Canada: The June 10, 2013 Clearing Requirement Remains In Effect

Last Updated: June 17 2013
Article by Gordon F. Peery

Most Read Contributor in Canada, September 2016

Barring last-minute relief by the U.S. Commodity Futures Trading Commission (CFTC), many market participants in the $639 trillion over-the-counter (OTC) derivatives market will be required on June 10, 2013 to substantially change their trading practices with U.S. counterparties in certain OTC derivatives.

New law and regulation require OTC derivatives listed in the appendix to this briefing to be traded on a regulated exchange and settled by a central clearinghouse unless certain exceptions apply or relief is granted by the CFTC.

We expect that the CFTC will add certain energy and commodity (and possibly currency) derivatives to the list of trades that are subject to the mandatory clearing requirement, based on testimony which CFTC Chairman Gary Gensler provided to a Senate Banking Committee during a hearing on February 14, 2013.

Once mandated for central clearing, U.S. statutory law makes it "unlawful" for parties to derivatives that are subject to the clearing mandate to execute and settle those derivatives bilaterally unless prerequisites to certain exceptions are satisfied or regulatory relief is granted.

As of the moment that this briefing went to press and despite a flurry of written comments submitted to CFTC leadership by members of the U.S. Congress, leading trade groups and other influential market participants - all stating that many in the derivatives market are not prepared for the June 10 deadline - the CFTC remains steadfast in bringing about the historic transformation of the OTC derivatives market to one that resembles a futures market, at least with respect to the derivatives listed in the appendix.

The CFTC's clearing requirement was first imposed on the largest market participants, characterized as Swap Dealers and Major Swap Participants (e.g., the largest hedge funds and exceedingly high-volume traders of certain categories of derivatives characterized as "Swaps"), which began clearing interest rate and credit default index swap transactions listed in the appendix this past March.

The next critical phase begins on Monday, June 10, 2013, when most other entities will be required to clear if they trade the swaps listed in the appendix, and then yet another group of market participants such as pensions will need to meet a September 9, 2013 Swap clearing deadline.

A wide array of legal, documentation, asset-allocation, operational and back-office issues and technological requirements need to be addressed to come into compliance with the CFTC clearing mandate.


With the generally mistaken impression that all derivatives were the root cause of the 2008 market crises, many members of Congress drafted and voted for a statutory mandate that derivatives traded OTC be executed on a regulated exchange and settled by means of a clearinghouse in the same way that futures are traded and cleared. Section 723(a)(3) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) amended the Commodity Exchange Act (CEA) to make it "unlawful" for any entity within the jurisdiction of the CFTC to enter into and settle a Swap mandated for clearing unless anexception applies.


A critical issue in this development is the reach of the U.S. clearing mandate. This is an issue (and unintended consequence) implicated by Section 723 of Dodd Frank. Uncertainty surrounding this issue has increased due to guidance that the CFTC provided last December and January when it defined again what is meant by a U.S. Person. If a party to a trade is a "U.S. Person", and that Swap is mandated for central clearing, then the Swap is unlawful after certain deadlines such as June 10, 2013 if it is executed bilaterally under an ISDA Master Agreement or otherwise, unless an exception or relief applies.

As of the date of this advisory, a U.S. Person is any one of the following:

  • A natural person who is a resident of the United States;
  • A corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing, in each case that is (a) organized or incorporated under the laws of a state or other jurisdiction in the United States; or (b) effective as of April 1, 2013 for all such entities other than funds or collective investment vehicles, having its principal place of business in the United States;
  • A pension plan for the employees, officers or principals of a legal entity described in (ii) above, unless the pension plan is primarily for foreign employees of such entity;
  • An estate of a decedent who was a resident of the United States at the time of death, or a trust governed by the laws of a state or other jurisdiction in the United States if a court within the United States is able to exercise primary supervision over the administration of the trust; or
  • An individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described the foregoing bulletpoints.

The foregoing definition may change on or before July 12, 2013.

On June 6, 2013, CFTC Commissioner Scott O'Malia asked his fellow CFTC Commissioners to join him in releasing for public comment a proposed extension of the period of time to finalize certain cross-border issues like the US Person term, until December 31, 2013, in order to allow the global market and regulators within it to resolve extraterritoriality issues and better define the reach of the CFTC clearing mandate to market participants entering into Swaps mandated for central clearing. The General Counsel of the CFTC confirmed that a 14-day public comment period must be provided by the CFTC for a new final rule on cross-border issues, including the definition of U.S. Person.

Accordingly, if the CFTC attempts to promulgate a new final rule (with or without alterations to the definition of U.S. Person, above), then the CFTC would have to propose that rule shortly after the date of this advisory, or the order embodying the U.S. Person term, above, would lapse, in which case the market would have to refer back to the statutory terms setting the reach of the CFTC in Dodd Frank.

Congress in Dodd Frank generally gave the CFTC statutory authority to regulate all conduct involving Swaps that have a "direct and significant" connection with, or effect on, the United States. U.S. Supreme Court decision language may also be invoked to extend the regulatory jurisdiction even further to activities which involve an instrumentality of U.S. commerce.


This all points to the need to continually monitor CFTC rulemaking and relief from the clearing mandate. This legal and regulatory environment underscore the need for market participants to take the following fundamental steps:

  • Analyze Exceptions to the Mandate. We recommend developing a clear understanding of exceptions to the clearing mandate such as the end user exception, which is available to "non-financial" market participants such as many energy, real estate, mining and mineral and other commodity firms;
  • Monitor CFTC Rulemaking. Continue to monitor CFTC rulemaking on the subject, which has been ongoing throughout much of 2013 to date. For example, on April 1, 2013, a final rule was promulgated by the CFTC (Regulation 50.52). Regulation 50.52, which becomes effective on June 13, 2013, exempts from the Section 723 clearing mandate Swaps between certain affiliated entities. The CFTC issued a no-action letter in early April 2013 with immediate effect, exempting parties from certain reporting requirements in connection with intra-group swaps, subject to certain conditions. The CFTC granted relief to certain market participants, with respect to Swaps entered into by entities that meet the definition of "financial entity" under section 2(h)(7)(C)(i)(VIII) of the CEA, because they are "predominately engaged in activities that are financial in nature", as defined in section 4(k) of the Bank Holding Company Act of 1956 (when such financial entities are acting on behalf of non-financial affiliates within a corporate group); and
  • Inventory Derivatives and Draft and Negotiate Legal Documentation. Market participants should inventory their trading of OTC derivatives to determine whether any of the trades fall within the categories of Swaps mandated for central clearing listed in the appendix to this advisory. If there is any likelihood of your firm entering into these Swaps in 2013, then clearing documentation should be drafted, negotiated and executed with at least one clearing member (unless an exception or relief applies). Legal documentation must take into account unique restrictions that exist and frequently takes several weeks to months to execute in final form.


Derivatives subject to the U.S. CFTC mandatory clearing requirement under Section 723 of Dodd Frank as of June 7, 2013 are specified in the tables that follow. These "Swaps" with the following specifications are required to be cleared under new Section 2(h)(1) of the CEA and, if traded bilaterally on or after certain compliance dates under ISDA Master Agreements or otherwise OTC, they are "unlawful" unless CFTC relief is granted or an exception applies and certain prerequisites are satisfied.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.