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Sen. Lincoln Explains Derivatives Clearing Provisions of Dodd-Frank

By Jim Hamilton

The mandatory clearing and trading of swaps and security-based swaps, along with real-time price reporting, is at the heart of swaps market reform. Under the Act, swaps and security-based swaps determined to be subject to the mandatory clearing requirement by the SEC and CFTC would also be required to be traded on a designated contract market, a national securities exchange, or new swap execution facilities or security-based swap execution facilities.

To avoid any conflict of interests, the CFTC and SEC will make a determination as to what swaps must be cleared following certain statutory factors. It is expected that the standardized, plain vanilla, high volume swaps contracts, which according to the Treasury Department are about 90 percent of the $600 trillion swaps market, will be subject to mandatory clearing. Derivatives clearing organizations and clearing agencies are required to submit all swaps and security-based swaps for review and mandatory clearing determination by the SEC and CFTC. It will also be unlawful for any entity to enter into a swap without submitting it for clearing if that swap has been determined to be required to clear. Congress understands that approximately 1,200 swaps and security-based swaps contracts are currently listed by CFTC-registered clearing houses and SEC-registered clearing agencies for clearing. Under the Dodd-Frank Act these 1,200 swaps and security-based swaps already listed for clearing are deemed submitted to the SEC and CFTC for review upon the date of enactment.

Senator Blanche Lincoln expects the SEC and CFTC, which are already familiar with these 1,200 swap and security-based swap contracts, to work within the 90-day time frame they are provided to identify which of the current 1,200 swap and security-based swap agreements should be subject to mandatory clearing requirements. The SEC and CFTC may also identify and review swaps and security-based swaps which are not submitted for clearinghouse or clearing agency listing and determine that they are or should be subject to mandatory clearing requirement. Senior members of the Senate Agriculture Committee consider this to be an important provision because it removes the ability for the clearinghouse or clearing agency to block a mandatory clearing determination. (Cong. Record, July 15, 2010, S5921).

Full post as published by Jim Hamilton's World of Securities Regulation on August 24, 2010 (boomark / email).