Swaps Industry Gears Up for Clearing and Reporting

Terry Flanagan

A raft of clearing and reporting requirements related to over-the-counter derivatives is heralding a new era of post-trade processing issues that will affect large swathes of the buy side.

Those firms affected by the new regulations enacted under the Dodd-Frank Act in U.S., as well as Europe’s Emir and similar legal frameworks across the globe will need to automate trade processing across major asset classes including credit, interest rate, equity and FX.

Jeff Gooch, CEO, MarkitSERV

Jeff Gooch, chief executive, MarkitServ

“Historically, very few buy-side firms have chosen to clear voluntarily,” said Jeff Gooch, chief executive of MarkitServ, which provides post-trade services for OTC products. “However, volumes have been building up steadily.”

In February, a total of 148 buy-side firms and swaps dealers used MarkitServ to match and process approximately 190,000 cleared OTC swap trades. Those transactions included nearly 9,000 cleared buy-side trades (transactions in which at least one party is not a clearing house member).

As of March 11, firms were required to begin clearing certain index credit default swaps and interest rate swaps.

“Firms categorized as swap dealers, major swap participants and active funds will be required to centrally clear several types of interest rate swaps—across four currencies—and certain credit default swap index trades,” said Gooch. “Additional products and market participants will be added as the Commodity Futures Trading Commission’s mandatory clearing requirement expands in June and September.”

In addition to clearing, firms are also subject to mandatory reporting requirements. MarkitServ provides a single point of connectivity for swap market participants to route trades to major clearing houses that are registered with the CFTC for OTC credit and rates products.

“The U.S. is slowly making the derivatives market more transparent,” Gooch said.

Under the 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.

MarkitServ automatically determines whether a trade is subject to mandatory clearing based on Regulation 50.4 (which defines which classes of swaps must clear), Regulation 50.25 (which defines the compliance schedule for swap market participants) and the MarkitServ database of counterparty jurisdictions. MarkitServ also supports mandatory and voluntary real-time trade reporting and reporting of primary economic terms for both cleared and non-cleared trades.

The CFTC has extended the deadlines for swap dealers to begin reporting to designated swap data repositories (SDRs) until April 13, which is the date that all counterparties to swap transactions are required to be in compliance with the swap data reporting rules.

Under the CFTC rules, known as Part 43, all entities whose swap activities exceeded a notional threshold ($8 billion) in the month of October 2012, were required to register no later than December 31, 2012, and are therefore among the initial group of swap dealers required to comply with the swap data reporting rules.

Exchange operator CME Group recently received approval for its CME Repository Service as an SDR for credit default swaps, interest rate swaps, commodities and foreign exchange asset classes. Market participants will be able to direct swap trades to the CME Repository by using existing CME interfaces and third-party connectivity points, thereby avoiding the additional costs associated with establishing connectivity to other SDRs.

CME Clearing offers clearing and settlement services for exchange-traded futures contracts and OTC derivatives transactions including interest rate swaps, credit default swaps and other OTC contracts.

“CME Clearing plans to offer customer clearing for security-based swaps, specifically single-name and narrow-based index,” said Kathleen Cronin, general counsel at CME Group, in a comment letter.

The CFTC also extended the compliance for reporting historical swaps (e.g., swaps entered into prior to October 2012) until 30 days after the entity’s swap dealer registration deadline. The no-action relief also expires on April 10, 2013.

The International Swaps and Derivatives Association, a trade body, has expressed concern that reporting obligations for historical swaps will become effective at the same time as reporting obligations under Part 43.

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