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In September 2009, the G20 set an objective of introducing mandatory clearing for standardized derivatives. The European Union (through EMIR), the U.S. (through Dodd-Frank) and other jurisdictions in the G20 are currently developing and implementing regulations to achieve this objective. In addition, International regulators developed more demanding international standards for CCPs (through CPSS-IOSCO Principles for FMIs) and are working to provide guidance on recovery and resolution plans that CCPs should have in place to ensure that they can continue to provide critical services during period of financial stress. Global banking supervisors are supporting the G20 effort (through Basel III) by developing rules for bank capital applicable to cleared and uncleared derivatives.


Visit our Mandatory Clearing Checker to find out which interest rate swaps are mandated for clearing in the U.S.

In the U.S., Title VII of the Dodd-Frank Act implements the G20 commitment to require mandatory clearing of swaps and, where appropriate, trading of swaps on exchanges or electronic trading platforms. Title VII gives the CFTC jurisdiction over swaps (i.e., interest rate swaps, CDS on broad-based indices, currency swaps, options and NDFs, energy and metals swaps, commodity swaps) and the SEC jurisdiction over security-based swaps (i.e., single-name CDS, swaps on a single security, swaps on a narrow-based index).

In Europe, EMIR implements the G20 commitment to require mandatory clearing and reporting to trade repositories of OTC derivatives contracts. EMIR also introduces new requirements for CCPs, such as capital requirements, prescriptive risk management and organizational requirements. These are in line with new CPSS-IOSCO’s Principles for FMIs.

The trading obligation in Europe will be introduced in the Markets in Financial Instruments Regulation (MiFIR), which will require the execution of standardized and liquid derivatives on Regulated Markets, Multilateral Trading Facilities (MTFs) or Organized Trading Facilities (OTFs). MiFIR will apply in January 2017.

The capital requirements for non-centrally cleared contracts are implemented via the Capital Requirements Regulation (CRR), which came into force on 1 January 2014. It is important to note that EMIR includes collateral requirements for non-centrally cleared derivative contracts.

CPSS-IOSCO
In April 2012, CPSS-IOSCO published new standards for financial markets infrastructures (FMIs), including CCPs, which are designed to ensure that the essential infrastructure supporting global financial markets is even more robust and thus even better placed to withstand financial shocks in the future. CPSS IOSCO continuously monitors the progress of implementation of the standards by each member jurisdiction.


CPSS IOSCO is due to issue a report on recovery of FMIs. The objective of the report is to ensure that FMIs, including CCPs, have recovery plans in place to address stresses that may create any uncovered credit loss, liquidity shortfall, or capital inadequacy, and any business, operational or other structural weakness that these stresses reveal. In Europe, the European Commission is scheduled to produce a legislative proposal in early 2015.


Basel III
As part of Basel III, in July 2012 the Basel Committee on Banking Supervision (BCBS) published interim capital standards for banks' exposure to CCPs. The interim standards are applicable both in Europe and in the US under national law since January 2014. In April 2014, the BCBS issued the final standards, which present changes to the framework used to measure the banks' exposure to CCPs. The changes aim to support the policy efforts of the G20 leaders and the Financial Stability Board, particularly those relating to central clearing of standardized OTC derivative contracts. The BCBS recommends implementation of the final standards by 1 January 2017. National laws in Europe and the US will be amended accordingly.


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US

Dodd-Frank Wall Street Reform Act is signed into law

Anti-manipulation rules in connection with swaps effective

CFTC swap data record keeping and reporting rules finalized

LSOC rules finalized

Mandatory clearing recommendation filed with the CFTC for the IRS asset class

CFTC straight-through processing rules finalized

Joint CFTC/SEC definition of SD and MSP finalized

CFTC cross-border guidance proposed

More

CFTC mandatory clearing determinations for IRS and index CDS proposed

Joint CFTC/SEC definition of "swap" and "security-based swap" finalized

More

CFTC straight-through processing rules effective date

More

Definition of "swap" and "security-based swap" effective date; reporting of IRS and index CDS to SDRs by DCOs begins

