Friday, September 30, 2016

Interest rate swap clearing requirement expanded

By R. Jason Howard, J.D.

A unanimous vote by the Commission approved an amendment to CFTC regulation 50.4 that establishes a new clearing requirement determination by expanding on the interest swaps required to be cleared.

Expanded classes. The expanded classes of interest rate swaps denominated in particular currencies in each of the four interest rate swap classes described in regulation 50.4(a), and required to be cleared under section 2(h) of the Commodity Exchange Act, include:
  • Fixed-to-floating interest rate swaps denominated in Australian dollars (AUD), Canadian dollars (CAD), Hong Kong dollars (HKD), Mexican pesos (MXN), Norwegian krone (NOK), Polish zloty (PLN), Singapore dollars (SGD), Swedish krona (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 up to three years.
AUD-denominated FRAs were not included in the final rulemaking in spite of being included in the proposal to expand Commission regulation 50.4(a).

There will be a phased-in approach to the final rule “according to an implementation schedule based on when analogous clearing requirements have taken, or will take, effect in non-U. S. jurisdictions.”

CFTC Chairman Timothy Massad said he was pleased that the CFTC is continuing its progress of increasing the use of central clearing for over-the-counter swaps by “expanding the Commission’s swap requirement to include interest rate swaps denominated in nine additional currencies.”

On the topic of risk, Massad said that “requiring clearing for these swaps will further reduce risk within our financial system. Today’s determination also represents another important step toward cross-border harmonization of swaps regulations, which is critically important to creating an effective regulatory framework.”

The CFTC also issued a Q&A on the clearing requirement determination under Section 2(h) of the Commodity Exchange Act for interest rate swaps.