The FSOC Designates Eight Systematically Important Financial Market Utilities
On Wednesday, July 18, 2012, the Financial Stability Oversight Council (the "FSOC") voted unanimously to designate eight financial market utilities ("FMUs") as systemically important under Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). This action is the first such designation made by the FSOC. The Dodd-Frank Act provides four specific factors the FSOC must consider when determining whether an FMU is, or is likely to become, systemically important: (1) the aggregate monetary value of transactions processed by the FMU; (2) the aggregate exposure of the FMU to its counterparties; (3) the relationship, interdependencies, or other interactions of the FMU with other FMUs or payment, clearing, or settlement activities; and (4) the effect that the failure of or a disruption to the FMU would have on critical markets, financial institutions, or the broader financial system.
The designated FMUs are:
- The Clearing House Payments Company, L.L.C., on the basis of its role as operator of the Clearing House Interbank Payments System
- CLS Bank International
- Chicago Mercantile Exchange, Inc.
- The Depository Trust Company
- Fixed Income Clearing Corporation
- ICE Clear Credit LLC
- National Securities Clearing Corporation
- The Options Clearing Corporation
The CFTC Proposes Clearing Determination for Certain Credit Default Swaps and Interest Rate Swaps
On Tuesday, July 24, 2012, the Commodity Futures Trading Commission (the "CFTC") proposed new rules to require certain credit default swaps and interest rate swaps to be cleared by registered derivatives clearing organizations ("DCOs") pursuant to Section 2(h)(1)(A) of the Commodity Exchange Act (the "CEA") as amended by Section 723 of the Dodd-Frank Act. The proposed rule is the first clearing determination by the CFTC under the Dodd-Frank Act. Under the proposed rules, market participants would be required to submit a swap that is identified in the rule for clearing by a DCO as soon as technologically practicable and no later than the end of the day of execution.
Section 723 of the Dodd-Frank Act amends the CEA to prevent market participants from engaging in a swap that is required to be cleared unless that person submits the swap for clearing to a DCO. The Dodd-Frank Act also requires the CFTC to determine whether a swap is required to be cleared by either a CFTC-initiated review or a submission from a DCO for the review of a swap, or group, category, type, or class of swap. The proposed rule does not apply to those who are eligible to elect an exception from clearing, such as non-financial entities hedging commercial risk.
The CFTC Adopts Phased Clearing Compliance Rule
On Tuesday, July 24, 2012, the CFTC approved final regulations that establish a schedule to phase in compliance with new clearing requirement under Section 2(h)(1)(A) of the CEA enacted by Section 723 of the Dodd-Frank Act. The final rule will phase in the clearing requirement based on the type of market participant entering into swaps subject to the clearing requirement. The compliance schedule does not prohibit any type of market participant from voluntarily complying with the clearing requirement sooner than the compliance deadline. Moreover, the compliance schedule will be used at the CFTC's discretion when it believes that phasing is appropriate and needed by market participants.
The triggering event for the compliance schedule will be the CFTC's issuance of a final clearing requirement determination. As discussed above, the CFTC on the same day issued its first proposed clearing determination rules for credit default swaps and interest rate swaps.
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