 

‘‘[h]edging 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.’’ Id. at 12. They go on to 

demonstrate that, ‘‘[t]o a first approximation, the 

cost charged for the non-margined swap must be 

equal to the cost of funding the margin account. 

This follows from the fact that the non-margined 

swap just includes funding of the margin account 

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

16. 

133See section I.B. discussing clearing 

requirements in non-U.S. jurisdictions. 

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.132 This 

means that the cost of capital for 

additional collateral posted as a 

consequence of requiring 

uncollateralized swaps to be cleared 

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. 

In addition, the proposed rule may 

result in added operational costs. With 

uncleared swaps, counterparties may 

agree not to collect variation margin 

until certain thresholds of exposure are 

reached, thus reducing or entirely 

eliminating the need to exchange 

variation margin as exposure changes. 

DCOs, on the other hand, collect and 

pay variation margin on a daily basis 

and sometimes more frequently. As a 

consequence, increased required 

clearing may increase certain 

operational costs associated with 

exchanging variation margin with the 

DCO (although the exchange of variation 

margin may be expected to provide the 

benefit of lowering the build-up of 

current exposure). On the other hand, 

increased clearing also could lead to 

reduced operational costs related to 

valuation disputes about posted 

collateral, as parties to cleared swaps 

agree to post collateral that is less 

susceptible to valuation disputes. 

The proposed rule also may result in 

additional costs for clearing members in 

the form of guaranty fund contributions. 

However, it also could decrease 

guaranty fund contributions for certain 

clearing members. Once the proposed 

clearing requirement takes effect, market 

participants that currently transact 

swaps bilaterally must either become 

clearing members of a DCO or submit 

such swaps for clearing through an 

existing clearing member. A market 

participant that becomes a direct 

clearing member must make a guaranty 

fund contribution, while a market 

participant that clears its swaps through 

a clearing member may pay higher fees 

if the clearing member passes the costs 

of the guaranty fund contribution to its 

customers. While the addition of new 

clearing members and new customers 

for existing clearing members may result 

in an increase in 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. 

Request for Comment 

The Commission invites further 

comment regarding the total amount of 

additional collateral that would be 

posted due to required clearing of the 

interest rate swaps covered by this 

proposed clearing requirement 

determination. Furthermore, the 

Commission invites comment regarding 

the cost of capital and returns on capital 

for that collateral. The Commission also 

invites comment on the effects of 

required clearing on the capital 

requirements for financial institutions. 

Finally, the Commission invites 

comment regarding the costs and 

benefits associated with operational 

differences related to the 

collateralization of uncleared versus 

cleared swaps. Please supply 

quantifiable data and analysis regarding 

these subjects, if possible. 

d. Benefits of Clearing 

As noted above, the benefits of swap 

clearing are generally significant. The 

Commission believes that while the 

requirement to margin uncleared swaps 

in certain circumstances will also 

mitigate counterparty credit risk, such 

risk is mitigated further for swaps that 

are cleared through a central 

counterparty. Moreover, as discussed 

above, the proposed clearing 

determination would apply to a larger 

set of market participants than the 

uncleared swaps margin requirements. 

Thus, to the extent that the proposed 

clearing requirement for additional 

interest rate swaps leads to increased 

clearing, these benefits are likely to 

result. As is the case for the costs noted 

above, it is impossible to predict the 

precise extent to which the use of 

clearing will increase as a result of the 

proposed rule, and therefore the benefits 

of the proposed rule cannot be precisely 

quantified. However, the Commission 

believes that the benefits of increased 

clearing resulting from the proposed 

rule will be substantial, because the 

additional swaps required to be cleared 

by the proposed rule have significant 

volumes within the overall interest rate 

swap market. 

The proposed rule’s requirement that 

certain swaps 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. As discussed 

above, DCOs are some of the most 

creditworthy counterparties in the swap 

market because of the risk management 

tools they have available. 

Request for Comment 

The Commission requests comment 

on whether benefits will result from the 

proposed rule, and, if so, the expected 

magnitude of such benefits. 

