July 24, 2012
I respectfully concur with the Commodity Futures Trading Commission’s (“Commission”) proposal to establish a clearing requirement for certain classes of credit default swaps and interest rate swaps pursuant to the Commission’s authority under new section
2(h)(1)(A) of the Commodity Exchange Act (“CEA”).1 Centralized clearing is a vital part of the
Dodd-Frank Act reforms and is expected to reduce counterparty credit risks, improve transparency and fairness around the setting of margin requirements, increase market liquidity, and reduce overall systemic risks.
I am pleased that the Commission’s proposal thoughtfully incorporates comments received in response to my July 28, 2011 letter2 to the public seeking comment on the five substantive criteria that the Commission is required to consider in making mandatory clearing determinations.3 The comments help provide the necessary clarity and guidance that the markets have sought regarding how the Commission will consider and weigh these criteria.
Today’s proposal also (1) includes a more reasoned cost-benefit analysis that is based on an appropriate pre-Dodd-Frank baseline, (2) discusses a variety of alternatives based on public comments, and (3) asks a series of questions in the absence of available data. Once again, I am encouraged that Commission staff is working with technical experts from the Office of Management and Budget (“OMB”) to improve our cost-benefit analyses. It is my hope that the
Commission’s final rule similarly benefits from our cooperative relationship with OMB.
Once this proposal is published in the Federal Register, the 90-day clock will start. The Commission will review all comments, and discuss its final determination for clearing the majority of swaps in due course. I implore commenters to provide feedback and to submit data as soon as possible so that the Commission can account for the actual impact that today’s rule will have on market liquidity, margining, and the reduction of risks.
1 7 U.S.C. 2(h). Congress amended section 2(h) of the CEA under section 723 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010) (“Dodd-Frank Act”).
2 My letter, and comments submitted in response thereto, can be found on the Commission’s website at: http://www.cftc.gov/About/Commissioners/ScottDOMalia/reviewofswaps.
3 Specifically, section 2(h)(2)(D)(ii) requires the Commission consider the following five factors based on a Commission initiated review of a swap submission: (1) the existence of significant outstanding notional exposures, trading liquidity, and adequate pricing of data; (2) the availability of rule framework, capacity operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded; (3) the effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the derivatives clearing organization (“DCO”) available to clear the contract; (4) the effect on competition, including appropriate fees and charges applied to clearing; and (5) the existence of reasonable legal certainty in the event of the insolvency of the relevant DCO (or one or more of its clearing members) with regard to the treatment of customer and swap counterparty positions, funds, and propert.
Last Updated: August 6, 2012