On April 9, 2012, the Commodity Futures Trading Commission "CFTC " issued its final rules governing Derivatives Clearing Organization "DCO" members’ activities. The rules address customer clearing documentation, timing of acceptance of swaps for clearing, and clearing member risk management for swap transactions.
Customer Clearing Documentation: The rules prohibit tri-party agreements between customers, SDs, MSPs, and FCMs that are clearing members, and DCOs that would (1) disclose to an FCM, SD, or MSP the identity of a customer’s original executing counterparty; (2) limit the number of counterparties with whom a customer may enter into a trade; (3) restrict the size of the position a customer may take with any individual counterparty; (4) impair a customer’s access to execution of a trade on terms that have a reasonable relationship to the best terms available; or (5) prevent compliance with the rule’s specified time frames for acceptance of trades into clearing.
Time Frames for Submission and Acceptance for Clearing: Clearing members, or the DCOs acting on their behalf, must accept or reject each trade submitted for clearing as quickly as would be technologically practicable if fully automated systems were used. This standard requires action in a matter of milliseconds or seconds or, at most, a few minutes, not hours or days. This timing rule does not require automatic trade processing, but it does require that manual trade processing operate within the same time frame as automated systems. The rules also require SDs, MSPs, FCMs, swap execution facilities and designated contract markets to submit swaps that are required to be cleared to a DCO as soon as technologically practicable, but no later than the close of business on the day of execution. Swaps that are not required to be cleared must be submitted to a DCO by the close of business on the day after execution or agreement to clear.
Clearing Member Risk Management: SDs, MSPs, and FCMs that are clearing members must (1) establish credit and market risk-based limits on position size, order size, margin requirements, or similar factors; (2) use automated means to screen orders for compliance with the risk-based limits; (3) monitor for adherence to the risk-based limits intra-day and overnight; (4) conduct stress tests for all positions in proprietary and customer accounts at least once per week; (5) evaluate their ability to meet initial margin requirements at least once per week; (6) evaluate their ability to meet variation margin requirements in cash accounts at least once per week; (7) evaluate their ability to liquidate positions they clear in an orderly manner, and estimate the cost of the liquidation, at least once per month; and (8) test all lines of credit at least once per year.
The effective date for FCMs, DCMs and DCOs is October 1, 2012. The effective date for SDs and MSPs is the later of October 1, 2012, or the date that the SD and MSP registration rules become effective. The effective date for SEFs is the later of October 1, 2012, or the date that the Core Principles and Other Requirements for SEFs rule becomes effective.© 2013 Schiff Hardin LLP