Also, would the proposed rule 

provide benefits by furthering 

international harmonization of clearing 

requirements? As noted above, if a nonU.S. jurisdiction were to proceed with a 

swap clearing requirement 

determination for an interest rate swap 

denominated in a particular currency, 

and the Commission’s clearing 

requirement did not cover that swap, 

the market participants might be able to 

avoid the non-U.S. jurisdiction’s 

requirement by entering into the swap 

in the U.S.133

D. Costs and Benefits of the Proposed 

Rule as Compared to Alternatives 

The proposed rule is a function of 

both the market importance of these 

products and the fact that they already 

are widely cleared. The Commission 

believes these interest rate swaps are 

appropriate to require to be cleared 

because they are widely used and 

already have a blueprint for clearing and 

risk management. 

Given the implementation of the 

Commission’s First Clearing 

Requirement Determination for interest 

rate swaps, and the widespread use of 

clearing for the additional products 

included in this proposal, DCOs, FCMs, 

and market participants already have 

experience clearing the types of swaps 

proposed for required clearing. The 

Commission therefore expects that 

DCOs and FCMs are prepared to handle 

the increases in volumes and 

outstanding notional amounts in these 

swaps that are likely to result from the 

proposed rule. Because of the wide use 

of these swaps and their importance to 

the market, and because these swaps are 

already successfully being cleared, the 

Commission is proposing to subject 


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certain additional interest rate swaps to 

the clearing requirement. 

The Commission is considering two 

alternative implementation scenarios. 

First, the Commission is considering a 

scenario under which the clearing 

requirement for all products subject to 

this proposal would take effect at the 

same time, regardless of whether an 

analogous clearing requirement has 

been promulgated by an authority of a 

non-U.S. jurisdiction. Implementing the 

clearing requirement for all products 

subject to this proposal on a single date 

would give market participants certainty 

and make it easier for industry members 

to update relevant policies and 

procedures at one time. 

Second, the Commission is 

considering a scenario under which 

compliance with the clearing 

requirement will be required upon the 

earlier of (i) the date 60 days after the 

effective date of an analogous clearing 

requirement that has been adopted by a 

regulator in a non-U.S. jurisdiction, 

provided that any such date for any 

swap covered by the final rule shall not 

be earlier than the date which is 60 days 

after the Commission’s final rule is 

published, or (ii) the date two years after 

the Commission’s final rule is published 

in the Federal Register. This scenario 

would allow the Commission to 

coordinate compliance dates with the 

effective dates set by non-U.S. 

jurisdictions in order to promote 

international harmonization of clearing 

requirements while maintaining 

certainty that compliance with all 

proposed clearing requirements will be 

required within a specific time period 

(i.e., all products subject to this proposal 

will be subject to a clearing requirement 

no later than two years after the final 

rule is published). 

Request for Comment 

The Commission requests comment 

on the costs and benefits of adding nine 

currencies to the fixed-to-floating 

interest rate swap class, adding AUDdenominated basis swaps to the basis 

swap class, adding AUD-, NOK-, PLN-, 

SEK-denominated FRA swaps to the 

FRA class, extending the termination 

date range for the USD, GBP, and EUR– 

OIS covered by the OIS class, and 

adding AUD- and CAD-denominated 

OIS to the OIS class. In addition, the 

Commission requests comment 

regarding the costs and benefits of the 

two alternative proposals for the 

finalization and implementation of the 

clearing requirements. The Commission 

requests that, if possible, commenters 

quantify costs and benefits that may 

result either from the approach 

proposed by the Commission or from 

alternatives that commenters believe the 

Commission should consider. 

E. Section 15(a) Factors 

As noted above, the requirement to 

clear the fixed-to-floating interest rate 

swaps, basis swaps, FRAs, and OIS 

covered by this proposed rule is 

expected to result in increased use of 

clearing, although it is impossible to 

quantify with certainty the extent of that 

increase. Thus, this section discusses 

the expected results from an overall 

increase in the use of swap clearing in 

terms of the factors set forth in section 

15(a) of the CEA. 

i. Protection of Market Participants and 

the Public 

As described above, required clearing 

of the interest rate swaps identified in 

this proposed rule is expected to most 

likely reduce counterparty risk for 

market participants that 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 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. 

