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Still Lacking a Horse, the CFTC Proposes a Timetable for Constructing the Cart

September 9, 2011

Photo by Slippy Slappy. Some rights reserved.

On September 8th, the CFTC voted to propose for comment two timetables for phasing in compliance with new rules—which have yet to be adopted—for the clearing and trading of swaps, and the documentation and margin requirements to accompany swaps.

A note on the horse

A horse is a horse, of course, except here, where it’s a metaphor for the rules needed to drive the CFTC’s swaps regulations. In his remarks preceding the CFTC Commissioners’ vote, Chairman Gary Gensler outlined when the agency will address the various rules it must adopt to implement the Dodd-Frank Act’s requirements concerning swaps.

By the end of the year, the CFTC will consider rules related to clearinghouse core principles and position limits; entity and product definitions; swap data recordkeeping and reporting; real-time reporting; and regulations for trading platforms. In 2012, the CFTC will address swap execution facilities; capital and margin requirements; documentation; processing; client clearing; and segregation for uncleared swaps.

Constructing the cart—clearing and trade execution timetable

The first proposed timetable establishes schedules to phase in compliance with the clearing and trade execution requirement provisions in the Dodd-Frank Act, once the implementing rules are adopted. The timetable is divided into three parts.

Category 1 Entities include swap dealers, security-based swap dealers, major swap participants, major security-based swap participants, or active funds.  The CFTC proposes to phase in compliance with the mandatory clearing requirement for any swap transaction between a Category 1 Entity or any other entity that desires to clear the transaction, within the first 90 days after the Commission issues any clearing requirement.

Category 2 Entities include commodity pools; private funds as defined in Section 202(a) of the Investment Advisors Act of 1940 other than active funds; employee benefit plans identified in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974; or persons predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature as defined in Section 4(k) of the Bank Holding Company Act of 1956, provided that the entity is not a third-party subaccount.  The CFTC proposes to phase in compliance for swap transactions between a Category 2 Entity and Category 1 Entity, another Category 2 Entity, or any other entity that desires to clear the transaction, within 180 days after the Commission issues any clearing requirement.

Category 3 Entities are all other swap transactions including those involving third-party subaccounts and those not excepted from the mandatory clearing requirement. The CFTC proposes to phase in compliance for them, within 270 days after the Commission issues a clearing requirement.

For all Entities, the Commission proposes to require compliance with the trade execution requirement at the same time as the clearing requirement or 30 days after the swap is made available for trading, whichever is later.

Trading documentation and margining requirements

The proposed timetable would require market participants to comply with swap trading relationship documentation requirements and margin requirements for uncleared swaps in accordance with the following schedule. A swap dealer or major swap participant would be required to comply with documentation requirements within 90 days if the counterparty is a Category 1 Entity, 180 days for most Category 2 Entity counterparties, or 270 days for all other counterparties.

View the CFTC’s webpage concerning its September 8th actions here.

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