LSOC initial implementation

More

Secretary of Treasury exempts foreign currency swaps and forwards from clearing requirement

CFTC final mandatory clearing determinations for IRS and index CDS publication in Federal Register

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First deadline to file SD applications and SD reporting of interest rate swaps and index CDS to SDRs begins

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Reporting of FX swaps, commodity swaps and equity swaps to SDRs by DCOs and registered SDs begins

Category 1 mandatory clearing of IRS and CDX begins

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SDR Reporting Date for financial counterparties

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Category 1 mandatory clearing of iTraxx begins

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SDR Reporting Date for financial counterparties

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Category 2 mandatory clearing of IRS and CDX begins

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SDR Reporting Date for financial counterparties

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SDR Reporting Date for non-financial counterparties

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Category 2 mandatory clearing of iTraxx begins

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SDR Reporting Date for non-financial counterparties

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SDR Reporting Date for non-financial counterparties

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Category 3 mandatory clearing of IRS and CDX begins

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SDR Reporting Date for non-financial counterparties

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SDR Reporting Date for financial counterparties

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Category 3 mandatory clearing of iTraxx begins

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SDR Reporting Date for non-financial counterparties

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Application date of US Regulatory Capital Rules

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Europe

EMIR entry into force

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Entry into force of EMIR RTS

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EU draft rules on margins for bilateral OTC derivatives transactions.

More

Application date for the Capital Requirements Regulation (CRR)

More

Start of reporting obligation

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First CCP authorised under EMIR

More

Expected beginning of clearing obligation

CPSS-IOSCO

Final Principles for FMIs

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Regulators to adopt principles for FMIs (CCPs to comply with principles ASAP)

CPSS-IOSCO consultation on recovery and resolution regime for CCPs

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CPSS-IOSCO publication of draft guidance on FMIs recovery; FSB publication of draft guidance on FMIs resolution planning

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Expected final CPSS IOSCO report on recovery of FMIs

Basel III

Publication of Basel Committee's interim principles

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Basel Committee's interim principles effective

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Final Basel capital standards for banks’ exposure to CCPs.

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CFTC cross-border guidance proposed

The CFTC received a number of comments from non-U.S. regulatory authorities and market participants on the proposed guidance. Final guidance will likely reflect changes based on these comments. There is no firm date for finalization of the guidance.

Joint CFTC/SEC definition of "swap" and "security-based swap" finalized

Finalization of these definitions crystallized the effective date of a number of regulations including real-time public reporting, reporting to swap data repositories (SDRs), and registration requirements for SDs and MSPs.

CFTC straight-through processing rules effective date

Among other things, the rules require acceptance or rejection of a swap by a derivatives clearing organization (DCO) “as soon as technologically practicable,” a standard that the CFTC interprets as within 60 seconds after the swap is presented for clearing by a clearing member.

LSOC initial implementation

LSOC (legally segregated, operationally commingled) applies to the segregation of customer margin and collateral for swaps. The initial implementation of LSOC addresses protection against fellow-customer risk.

CFTC final mandatory clearing determinations for IRS and index CDS publication in Federal Register

CFTC mandatory clearing determinations for IRS and index CDS finalized. Mandatory clearing for IRS and CDS that fall within the CFTC's determination will be phased in throughout 2013. The CFTC is likely to make mandatory clearing determinations on additional products in 2013.

First deadline to file SD applications and SD reporting of interest rate swaps and index CDS to SDRs begins

Swap Dealer registration applications begin to be filed, reporting of IRS and index CDS to SDRs by swap dealers begins. Entities that met the criteria for swap dealer registration in October 2012 must file a registration application by December 31, 2012. These entities also have to begin to report IRS and CDS to SDRs by that date.

Category 1 mandatory clearing of IRS and CDX begins

Category 1 includes SDs, MSPs, and active funds. Mandatory clearing applies to swaps entered into on or after March 11, 2013.

SDR Reporting Date for financial counterparties

SDR reporting is effective for IRS and credit swaps for financial swap counterparties. CFTC No-Action 13-10 is in effect for all other asset classes and non-financial swap counterparties.

