November 28, 2012
I support the final rule requiring certain interest rate swaps and credit default swap (CDS) indices to be cleared, as provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
Central clearing is one of the three major building blocks of Dodd-Frank swaps market reform -- in addition to promoting market transparency and bringing swap dealers under comprehensive oversight -- and this rule completes the clearing building block.
Central clearing lowers the risk of the highly interconnected financial system. It also democratizes the market by eliminating the need for market participants to individually determine counterparty credit risk, as now clearinghouses stand between buyers and sellers.
In a cleared market, more people have access on a level playing field.
Small and medium-sized businesses, banks and asset managers can enter the market and trade anonymously and benefit from the market’s greater competition.
Clearinghouses have lowered risk for the public and fostered competition in the futures markets since the late 19th century. Following the 2008 financial crisis, President Obama convened the G-20 leaders in Pittsburgh in 2009, and an international consensus formed that standardized swaps should be cleared by the end of 2012.
The CFTC has already completed a number of significant Dodd-Frank reforms laying the foundation of risk management for clearinghouses, futures commission merchants and other market participants that participate in clearing. Other reforms paving the way for this rule include straight-through processing for swaps and protections for customer funds.
This rule, which fulfills President Obama’s G-20 commitment on clearing, is the last step on the path to required central clearing between financial entities. It benefited from significant domestic and international consultation. Moving forward, we will work with market participants on implementation. I would like to thank my fellow Commissioners and the CFTC staff for all of their hard work and dedication so that now clearing will be a reality in the swaps market.
For this first set of determinations, the Commission looked to swaps that are currently cleared by four derivatives clearing organizations (DCOs).
This set includes standard interest rate swaps in U.S. dollars, euros, British pounds and Japanese yen, as well as five CDS indices on North American and European corporate names.
With this rule, swap dealers and the largest hedge funds will be required to clear these swaps in March. Compliance would be phased in for other market participants through the summer of 2013.
I believe that the Commission’s determination for each class satisfies the five factors provided for by Congress in the Dodd-Frank Act, including the first factor that addresses outstanding exposures, liquidity and pricing data.
Under the rule, a DCO must post on its website a list of all swaps it will accept for clearing and must indicate which swaps the Commission had determined are required to be cleared. In addition, the Commission will post this information on our website.
Last Updated: November 28, 2012