• Update on Mandatory On-Facility Trading of Swaps
  • December 12, 2013 | Authors: Akshay N. Belani; Lihua Chen; Joshua B. Sterling
  • Law Firms: Bingham McCutchen LLP - New York Office ; Bingham McCutchen LLP - Washington Office
  • Under the Commodity Exchange Act, as amended by Dodd-Frank, certain swaps must be cleared as determined by the CFTC. In late 2012, the CFTC determined that major classes of interest swaps and index credit default swaps would become subject to this mandatory clearing requirement. That clearing determination has gone into effect, and the CFTC is expect to propose more determinations in the near future.

    The Commodity Exchange Act also provides that swaps must be traded on a swap execution facility (SEF) or a designated contract market (DCM), unless no SEF nor DCM makes the swap available to trade or an exception to the clearing requirement applies.

    Recently, four SEFs have made filings with the CFTC for determinations that certain types of interest rate and index credit default swaps are “made available to trade.” The CFTC is currently reviewing those filings. The CFTC will determine whether to approve these “made available to trade” determinations in January 2014. If approved, those determinations will become effective in the manner specified by the CFTC.

    Earlier this year, several firms signed up for access to SEFs as a result of the separate requirement that a multiple-to-multiple trading platform that meets the definition of an SEF must register as such by October 2, 2013. Firms that are able to trade on SEFs currently have the option - at least theoretically - to trade bilaterally with counterparties. But that option will no longer be available for swaps that are covered by an effective “made available to trade” determination. Firms therefore should consider watching out for “made available to trade” determinations, starting with the four proposals that are currently in the queue.