Category 1 mandatory clearing of iTraxx begins

Category 1 includes SDs, MSPs, and active funds. Mandatory clearing applies to swaps entered into on or after April 26, 2013.

SDR Reporting Date for financial counterparties

SDR reporting is effective for equity swaps, foreign exchange and other commodity swaps for financial swap counterparties under conditional no-action relief. Related information: CFTC No-Action 13-10.

Category 2 mandatory clearing of IRS and CDX begins

Category 2 includes commodity pools, hedge funds, and non-swap dealer banks so long as the entity is not a third-party subaccount. Mandatory clearing applies to swaps entered into on or after June 10, 2013.

SDR Reporting Date for financial counterparties

SDR reporting deadline for backloading and reporting all swap transaction data from April 10 to May 29, 2013 for financial swap counterparties under conditional no-action relief. Related information: CFTC No-Action 13-10.

SDR Reporting Date for non-financial counterparties

SDR reporting is effective for IRS and credit swaps for non-financial swap counterparties under conditional no-action relief. Related information: CFTC No-Action 13-10.

Category 2 mandatory clearing of iTraxx begins

Category 2 includes commodity pools, hedge funds, and non-swap dealer banks so long as the entity is not a third-party subaccount. Mandatory clearing applies to swaps entered into on or after July 25, 2013.

SDR Reporting Date for non-financial counterparties

SDR reporting deadline for backloading and reporting all IRS and credit swap transaction data from April 10 to July 1, 2013 for non-financial swap counterparties under conditional no-action relief. Related information: CFTC No-Action 13-10.

SDR Reporting Date for non-financial counterparties

SDR reporting is effective for equity swaps, foreign exchange and other commodity swaps for non-financial swap counterparties under conditional no-action relief. Related information: CFTC No-Action 13-10.

Category 3 mandatory clearing of IRS and CDX begins

Category 3 includes all entities required to clear, including ERISA plans, that do not fall into Categories 1 or 2. Mandatory clearing applies to swaps entered into on or after September 9, 2013.

SDR Reporting Date for non-financial counterparties

SDR reporting deadline for backloading and reporting all equity swap, foreign exchange and other commodity swap transaction data from April 10 to August 19, 2013 for non-financial swap counter parties under conditional no-action relief. Related information: CFTC No-Action 13-10.

SDR Reporting Date for financial counterparties

SDR reporting effective for historical swaps in all asset classes for financial swap counterparties. Related information: CFTC No-Action 13-10.

Category 3 mandatory clearing of iTraxx begins

Category 3 includes all entities required to clear, including ERISA plans, that do not fall into Categories 1 or 2. Mandatory clearing applies to swaps entered into on or after October 23, 2013.

SDR Reporting Date for non-financial counterparties

SDR reporting deadline for historical swaps in all asset classes for non-financial swap counterparties.

Application date of US Regulatory Capital Rules

The Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued Regulatory Capital Rules which transpose the Basel III capital framework into the US legal framework. These rules include provisions around the capitalization of banks for their exposure to CCPs, which become effective as of 1 January 2014.

US Regulatory Capital Rules: http://www.federalreserve.gov/newsevents/press/bcreg/20130702a.htm

EMIR entry into force

On 16 August 2012, EMIR entered into force. The Regulation includes some provisions that require secondary legislation, so-called regulatory technical standards (RTS).

Related material: European Markets Infrastructure Regulation

Entry into force of EMIR RTS

ESMA and EBA have drafted secondary legislation, so-called regulatory technical standards (RTS), on certain provisions in EMIR. These have been endorsed by the European Commission and received non-objection from the European Parliament and Council. They entered into force on 15 March 2013.

Related material: EMIR RTS in force from 15 March 2013

EU draft rules on margins for bilateral OTC derivatives transactions.

ESMA/EBA/EIOPA are consulting on EMIR Regulatory Technical Standards (RTS) on margin requirements for non-centrally cleared OTC derivatives transactions. The proposed RTS are aligned with the BCBS-IOSCO’s final recommendations published in September 2013.

