Investment managers who use swaps on behalf of their clients (including funds) are reminded that the phase-in for mandatory clearing of certain types of swaps has begun. Investment managers should be analyzing (a) the types of swaps they are using to determine whether mandatory clearing applies and (b) if so, whether the client account/fund is in Category 1, 2 or 3 (see below), which categorization determines when mandatory clearing applies. Initially, only certain credit default swaps (“CDS”) and interest rate swaps (“IRS”) (see below) must be cleared through a derivatives clearing organization (“DCO”). Mandatory clearing for the covered CDS and the covered IRS is being implemented in phases with the first deadline coming up on March 11, 2013.
Category 1 Entities
Swap dealers, security-based swap dealers, major swap participants, major security-based swap participants and private funds which are active funds (“Category 1 Entities”) must comply with the clearing requirement beginning March 11, 2013 with respect to swaps solely between such Category 1 Entities. An “active fund” means any private fund (as such term is defined in Section 202(a) of the Investment Advisers Act of 1940) that is not a third-party subaccount and which executed 200 or more swaps per month (including toward such 200 any type of swap other than foreign exchange swaps and foreign exchange forwards previously exempted from regulation as “swaps” by the Secretary of the Treasury) on a monthly average over the 12 months preceding November 1, 2012.
Category 2 Entities
Commodity pools, private funds (including any funds which are not active funds) and persons predominantly engaged in activities that are in the business of banking or in activities that are financial in nature as defined in Section 4(k) of the Bank Holding Company Act of 1956 (except third-party subaccounts as defined in the CFTC release) (“Category 2 Entities”) must comply with the clearing requirement beginning June 10, 2013.
Category 3 Entities
All other counterparties including third-party subaccounts and ERISA plans (“Category 3 Entities”) must comply with the clearing requirement beginning September 9, 2013 unless such entities are electing the end-user exception to clearing under Section 2(h)(7) of the Commodity Exchange Act.
The clearing requirement currently applies to two classes of CDS and four classes of IRS. This link to the CFTC’s release provides a detailed listing of the CDS and IRS which are subject to mandatory clearing. Managers who trade in swaps subject to mandatory clearing should be discussing with their counterparties the transition process to mandatory clearing.