The CFTC proposed amendments to CFTC Rule 50.4(a) that would require certain interest rate swaps to be subject to mandatory clearing. The scope of this proposal would make the CFTC's clearing requirement consistent with those that were proposed and finalized in 2015 and 2016 by the CFTC's counterparts in Australia, Canada, the European Union, Hong Kong, Mexico and Singapore.

The proposal would amend CFTC Rule 50.4(a) in the following ways:

  • adding fixed-to-floating interest rate swaps denominated in the nine additional currencies;
  • adding Australian dollar ("AUD") denominated basis swaps;
  • adding AUD-, Norwegian krone-, Polish zloty-, and Swedish krona-denominated forward rate agreements;
  • changing the maximum stated termination date for USD-, British pound- and EUR-denominated overnight index swaps ("OIS") from two to three years; and
  • adding AUD- and Canadian dollar-denominated OIS.

The proposal is the second Clearing Requirement Determination by the CFTC. The first, which occurred in 2012, required the clearing of four classes of interest rate swaps and two classes of credit default swaps ("CDS") that met certain specifications. See Clearing Requirement Determination under Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 2012). The CFTC noted at the time that in the future, it expected to publish a clearing requirement determination for interest rate swaps denominated in additional currencies. Today's proposed clearing determination would amend the First Clearing Requirement Determination to add fixed-to-floating interest rate swaps denominated in nine additional currencies, as well as certain non-U.S. denominated forward rate agreements. The proposed amendment also includes two implementation schedules, one of which would tie the implementation of the CFTC clearing determination to that of an analogous clearing requirement in a non-U.S. jurisdiction.

Commentary

Even though the CFTC alludes briefly to concerns raised by the "highly concentrated" number of swap clearinghouses and swap clearing members, and notes that such concentration "could have systemic implications," it dismisses those concerns with the reassurance that the "Commission believes that [derivatives clearing organizations] are capable of risk managing the swaps that are the subject of this proposed determination." In the eyes of the CFTC, it also may be worth the risk implicitly in light of the "benefits of swap clearing," which the agency characterizes as being "generally significant." By contrast, the CFTC appears not to favor bilateral, uncleared swaps because, in the agency's words, they can "create counterparty risk that may lead market participants to discriminate among potential counterparties based on their creditworthiness." Still, if bilateral markets and central counterparties "are just different ways of sharing that risk," as economist Craig Pirrong observes, then it seems unapparent that requiring clearing will reduce counterparty risk or solve the problem of systemic risk. (Craig Pirrong, "The Clearinghouse Cure,"Regulation (Winter 2008-2009), p. 49.

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