ESMA/EBA/EIOPA consultation

Application date for the Capital Requirements Regulation (CRR)

The CRD IV package comprises of a Regulation (CRR) and a Directive (CRD IV). It transposes the Basel III capital framework into the EU legal framework. The CRR implements the Basel III interim capital standards for banks’ exposure to CCPs, which became effective in 1 January 2014. The CRR will be revised to reflect the final capital standards issued in April 2014 by the BCBS.

Related Material CRR

Start of reporting obligation

Counterparties and CCPs started reporting all derivative contracts to a trade repository (TR) as of 12 February 2014.

The reporting obligation applies to derivative contracts which were entered into:

  • BEFORE 16 August 2012 (i.e. entry into force of EMIR level 1 legislation) if were outstanding on that date;
    N.B. if the contracts are not outstanding on RSD, they must be reported on RSD + 3 yrs
    if the contracts are still outstanding on RSD, they must be reported on RDS + 90 days
  • BETWEEN 16 August 2012 and RSD
    N.B. if the contracts are not outstanding on RSD, they must be reported on RSD + 3 yrs
    if the contracts are still outstanding on RSD, they must be reported on RDS
  • ON or AFTER RSD
    N.B. all of these contracts must be reported on T+1

First CCP authorised under EMIR

Following the authorisation of CCPs under EMIR, the regulatory steps are as follows:

  • ESMA is due to issue a consultation paper on proposed rules (RTS) on the clearing obligation based on the products that EMIR-authorised CCPs clear. The consultation will propose:
    • which classes of OTC derivatives are subject to the clearing obligation;
    • when the clearing obligation is effective, and any phasing-in;
    • minimum remaining maturity above which some OTC derivatives contracts must be backloaded.
  • ESMA will then propose the draft RTS to the EU Commission for endorsement and the EU Parliament and the EU Council will then give their non-objection.
  • The RTS are then published in the Official Journal and enter into force.
  • The actual date of application of the clearing obligation will depend on the phase-in period per type of counterparty, to be defined in the RTS. The expectation is that mandatory clearing will start in H1 2015.

Final Principles for FMIs

Related material: Principles for financial market infrastructures

Publication of Basel Committee's interim principles

Related material: BCBS report on capital requirements for bank exposures to central counterparties

Basel Committee's interim principles effective

Related material: BCBS report on capital requirements for bank exposures to central counterparties

CPSS-IOSCO publication of draft guidance on FMIs recovery; FSB publication of draft guidance on FMIs resolution planning

Related Material:

FSB report ‘Application of the Key Attributes of Effective Resolution Regimes to Non-Bank Financial Institutions’

CPSS IOSCO ‘Recovery of financial market infrastructures’

Final Basel capital standards for banks’ exposure to CCPs.

The final BCBS capital standards for banks’ exposure to CCPs replace the interim standards currently in place and are effective as of 1 January 2017.

Related Material:

BCBS final capital standards for banks’ exposure to CCPs

Key

BCBSBasel Committee on Banking Supervision

CCPCentral Counterparty

CDSCredit Default Swaps

CPSSCommittee on Payment and Settlement Systems

CRDIVCapital Requirements Directive

CRRCapital Requirements Regulation

DCODerivatives Clearing Organization

EBAEuropean Banking Authority

ECEuropean Commission

EIOPAEuropean Insurance and Occupational Pensions Authority

EMIREuropean Market Infrastructure Regulation

ESMAEuropean Securities and Markets Authority

EUEuropean Union

FXForeign Exchange

IRSInterest Rate Swaps

IOSCOInternational Organization of Securities Commissions

MiFIRMarkets in Financial Instruments Regulation

MSPMajor Swap Participant

RSDReporting start date

RTSRegulatory Technical Standards

SDSwap Dealer

SDRSwap Data Repository

Disclaimer
The contents of this document have been provided to you for informational purposes only and are intended as a broad overview of certain regulatory considerations. The information contained herein is subject to change, and LCH.Clearnet assumes no duty or liability whatsoever to update such information. This document does not, and does not purport to, contain a detailed description of any of the topics discussed herein and has not been prepared for any specific audience. Accordingly, you may not rely upon the contents of this document and should seek your own independent legal advice. Nothing in this document should be considered as legal advice.