The Commodity Futures Trading Commission (CFTC) recently adopted three final rules pursuant to Title VII of the Dodd-Frank Wall Street Reform and Customer Protection Act that impact the manner in which end-users’ cleared swaps will be executed. These rules (i) set forth a regulatory framework for swap execution facilities (SEFs) (the SEF Final Rule), (ii) establish a process for a designated contract market (DCM), typically referred to as an exchange, or a SEF to make a swap that is subject to mandatory clearing and trade execution “available to trade” (the Available to Trade Final Rule), and (iii) establish a process for determining which large swap transactions can qualify as “block trades” (the Block Trade Final Rule). This Legal Alert provides a high-level summary of each of the three final rules as they relate to trading entities in the swap markets.
Currently, only certain classes of interest rate and credit default swaps are subject to mandatory clearing and trade execution by the CFTC under sections 2(h)(1) and 2(h)(8) of the Commodity Exchange Act (CEA). Category 1 and Category 2 market participants are now required to clear such swaps, while Category 3 market participants (including all non-financial entity end-users and certain funds) will be required to do so by September 9, 2013. Once these swaps are made available to trade, market participants will also be required to execute these transactions on a registered SEF or DCM. Block trades and large notional off-facility swaps, however, are not required to be executed on a SEF or DCM, and will be reported on a time delay for purposes of the real-time reporting obligations under CFTC Regulation 43.
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