OTC Interest Rate Swaps Mandatory Clearing Summarized. Susan Milligan, Head of US Public Affairs December 7, 2012

Transcription

1 OTC Interest Rate Swaps Mandatory Clearing Summarized Susan Milligan, Head of US Public Affairs December 7, 2012

2 Introduction/Table of Contents This document summarizes the mandatory clearing determination as put forth in the 212-page document released by the CFTC on November 29, It outlines which products will have to be cleared, the timeline for the commencement of their clearing, and which products are currently not covered under the mandatory clearing determination. For further information, please contact LCH.Clearnet s SwapClear team; we are happy to assist you with your OTC IRS clearing questions or needs. Disclaimer The contents of this document have been provided to you for informational purposes only and are intended as a broad overview of the CFTC s mandatory clearing determination. This document does not, and does not purport to, contain a detailed description of the CFTC s mandatory clearing determination and has not been prepared for any specific person. Accordingly, you may not rely upon the contents of this document and should seek your own independent legal and investment advice. Nothing in this document should be considered as legal or investment advice or as a recommendation with respect to any applicable securities or other financial instruments. Nothing in this document should be taken as a public offer to sell or to buy any applicable securities or financial instruments. Copyright 2012 LCH.Clearnet Limited. All rights reserved. No part of this document may be copied, whether by photographic or any other means, without the prior written consent of LCH.Clearnet Limited. SwapClear is a registered trademark of LCH.Clearnet Limited. Table of Contents OTC IRS Classes Subject to Mandatory Clearing 3 Mandatory Clearing Timeline 4 Exclusions/Issues 5 Definitions/Notes 7 Products Cleared by SwapClear 8 2

3 OTC IRS Classes Subject to Mandatory Clearing The following are included in the CFTC mandatory clearing determination. Note: All of these products are cleared by SwapClear today. Fixed-to-Floating Swap Class (includes Variable Notional Swaps Roller Coaster and Amortizing Swaps) Cleared on SwapClear Currency U.S. Dollar (USD) Euro (EUR) Sterling (GBP) Yen (JPY) Floating Rate Indexes LIBOR EURIBOR LIBOR LIBOR Stated Termination Date Range 30 years Basis Swap Class Cleared on SwapClear Currency U.S. Dollar (USD) Euro (EUR) Sterling (GBP) Yen (JPY) Floating Rate Indexes LIBOR EURIBOR LIBOR LIBOR Stated Termination Date Range 30 years Forward Rate Agreement Class Cleared on SwapClear Currency U.S. Dollar (USD) Euro (EUR) Sterling (GBP) Yen (JPY) Floating Rate Indexes LIBOR EURIBOR LIBOR LIBOR Stated Termination Date Range 3 days to 3 years 3 days to 3 years 3 days to 3 years 3 days to 3 years Overnight Index Swap Class Cleared on SwapClear Currency U.S. Dollar (USD) Euro (EUR) Sterling (GBP) Floating Rate Indexes FedFunds EONIA SONIA Stated Termination Date Range 7 days to 2 years 7 days to 2 years 7 days to 2 years 3

4 Mandatory Clearing Timeline Category 1 Entities: Monday, March 11, 2013 Category 1 Entities (swap dealers, major swap participants, and active funds). Mandatory clearing will commence on Monday, March 11, 2013, for swaps entered into on or after that date. Category 2 Entities: Monday, June 10, 2013 Category 2 Entities (includes commodity pools, hedge funds, and nonswap dealer banks so long as the entity is not a third-party subaccount). Mandatory clearing will commence on Monday, June 10, 2013, for swaps entered into on or after that date. Category 3 Entities: Monday, September 9, 2013 Category 3 Entities (all other entities required to clear including ERISA plans). Mandatory clearing will commence on Monday, September 9, 2013, for swaps entered into on or after that date. 4

5 Exclusions/Issues Swaps with any of the following contract specifications are currently not covered under the mandatory clearing determination. Fixed-to-Floating Swaps Basis Swaps Forward Rate Agreements Overnight Index Swaps Excluded from clearing if having these specifications: Optionality Dual Currencies Conditional Notional Amounts Conditional Notional Amounts Swaps containing conditional notional amounts do not have to be cleared. The Commission states that the term conditional notional amount means 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. Swaptions and Extendable Swaps The clearing requirement does not apply to swaps created after the commencement of mandatory clearing by the exercise or expiry of swaptions entered prior to the commencement of mandatory clearing. The Commission states that the clearing requirement only applies to swaps resulting from the exercise of a swaption or extendible swap extension if the clearing requirement would have been applicable to the underlying swap or the extended swap at the time the counterparties executed the swaption or extendible swap. DCO Rejected Swaps If counterparties submit their swap to a DCO for clearing and the swap fails to clear because it contains a term or terms that prevent any eligible DCO from clearing the swap, the Commission states that the swap is not subject to the Commission s clearing requirement. On the other hand, if the swap fails to (continues) 5

6 Exclusions/Issues (continued) clear because one or both of the counterparties have not met the DCO s or their clearing members credit requirements, the Commission states that such swap remains subject to the clearing requirement and must be cleared as soon as technologically practicable after the counterparties learn of the credit issue. The Commission also confirms that a party is in compliance with clearing requirement and is not in violation of rule against evasion of the clearing requirement if a party submits a swap for clearing in good faith and the party has a reasonable expectation of clearing. Documentation In response to comment letters raising concerns about the length of time that it takes to complete documentation related to mandatory clearing, the Commission notes that any market participant may petition for exemptive or no-action relief if that entity is unable to find an FCM to clear its swaps or if it needs additional time to complete requisite documentation. Implementation Phasing Swaps executed prior to the specific compliance dates are not subject to mandatory clearing. Note that the change in ownership of a swap that existed prior to the compliance date is subject to mandatory clearing to the same extent as a newly executed swap. The Commission states that changes in the ownership of a swap include assignment, novation, exchange, transfer, or conveyance of the swap. 6

7 Definitions/Notes A third-party subaccount is an account managed by an investment manager that is (1) independent of the account s beneficial owner or sponsor and (2) responsible for the documentation necessary for the account s beneficial owner to clear swaps. An active fund is a private fund under the Investment Advisers Act that is not a third-party subaccount and that executes 200 or more swaps per month based on a monthly average over the 12 months preceding a CFTC mandatory clearing determination. Note the commission clarifies that the calculation on monthly activity should be based on the number of swaps entered into as a monthly average over the past 12 months preceding November 1, Foreign exchange swaps do not have to be included in this calculation. Note that the Commission moved the rules for electing the end-user exception from clearing by non-financial entities to so that market participants are able to locate all rules related to the clearing requirement in one part of the Code of Federal Regulations. The Commission noted that the portion of the definition of day of execution applicable to swaps executed after 4 PM is intended to give market participants flexibility and to respond to concerns about counterparties in different time zones. In addition, this definition should not be interpreted as a prohibition on late-day submission of swaps to DCOs or as impeding DCOs ability to accept such swaps. Upcoming information: The Commission pledges to consider all other types of swaps submitted for a mandatory clearing determination as soon as possible after this determination is published. At this point, the Commission is only focusing on mandatory clearing for swaps that are already cleared. However, the Commission notes that swap clearing is likely to evolve and clearing requirement determinations made in the future may not be based on the extent to which swaps are already being cleared. The Commission noted that it expects to initiate a clearing determination for interest rate swaps in the 13 currencies, all of which are cleared by LCH.Clearnet, and not covered by the initial determination, at some time in

8 Products Cleared by SwapClear For more information please US: UK: 8