In connection with its ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commodity Futures Trading Commission last Friday voted to propose several rules for publication in the Federal Register. The CFTC proposals include rules relating to the financial resources requirements for derivatives clearing organizations (DCOs) and the mitigation of conflicts of interest by DCOs, designated contract markets (DCMs), and swap execution facilities (SEFs).
Under the proposed financial resources rules, DCOs would be required to maintain financial resources that, at a minimum, (i) exceed the total amount that would be required for a DCO to meet its financial obligations to its clearing members notwithstanding a default by the clearing member (or, in the case of DCOs designated as “systematically important” by the Financial Stability Oversight Council, the two clearing members) creating the largest financial exposure for the DCO in extreme but plausible market conditions, and (ii) enable the DCO to cover its operating costs for a period of one year, as calculated on a rolling basis. For purposes of meeting the first requirement above, DCOs would be permitted to include: (1) margin of a defaulting clearing member, (2) the DCO’s own capital, (3) guaranty fund deposits, (4) default insurance, and (5) potential assessments (subject to certain haircuts and other restrictions) for additional guaranty fund contributions. For purposes of the second requirement, DCOs would be permitted to include the DCO’s own capital and any other financial resource deemed acceptable by the CFTC, which would have to include unencumbered, liquid financial assets (which could include a committed line of credit or similar facility) equal to at least six months’ operating costs.
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