United States: CFTC Expands Swap Clearing Requirement

Last Updated: October 25 2016
Article by Nikiforos Mathews and Jonas Robison

On September 28, 2016, the Commodity Futures Trading Commission (the "CFTC") unanimously approved the expansion of currencies of interest rate swaps subject to mandatory clearing under the U.S. Commodity Exchange Act (the "Act").1  Subjecting standardized swaps to central clearing is intended to decrease risk in the financial system and has been a primary goal of global regulators for several years.

Section 2(h) of the Act makes it unlawful for any person to engage in a swap that is required to be centrally cleared unless that swap is submitted to a derivatives clearing organization (a "DCO") that is either registered under the Act or exempt from registration under the Act.2  This same section of the Act sets forth the process through which the CFTC is to make determinations of whether a swap, or group, category, type or class of swaps should be subject to mandatory clearing.3

In December 2012, the CFTC issued its first clearing determination,4 which subjected the following swaps to mandatory clearing:

  1. four classes of interest rate swaps (i.e., fixed-to-floating swaps, basis swaps, forward rate agreements and overnight index swaps) denominated in four currencies (i.e., USD, EUR, GBP and JPY)5 and having certain specifications (e.g., floating rate index, stated termination date range);6 and
  2. two classes of credit default swaps ("CDS") (i.e., North American untranched CDS indices and European untranched CDS indices) having certain specifications (e.g., reference entity types, tenors, indices).

The December 2012 Clearing Determination had been the only clearing determination made by the CFTC until the September 2016 Clearing Determination. The September 2016 Clearing Determination does not expand the categories of swaps that are subject to mandatory clearing; these continue to be limited to interest rate swaps and CDS.  However, this determination expands the currencies in which existing classes of interest rate swaps that are subject to mandatory clearing are denominated.

Specifically, the September 2016 Clearing Determination expands all four classes of interest rate swaps to include transactions denominated in the following additional currencies, in addition to the currencies set forth in the December 2012 Clearing Determination:

  1. fixed-to-floating interest rate swaps (i.e., swaps in which the payment or payments owed for one leg of the swap is calculated using a fixed rate and the payment or payments owed for the other leg are calculated using a floating rate):  AUD, CAD, HKD, MXN, NOK, PLN, SGD, SEK and CHF;
  2. basis swaps (i.e., swaps in which the payments for both legs are calculated using floating rates):  AUD;
  3. forward rate agreements (i.e., swaps in which payments are exchanged on a pre-determined date for a single specified period and one leg of the swap is calculated using a fixed rate and the other leg is calculated using a floating rate that is set on a pre-determined date):  NOK, PLN and SEK; and
  4. overnight index swaps (i.e., swaps in which one leg of the swap is calculated using a fixed rate and the other leg is calculated using a floating rate based on a daily overnight rate):  AUD and CAD.

With certain exceptions, the September 2016 Clearing Determination finalized the amendments proposed by the CFTC in June 2016.7  In its determination, the CFTC noted the significant activity in interest rate swaps denominated in the new currencies.8

In addition, the September 2016 Clearing Determination expands the stated termination date range specification for overnight index swaps denominated in USD, EUR and GBP (but not the new currencies of AUD and CAD) from an outside date of two years to an outside date of three years. This change is intended to make the CFTC's clearing requirement for overnight index swaps consistent with that in effect in the European Union.9  The classes of and specifications for CDS subject to mandatory clearing remain unchanged.

Compliance with these expanded clearing requirements will be phased in under an implementation schedule based on when analogous clearing requirements take effect in non-U.S. jurisdictions, up to a two-year time limit.

Significantly, existing exemptions and exceptions to the clearing requirement remain unaffected by the expansions of the September 2016 Clearing Determination. Market participants may continue to rely on the "end-user exception" under CFTC Regulation 50.50, as well as other applicable exemptions.


1. Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps, 81 Fed. Reg. 71,202 (October 14, 2016) (the "September 2016 Clearing Determination").

2. 7 U.S.C. § 2(h)(1).

3. 7 U.S.C. § 2(h)(2).

4. Clearing Requirement Determination Under Section 2(h) of the CEA, 77 Fed. Reg. 74,284 (Dec. 13, 2012) (the "December 2012 Clearing Determination").

5. Note, however, that this clearing determination did not apply to overnight index swaps denominated in JPY.

6. 17 C.F.R. § 50.4. Note that the CFTC also included several "negative" specifications for interest rate swaps, including that they could not have optionality.

7. See Clearing Requirement Determination Under Section 2(h) of the CEA for Interest Rate Swaps, 81 Fed. Reg. 39,506 (June 16, 2016).  The CFTC received 10 comment letters during the 30-day comment period following the publication of this proposed rule.  September 2016 Clearing Determination, at 25.

8. For example, the class of fixed-to-floating interest rate swaps reported in the second quarter of 2015 to a registered swap data repository pursuant to 17 C.F.R. Part 43 (Real-Time Public Reporting) (for which at least one counterparty was a U.S. person) in these new currencies amounted to almost 31,000 trades having an aggregate notional amount of over U.S.$1.3 trillion. September 2016 Clearing Determination, at 37 (Table 2).  Approximately one-half of the trades and one-third of the aggregate notional amount involved swaps denominated in MXN. Id.

9. September 2016 Clearing Determination, at 51.

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.

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Nikiforos Mathews
Jonas Robison
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