By proposing to require clearing of 

certain interest rate swaps, all of which 

are already available for clearing, the 

Commission expects to encourage a 

smooth transition 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 currently clearing these interest 

rate swaps, CME, Eurex, LCH, and SGX 

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 the covered 

interest rate swaps. The experience of 

FCMs with these products also is likely 

to benefit customers that are new to 

clearing, as the FCM guides them 

through initial experiences with cleared 

swaps. 

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. 

Potential future exposures can grow 

significantly and even beyond the 

amount of initial margin posted during 

that time, leaving one of the two 

counterparties exposed to counterparty 

credit risk. DCOs virtually eliminate 

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 who transact in 

swaps that are required to be cleared. 

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 likely will be 

required to pay monthly or annual fees 

that FCMs charge to maintain both the 

relationship and outstanding swap 

positions belonging to the customer. In 

addition, the FCM is likely to pass along 

fees charged by the DCO for establishing 

and maintaining open positions. 

It is expected that most market 

participants already will have had 

experience complying with prior 

clearing requirements and that the 

incremental burdens associated with 

clearing these additional products 

should be minimal, especially given the 

similarities that these products have to 

those already included within the prior 

clearing determination and the fact that 

they are already widely cleared 

products. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Swap Markets 

Swap clearing, in general, is expected 

to reduce uncertainty regarding 

counterparty 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 by exiting 

positions effectively and efficiently 

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 cleared through a smaller number 

of clearinghouses, clearing facilitates 

increased netting. This reduces the 

amount of collateral that that a party 

must post in margin accounts. 

As discussed above, in setting forth 

this proposed clearing requirement 

determination, the Commission took 

into account a number of specific factors 

that relate to the financial integrity of 

the swap markets. Specifically, the 

discussion above includes an 

assessment of whether CME, Eurex, 

LCH, and SGX, each of which currently 

clear interest rate swaps, have the rule 

framework, capacity, operational 


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134See section II.B.iii.b and section II.B.ii i.e. 

135For example, there is a small risk of a sudden 

price move so large that a counterparty would be 

unable to post sufficient variation margin to cover 

the loss, which may exceed the amount of initial 

margin posted, and could be forced into default. 

136As discussed in sections II.A and V.B., sound 

risk management practices are critical for all DCOs, 

especially those offering clearing for interest rate 

swaps. In section II.B.ii, the Commission 

considered whether each § 39.5(b) 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 section II.B.iii for a discussion of the effect on 

the mitigation of systemic risk in the interest rate 

swap market, as well as the protection of market 

participants during insolvency events at either the 

clearing member or DCO level. 

137See Dietrich Domanski, Leonardo Gambacorta, 

and Cristina Picillo, ‘‘Central clearing: Trends and 

current issues,’’ BIS Quarterly Review, Dec. 2015, 

available at: http://www.bis.org/publ/qtrpdf/rl

qt1512g.pdf. and 2015 Financial Stability Report 

published by the Office of Financial Research of the 

U.S. Department of the Treasury, available at: 

http://financialresearch.gov/financial-stabilityreports/files/OFRl2015-Financial-StabilityReportl12-15-2015.pdf. 

138The G20 Leaders Statement made in 

Pittsburgh is available at: http://www.g20.utoronto.

ca/2009/2009communique0925.html. 

139 5 U.S.C. 601 et seq. 

