Derivatives (Title VII)

Title VII of Dodd-Frank addresses the regulation of over-the-counter derivatives.

Clearing Requirement: Dodd-Frank and implementing regulations require that most interest rate swaps be cleared through a derivatives clearing organization (“DCO”). The relevant compliance date was June 10, 2013, on and after which new swap transactions must be submitted to a DCO for clearing.

Commodity Pool Regulations: Dodd-Frank amended the Commodity Exchange Act to create a statutory definition of “commodity pool,” which for the first time treats swaps as commodity interests. CFTC interpretive guidance exempts most securitizations, including ABCP, CLOs and covered bonds, from the definition of commodity pool.

Swaps Clearing: As of June 10, 2013, many securitization issuers could be required to submit newly executed interest rate swaps for clearing under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act and implementing regulations. Most securitizations are currently structured such that swap providers are secured only by receivables or other collateral securing investors in the securitization. For these securitization issuers, the clearing process and posting of cash or highly liquid securities required for clearing will be prohibitively expensive and burdensome. As of today, interest swaps with a conditional notional amount and cap agreements are not required to be cleared under the CFTC’s first clearing determination, but such instruments may be required to be cleared in the future. Many securitizations could avoid clearing if they contain standard non-petition and limited recourse provisions. Swaps containing such provisions would not likely be accepted for clearing by any clearing organization and therefore may not be required to be cleared. However, even if a swap is not required to be cleared, proposed margin rules by banking regulators and the CFTC would require swap dealers to collect liquid margin (e.g. cash or treasuries) from their counterparties to uncleared swaps. The clearing requirement does not apply to securitization interest rate swaps entered into prior to June 10, 2013, but will apply to new transactions - including confirmations and novations - entered into on or after June 10, 2013, even if the related master agreement was executed prior to that date.  

Regulatory Materials

• CFTC Issues Advisory re Certain Swap Data Reporting Requirements - March 15, 2013
• CFTC Advisory re Certain Swap Data Reporting Requirements - March 8, 2013
• SEC Extension re Exemption for Security-Based Swaps - February 27, 2013
• SEC Notice of Comment Period Extension: Capital, Margin, and Segregation Requirements - January 15, 2013