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7.5 Clearing Requirements

<< Title VII Overview

7.5 Clearing Requirements

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            7.5.       Clearing Requirements.

                        7.5.1.    What are the Clearing Requirements for Swaps?  Title VII requires clearing of all swap transactions that are acceptable to a DCO for clearing, other than, as noted above, any swaps for which one of the counterparties is a commercial end-user.  A DCO must submit to the SEC or CFTC for prior approval any group, category, type, or class of swaps the DCO seeks to clear.  The relevant Commission must respond to any such DCO request within 90 days of the submission of the request. [§723]

                        DCOs are required to treat all swaps (but not commodity futures or options thereon) submitted to the DCO with the same terms and conditions as economically equivalent within the DCO and able to be offset with each other.  DCOs are further required to provide for non-discriminatory clearing of a swap (but not a commodity future or option thereon) executed bilaterally or on or through the rules of an unaffiliated contract market or swap execution facility ("SEF").

                        7.5.2.    What are the Requirements to Qualify as a DCO?  Clearing of swaps is a cornerstone of the derivatives reform legislative agenda.  Accordingly, to be registered and to maintain registration as a DCO, a DCO must meet an extensive set of criteria, with the most important criteria being: (i) each DCO must have adequate financial, operational and managerial resources, as determined by the CFTC or SEC, respectively; (ii) each DCO must possess financial resources that, at a minimum, exceed the total amount that would (a) enable the DCO to meet its financial obligations to its members and participants, notwithstanding a default by the member or participant creating the largest financial exposure for that DCO in "extreme but plausible market conditions;" and (b) enable the DCO to cover the costs of the DCO for a one-year period;  (iii) on an on-going basis, each DCO must establish and implement procedures to verify the compliance of each participation and membership requirement of the DCO; (iv) each DCO must (a) not less than once during each business day, measure the credit exposures of the DCO to each member and participant of the DCO, and (b) monitor each such exposure periodically during the business day of the DCO;  (v) through margin requirements and other risk control measures, each DCO must limit the exposure of the DCO to potential losses from default by members and participants of the DCO; (vi) each DCO must have rules and procedures designed to allow for the efficient, fair, and safe management of events in the event of a member or participant insolvency; and (vii) with respect to conflicts of interest, each DCO must establish and enforce rules to minimize conflicts of interest in the decision-making process of the DCO. [§725]

                        7.5.3.    Can Parties Enter into Swaps that are not Cleared?  Yes, parties to a swap that is not accepted by a DCO will be required to report the swap to a "swap data repository" or "SDR."[§723]

                        7.5.4.    What is a Swap Data Repository or "SDR"?  An SDR is generally any person that collects, calculates, and prepares information or records related to transactions or positions in, or the terms and conditions of, swaps entered into with third parties. [§728]   The data collection and data maintenance standards for SDRs will be determined by the SEC and CFTC.  Swaps entered into before the enactment of the Act will be required to be reported to an SDR within 30 days of issuance of an interim final rule on the reporting of swaps, which in turn must be promulgated by the SEC and CFTC within 90 days of the effective date of the Act. [§729]

                        7.5.5.    Are Existing Swap Transactions Required to be Cleared?  No, swaps entered into before the date of enactment of Title VII are exempt from the clearing requirements provided these swaps are reported to a SDR.[§723]