Alternative Investment Management Association Representing the global hedge fund industry
On 17 July 2010, US President Obama enacted the Dodd-Frank Act into law. Title VII of the Dodd-Frank Act creates new requirements for the trading, clearing and reporting of the details of swap and security-based-swap contracts.
Implementation of Title VII is divided among the Commodity Futures Trading Commission (CFTC), which is responsible for the regulation of swaps, and the Securities and Exchange Commission (SEC), which is responsible for the regulation of security-based-swaps.
Under the Dodd-Frank Act certain derivatives that have traditionally been traded over-the-counter will now be required to be cleared through a derivatives clearing organization (DCO) or clearing agency and derivatives contracts deemed unsuitable for clearing will be subject to increased margin and capital requirements.
The SEC and CFTC are charged with making the determination regarding which of the Dodd-Frank categories, types and groups of swaps will be subject to clearing requirements. Swaps are required to be cleared through a DCO and security-based swaps through a clearing agency.
The CFTC has already issued its first mandatory clearing requirement with respect to certain interest rate and credit default swaps (so-called ‘covered swaps’). Category I entities (swap dealers, major swap participants, security-based swap dealers, major security-based swap dealers and active funds (200 swaps per month)) will be required to clear covered swaps entered into on or after 11 March 2013. Category 2 entities (commodity pools, private funds other than active funds, and financial entities (including entities predominantly engaged in activities that are in the business of banking or activities that are financial in nature)) will be required to clear covered swaps entered into on or after 10 June 2013. All other entities will be required to clear covered swaps entered into on or after 9 September 2013. Covered Swaps entered into by counterparties that fall within different counterparty categories will be subject to the later of the two applicable compliance dates.
Cross-border application of CFTC and SEC rules
The Dodd-Frank Act provides for the application of both its swap and security-based swap provisions to apply cross-border activities when certain conditions are met. The manifestation of the CFTC and SEC’s interpretation of the relevant sections of the Dodd-Frank Act which relate to the cross-border reach of their respective rules, can be seen in various pieces of rule-making and guidance, including:
AIMA/MFA submission - Cross-Border Exemptive Order (August 2013)
AIMA/MFA submission - cross-border swaps rules (August 2013)
CFTC Exemptive Order on cross-border swaps (July 2013)
SEC Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security Based Swap Participants (May 2013)
Margin and Segregation rules
AIMA Response - SEC Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers (February 2013)