140 66 FR 20740, 20743 (Apr. 25, 2001). 

expertise and resources, and credit 

support infrastructure to clear these 

swaps on terms that are consistent with 

the material terms and trading 

conventions on which the contract is 

then traded. This proposed clearing 

requirement determination also 

considered the resources of DCOs to 

handle additional clearing during 

stressed and non-stressed market 

conditions, as well as the existence of 

reasonable legal certainty in the event of 

a clearing member or DCO 

insolvency.134

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 certain types of swaps 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 proposing a clearing requirement 

for interest rate swaps, the Commission 

must consider the effect on competition, 

including appropriate fees and charges 

applied to clearing. As discussed in 

more detail in section II.B.iii.d, 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 an 

anticompetitive manner, and some of 

the outcomes would be positive, such as 

if the clearing requirement facilitated a 

stronger entry opportunity for 

competitors. 

iii. Price Discovery 

Clearing, in general, encourages 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. 

As discussed in section II.B.iii.a 

above, CME, Eurex, LCH, and SGX 

obtain adequate pricing data for the 

interest rate swaps that they clear. Each 

of these DCOs 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 uncleared and 

uncollateralized swaps to hedge certain 

positions and then the counterparty to 

those swaps defaults unexpectedly, the 

firm could be left with large outstanding 

exposures. Even for uncleared swaps 

that are subject to the Commission’s 

uncleared swap margin regulations, 

some counterparty credit risk 

remains.135 As stated above, when a 

swap is cleared the DCO becomes the 

counterparty facing each of the two 

original participants in the swap. This 

standardizes and reduces counterparty 

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. 

In addition, required clearing reduces 

the complexity of unwinding or 

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 anticipates that they are 

much more likely to function in a 

manner that enables rapid transfer of 

defaulted positions than legal processes 

that would surround the enforcement of 

bilateral contracts for uncleared 

swaps.136

Central clearing has evolved since the 

2009 G20 Pittsburgh Summit, when G20 

leaders committed to central clearing of 

all standardized swaps. The percentage 

of the swap market that is centrally 

cleared has increased significantly, 

clearinghouses have expanded their 

offerings, and the range of banks and 

other financial institutions that submit 

swaps to clearinghouses has broadened. 

At the same time, the numbers of swap 

clearinghouses and swap clearing 

members has remained highly 

concentrated. This has created concerns 

about a concentration of credit and 

liquidity risk at clearinghouses that 

could have systemic implications.137

However, the Commission believes that 

DCOs are capable of risk managing the 

swaps that are the subject of this 

proposed determination. Moreover, 

because only a very small percentage of 

the swap market would be affected by 

this proposed clearing requirement 

determination and because significant 

percentages of the swaps covered by this 

proposed determination are already 

cleared voluntarily, this proposed 

determination would only marginally 

increase the extent to which credit risk 

and liquidity risk is concentrated at 

DCOs. The Commission requests 

comments on this issue. 

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.138 The Commission 

believes that this clearing requirement 

would represent another step toward the 

fulfillment of the G20’s commitment. 

VI. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires agencies to consider whether 

the rules they propose will have a 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.139 The proposed clearing 

requirement determination contained in 

this proposed rulemaking will not affect 

any small entities, as the RFA uses that 

term. Pursuant to section 2(e) of the 

CEA, only eligible contract participants 

(ECPs) may enter into swaps, unless the 

swap is listed on a DCM. The 

Commission has previously determined 

that ECPs are not small entities for 

purposes of the RFA.140 The proposed 

clearing requirement determination 

would only affect ECPs because all 


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141 44 U.S.C. 3507(d). 

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 

determination. Therefore, the Chairman, 

on behalf of the Commission, hereby 

certifies pursuant to 5 U.S.C. 605(b) that 

this proposed rulemaking will not have 

a significant economic impact on a 

substantial number of small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(PRA) 141 imposes certain requirements 

on federal agencies, including the 

Commission, in connection with 

conducting or sponsoring any collection 

of information as defined by the PRA. 

This rulemaking will not require a new 

collection of information from any 

persons or entities. 

List of Subjects in 17 CFR Part 50 

Business and industry, Clearing, 

Swaps. 

