Mandatory Clearing of OTC Derivatives

Mandatory clearing will be phased in over the first three quarters of 2013.

Market participants trading certain interest rate and credit default swaps will be required to comply by March 11, 2013. Regulated entities such as swap dealers and major swap participants must comply in this first phase; buy side firms that meet the definition of “active fund”  could also be impacted in this phase.  “Active funds,” are defined by the CFTC as private funds executing on average 200 or more swaps per month over the preceding 12 months.

Next, commodity pools, private funds (other than active funds or third party sub-accounts) and other financial entities will need to comply by June 10, 2013.

Entities that include subaccounts managed by third party investment managers and Erisa pension plans and others subject to the clearing mandate are required to comply by Sept. 9, 2013.

Participants will need to select one or more central clearing counterparties (CCPs) to clear OTC transactions for each product and asset class.   CCP selection will be primarily based on: pre-existing relationships, ease of negotiating documentation, initial and excess margin requirements, per trade pricing, and customer service.