CFTC Proposal to Mandate Broader Clearing of Interest Rate Swaps Receives Conditional Support

Several leading industry groups and market participants offered support for a CFTC proposal to amend CFTC Rule 50.4(a). The proposal would require certain interest rate swaps that are denominated in certain currencies, or that have certain termination dates, to be subject to mandatory clearing.

In comments on the proposal:

  • The Managed Funds Association expressed strong support for the proposal and urged the CFTC to harmonize mandatory clearing with the requirements of other jurisdictions.
  • ISDA expressed strong support for CFTC efforts to harmonize its clearing mandate with those of other countries, but encouraged the CFTC to ensure that data on (i) the impact of its clearing mandate on liquidity and risk management for a particular product, and (ii) the mandate’s interaction with the mandatory trading requirement and “made available-to-trade” (“MAT”) process, “are appropriate and accurate.” ISDA also urged the CFTC to avoid “prioritizing harmonization of clearing mandates” over concerns relating to liquidity and risk management.
  • LCH Group Limited (“LCH”) voiced support for the CFTC initiative and for CFTC leadership in fostering international harmonization. LCH emphasized that the “OTC derivatives marketplace is global in nature and . . . this Proposed Determination . . . will promote certainty and international consistency for all market participants.”
  • CME Group Inc. (“CME”) expressed general support for the proposal, but recommended that “CFTC implementation of clearing obligations takes into account the timing of clearing mandates in other jurisdictions and ensures that the timing does not create an imbalance in the competitive landscape for market participants across jurisdictions.”
  • SIFMA Asset Management Group (“SIFMA”) expressed general support for the proposal, but argued that the determination “must not be considered in a vacuum in light of the clearing mandate’s status as a condition precedent” for a made-available-to-trade (“MAT”) determination. SIFMA urged the CFTC to harmonize clearing requirements with those in non-U.S. jurisdictions in a manner that is consistent with those jurisdictions’ “implementation timing.” Accordingly, SIFMA recommended that the CFTC defer the compliance date for any final clearing mandate until 180 days after a regulator in a non-U.S. jurisdiction has adopted an analogous mandate, and that it should do so with a phased-in approach by counterparty type.
  • Citadel LLC (“Citadel”) expressed “full support” for the proposal, and applauded the CFTC for “recognizing the important role of central clearing in achieving the Dodd-Frank Act objectives of reducing interconnectedness, mitigating systemic risk, increasing transparency and promoting competition in these markets.” Citadel urged the CFTC not to be concerned about the impact of its determination on the companion MAT requirement, and argued that such an assessment would not be “part of the criteria for determining whether OTC derivatives are suitable for mandatory clearing.”

Lofchie Comment: CEA Section 2(h) should be amended to specify that any determination that a swap is subject to mandatory exchange trading must be initiated by regulators, in light of market conditions, and not by exchanges. Unbundling the mandatory exchange-trading element of the CEA from the mandatory clearing element would give the CFTC more latitude to make its clearing determination without being forced to approve the mandatory exchange trading of the swap.

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