Mandatory Clearing in U.S. Kicks Off Under Dodd-Frank

Terry Flanagan

As mandatory clearing gets under way in the U.S. for over-the-counter swaps products, the derivatives industry is building out infrastructure for connecting swap dealers, end users and clearing organizations.

Swap dealers, major swap participants and private funds active in the swaps market have all been required, from March 11, to begin clearing certain index credit default swaps and interest rate swaps.

MarkitServ, an electronic trade processing service for OTC derivative transactions, has built connections to multiple clearing houses to help the swaps industry comply with the mandate to clear OTC derivatives.

MarkitServ provides middleware for OTC derivatives trade processing for cleared and non-cleared trades, across electronic execution venues and off-facility execution in credit, rates, equity and foreign exchange derivatives.

“When it comes to complying with regulatory deadlines from the Commodity Futures Trading Commission and regulators worldwide, MarkitServ is supporting the majority of OTC derivative market participants,” said Henry Hunter, head of product management at MarkitServ. “Our cross-asset class network links traders and execution venues to clearing houses and trade reporting facilities, making it much more straightforward to manage, clear and report OTC derivatives.”

Under the U.S. Dodd-Frank Act, the CFTC must make a determination whether a swap is required to be cleared by either a Commission-initiated review or a submission from a derivatives clearing organization (DCO) for the review of a swap, group, category, type or class of swap.

The clearing requirement applies to newly executed swaps, as well as changes in the ownership of a swap.

“Central clearing lowers the risk of the highly interconnected financial system,” said Gary Gensler, chairman of the CFTC, in a statement. “It promotes competition in and broadens access to the market by eliminating the need for market participants to individually determine counterparty credit risk, as now clearing houses stand between buyers and sellers.”

The CFTC has largely completed swaps market rule writing. On October 12 last year, the CFTC and the Securities and Exchange Commission’s foundational definition rules went into effect with the CFTC now seeking to consider and finalize the remaining Dodd-Frank Act swaps reforms later this year.

As the result of CFTC rules completed in the first half of last year, 71 swap dealers are now provisionally registered. This initial group of dealers includes the largest domestic and international financial institutions dealing in swaps with U.S. persons. It includes the 16 institutions—the largest derivatives dealers—commonly referred to as the G16 dealers.

The CFTC is working to finish the pre-trade transparency rules for swap execution facilities, as well as the block rule for swaps. Swap execution facilities would allow market participants to view the prices of available bids and offers prior to making their decision on a transaction.

MarkitServ seeks to provide market participants efficient and simplified access to key pieces of market infrastructure without having to incur the duplicative costs and risks of building and maintaining their own direct connections, according to Hunter.

The CTFC-registered DCOs to which MarkitServ is connected are: CME, Ice Clear Credit, Ice Clear Europe, LCH.Clearnet (SwapClear US), LCH.Clearnet (SwapClear UK) and Options Clearing Corp. MarkitServ is also connected to Eurex Clearing and LCH.Clearnet (CDSClear), both of which have DCO registrations pending with the CFTC.

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