Update on Mandatory On-Facility Trading of Swaps

Under the Commodity Exchange Act, as amended by Dodd-Frank, certain swaps must be cleared as determined by the CFTC. In late 2012, the CFTC determined that major classes of interest rates and index credit default swaps would become subject to this mandatory clearing requirement. This clearing determination has gone into effect, and the CFTC is expected to propose more determinations in the near future.

The Commodity Exchange Act also provides that swaps must be traded on a swap execution facility (SEF) or a designated contract market (DCM), unless no SEF nor DCM makes the swap available to trade or an exception to the clearing requirement applies. (For further background on SEFs and on-facility trading, please see our earlier alert.)

Recently, five SEFs have submitted to the CFTC that certain types of interest rate and index credit default swaps be “made available to trade.” The CFTC is currently reviewing these filings, and will decide whether to approve these “made available to trade” determinations in January 2014. If approved, the determinations will become effective after a 30-day implementation period.

Earlier this year, several firms signed up for access to SEFs as a result of the separate requirement that a multiple-to-multiple trading platform that meets the definition of an SEF must register as such by October 2, 2013. Firms that are able to trade on SEFs currently have the option – at least theoretically – to trade bilaterally with counterparties. But that option will no longer be available for swaps that are covered by an effective “made available to trade” determination. Firms therefore should consider watching out for “made available to trade” determinations, starting with the five proposals that are currently in the queue.

Those proposals are summarized in the attached chart.

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Please feel free to reach out to your regular contacts at Bingham if you have any questions about the matters addressed in this alert. In addition, you are welcome to contact the members of Bingham’s Derivatives Group set forth below.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: