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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 is currently being negotiated between the European Commission, Council and European Parliament and it is unlikely to be effective before 2015.

The capital requirements for non-centrally cleared contracts are implemented via the Capital Requirements Regulation (CRR), which will come into force as of 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. The report states that CPSS-IOSCO members should aim to adopt the new standards by the end of 2012, and FMIs are expected to observe the standards as soon as possible.


In July 2012, CPSS-IOSCO consulted on possible recovery and resolution frameworks for CCPs. The purpose of the report was to outline the issues that should be taken into account for different types of FMIs, including CCPs, when putting in place effective recovery plans and resolution regimes that are consistent with the Principles for financial market infrastructures and the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions, published in 2011. In August, CPSS IOSCO and the FSB issued, respectively, draft guidance on recovery and resolution plans for CCPs. In Europe, the European Commission has also consulted on the same topic at the end of 2012 and is scheduled to produce a legislative proposal in early 2014.


Basel III
As part of Basel III, in July 2012 the Basel Committee on Banking Supervision published an interim framework determining capital requirements for banks' exposure to CCPs. While this interim framework is in place as of 1st January 2013, the Basel Committee is working towards final principles, which will replace the interim principles (earliest expected Q4 2013). Jurisdictions are working to transpose the interim framework into local laws, ahead of the publication of final rules. Both in Europe and in the US the interim principles are effective under national law as of January 2014.


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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

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CFTC mandatory clearing determinations for IRS and index CDS proposed

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

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CFTC straight-through processing rules effective date

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

LSOC initial implementation

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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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Expected consultation on EU rules for bilateral collateralisation for non-centrally cleared derivatives

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Application date for the Capital Requirements Regulation (CRR)

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Start of reporting obligation

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Expected date by which CCPs will be re-authorized under EMIR

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Earliest estimate for beginning of clearing mandate

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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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Basel III

Publication of Basel Committee's interim principles

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Basel Committee's interim principles effective

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Expected publication of Basel Committee's final principles

Expected CPSS-IOSCO final guidance on FMIs recovery and FSB final guidance on FMIs resolution

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

Expected consultation on EU rules for bilateral collateralisation for non-centrally cleared derivatives

ESMA/EBA/EIOPA will consult on Regulatory Technical Standards (RTS) for bilateral collateralisation. The RTS are expected to be based on the BCBS-IOSCO’s final recommendations published in September 2013.

Related material: BCBS-IOSCO final report on margin requirements for non-centrally cleared derivatives

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 includes provisions around the capitalization of banks for their exposure to CCPs, which become effective as of 1 January 2014.

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:176:0001:0337:EN:PDF

Start of reporting obligation

The reporting start date for all derivative asset classes – commodities, credit, foreign exchange, equity and interest rates - is 12 February 2014.

ESMA’s registration of the following trade repositories for the European Union (EU) came into effect on 14 November 2013.

  • DTCC Derivatives Repository Ltd. (DDRL), based in the United Kingdom;
  • Krajowy Depozyt Papierów Wartosciowych S.A. (KDPW), based in Poland;
  • Regis-TR S.A., based in Luxembourg; and
  • UnaVista Ltd, based in the United Kingdom.

The reporting obligation shall apply to derivative contracts:

(a) entered into before entry into force of EMIR level 1 legislation (16 August 2012) and remain outstanding on that date;

(b) are entered into on or after 16 August 2012

Expected date by which CCPs will be re-authorized under EMIR

Immediately after a CCP is re-authorised, the national regulator notifies ESMA of the classes of derivatives a CCP is authorised to clear at a national level. Based on this notification, ESMA will propose rules on the clearing obligation, following a public consultation.

The proposed rules shall specify:

  • The class of OTC derivatives subject to the clearing mandate;
  • The dates from which the clearing obligation takes effect, including any phased-in implementation similarly to the US, where major banks have started clearing ahead of smaller entities;
  • The minimum remaining maturity of the OTC derivative contracts entered into between the re-authorisation of a relevant CCP and the beginning of a clearing mandate. Contracts with a remaining maturity below such minimum will not have to be cleared; those with a remaining maturity above such minimum will have to be back-loaded.

Earliest estimate for beginning of clearing mandate

The clearing obligation could take effect in Q4 2014 - Q1 2015, taking into account any phasing-in by market participants, which means that the obligation could be effective from a later date for some categories of participants.

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’

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

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.