For the reasons set forth in the 

preamble, the Commodity Futures 

Trading Commission proposes to amend 

17 CFR part 50 as follows: 

PART 50—CLEARING REQUIREMENT 

AND RELATED RULES 

■ 1. The authority citation for part 50 

continues to read as follows: 

Authority: 7 U.S.C. 2(h) and 7a–1 as 

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

■ 2. Revise § 50.4(a) to read as follows: 

§ 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 ................................. Australian Dollar (AUD).Canadian Dollar 

(CAD).

Euro (EUR) ...... Hong Kong Dollar (HKD).Mexican Peso 

(MXN).

Norwegian 

Krone (NOK). 

2. Floating Rate Indexes ............ BBSW .............. CDOR .............. EURIBOR ........ HIBOR ............. TIIE .................. NIBOR. 

3. Stated Termination Date 

Range.

28 days to 30 

years.

28 days to 30 

years.

28 days to 50 

years.

28 days to 10 

years.

28 days to 21 

years.

28 days to 10 

years. 

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

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

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

Specification Fixed-to-Floating Swap Class 

1. Currency .......................... Polish Zloty 

(PLN).

Singapore 

Dollar 

(SGD).

Swedish 

Krona 

(SEK).

Swiss Franc 

(CHF).

Sterling 

(GBP).

U.S. Dollar 

(USD).

Yen (JPY). 

2. Floating Rate Indexes ..... WIBOR ......... SOR–VWAP STIBOR ........ LIBOR ........... LIBOR ........... LIBOR ........... LIBOR. 

3. Stated Termination Date 

Range.

28 days to 10 

years.

28 days to 10 

years.

28 days to 15 

years.

28 days to 30 

years.

28 days to 50 

years.

28 days to 50 

years.

28 days to 30 

years. 

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

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

6. Conditional Notional 

Amounts.

No ................. No ................. No ................. No ................. No ................. No ................. No. 

Specification Basic Swap Class 

1. Currency ......................................... Australian Dollar 

(AUD).

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

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

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

years.

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 ........................ No. 

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

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

Specification Forward Rate Agreement Class 

1. Currency ......................................................................................... Australian Dollar 

(AUD).

Euro (EUR) ....... Polish Zloty 

(PLN).

Norwegian 

Krone (NOK). 

2. Floating Rate Indexes ..................................................................... BBSW ............... EURIBOR ......... WIBOR .............. NIBOR. 

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

years.

3 days to 3 

years.

3 days to 2 

years.

3 days to 2 

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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39536 Federal Register / Vol. 81, No. 116 / Thursday, June 16, 2016 / Proposed Rules 

Specification Forward Rate Agreement Class 

1. Currency ......................................................................................... Swedish Krona 

(SEK).

Sterling (GBP) .. U.S. Dollar 

(USD).

Yen (JPY). 

2. Floating Rate Indexes ..................................................................... STIBOR ............ LIBOR ............... LIBOR ............... LIBOR. 

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

years.

3 days to 3 

years.

3 days to 3 

years.

3 days to 3 

years. 

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

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

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

Specification Overnight Index Swap Class 

1. Currency ........................................................................... Australian Dollar (AUD).Canadian Dollar (CAD).Euro (EUR) .... Sterling (GBP) U.S. Dollar 

(USD). 

2. Floating Rate Indexes ...................................................... AONIA–OIS ... CORRA–OIS EONIA ........... SONIA ........... FedFunds. 

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

years.

7 days to 2 

years.

7 days to 3 

years.

7 days to 3 

years.

7 days to 3 

years. 

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

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

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

* * * * * Issued in Washington, DC, on June 9, 2016, 

by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Note: The following appendix will not 

appear in the Code of Federal Regulations. 

Appendix to Clearing Requirement 

Determination Under Section 2(h) of the 

CEA for Interest Rate Swaps— 

Commission Voting Summary 

On this matter, Chairman Massad and 

Commissioners Bowen and Giancarlo voted 

in the affirmative. No Commissioner voted in 

the negative. 

[FR Doc. 2016–14035 Filed 6–15–16; 8:45 am] 

BILLING CODE 6351–01–P 


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