The CFTC voted unanimously to require the clearance of certain interest rate swaps ("IRS") that are denominated in specific major currencies or have particular termination dates.

The mandatory clearing determination applies to swaps denominated in particular currencies in each of the four interest rate swap classes described in CFTC regulation 50.4(a). The final expanded interest rate swap classes include the following:

  • fixed-to-floating interest rate swaps denominated in Australian dollars ("AUD"), Canadian dollars ("CAD"), Hong Kong dollars ("HKD"), Mexican pesos ("MXN"), Norwegian kroner ("NOK"), Polish złoty ("PLN"), Singapore dollars ("SGD"), Swedish kronor ("SEK") and Swiss francs ("CHF");
  • basis swaps denominated in AUD;
  • forward rate agreements ("FRAs") denominated in NOK, PLN and SEK; and
  • overnight index swaps ("OIS") denominated in AUD and CAD, as well as U.S. dollar-, euro- and sterling-denominated OIS with termination dates of up to three years.

The CFTC emphasized that clearance requirements for AUD-denominated FRAs have been removed from the final amendments based on comments received from the Notice of Proposed Rulemaking.

The determination applies to swaps that have been cleared by the following four registered derivatives clearing organizations ("DCOs"): (i) Chicago Mercantile Exchange Inc., (ii) Eurex Clearing AG, (iii) LCH.Clearnet Ltd., and (iv) Singapore Exchange Derivatives Clearing Ltd. In addition, four other DCOs have been exempted from CFTC registration and are eligible to clear interest rate swaps subject to the expanded clearing requirement. These DCOs are as follows: (i) ASX Clear (Futures) Pty Ltd., (ii) Japan Securities Clearing Corp., (iii) Korea Exchange Inc., and (iv) OTC Clearing Hong Kong Ltd.

The final rule specifies that compliance with this determination will not be phased in but will take effect coincidently with analogous clearing requirements in non-U.S. jurisdictions, subject to a two-year limitation on the phase-in schedule.

In his supporting statement concerning the determination, CFTC Chair Timothy Massad asserted that central clearing "does not eliminate the risk of transactions," but added that "[r]equiring clearing for these swaps will further reduce risk within our financial system."

Commentary / Steven Lofchie

Regulators exaggerate the benefits of central clearing despite the following pressing consideration: since short-term interest rate swaps in major currencies are fairly liquid, it is unlikely that central clearing greatly reduces systemic risk. The financial crisis was not caused by interest rate swaps in major currencies. If the mandatory clearing of these swaps offers any benefit whatsoever, it might be the facilitation of trading in the ordinary course, since clearing allows a customer to enter into a swap with Dealer A and close it out in a swap with Dealer B. Ironically, regulators seem disinclined to boast that central clearing facilitates swap trading. Ultimately, even that advantage might not prove to be real, since the expansion of mandatory central clearing coincides with a decline in the number of futures commission merchants that are willing to clear trades, which also results in a greater centralization of risk.

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