The Commodity Futures Trading Commission (CFTC) is adopting regulations to establish a schedule to phase in compliance with the clearing requirement under new section 2(h)(1)(A) of the Commodity Exchange Act (CEA), enacted under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The rules will become effective September 28.
As previously proposed, a swap between two Category 1 Entities must comply with the clearing requirement no later than 90 days after the publication of the clearing requirement determination in the Federal Register. A swap between a Category 2 Entity and a Category 1 Entity or another Category 2 Entity must comply within 180 days, and all other swaps must be submitted for clearing no later than 270 days after the clearing requirement determination is published in the Federal Register.
Category 2 Entities previously included employee benefit plans under ERISA, but under the final rule, these plans will not be included in Category 2.
The CFTC made this change in response to comments from the Committee on Investment of Employee Benefit Assets (CIEBA) which stated that in-house ERISA funds should be in the group with the longest compliance time, and not Category 2 Entities. CIEBA noted that such funds do not pose systemic risk, and they typically rely upon third-party managers for some portion of their fund management. Splitting in-house and external accounts (i.e. those accounts meeting definition of Third-Party Subaccount and permitted 270 days) of the same ERISA plan will impact risk management given different implementation schedules. CIEBA also states that this distinction will cause pension funds to bear the costs of compliance because they will need to comply prior to their third-party managers, who would be better positioned to provide insight and service in this regard.
Section 723(a)(3) of the Dodd-Frank Act amended the CEA to provide, under new section 2(h)(1)(A) of the CEA, that it shall be unlawful for any person to engage in a swap unless that person submits such swap for clearing to a derivatives clearing organization (DCO) that is registered under the CEA or a DCO that is exempt from registration under the CEA if the swap is required to be cleared (the clearing requirement). Section 2(h)(7) of the CEA provides an exception to the clearing requirement when one of the counterparties to a swap (i) is not a financial entity, (ii) is using the swap to hedge or mitigate commercial risk, and (iii) notifies the Commission how it generally meets its financial obligations associated with entering into a non-cleared swap. Text of the final rule is here.