Clearing for OTC derivatives market finally in sight
NEW YORK, Aug 14 (IFR) - After years of wrangling and missed deadlines, the implementation of the Dodd-Frank clearing mandate for the $648 trillion over-the-counter derivatives market appears to finally be on the horizon.
The Commodity Futures Trading Commission (CFTC) has published several important rules that set the clock ticking for compliance, and industry groups have released documentation and connectivity protocols that will ease the transition to clearing for derivatives market participants.
Though the CFTC had targeted October for a group of key compliance dates -- and the end of the year for full implementation of clearing -- many were sceptical the goals would be met. Two previous deadline extensions had been put in place by the CFTC over the past year and a half.
But on Monday, the CFTC published its entity and product definitions in the Federal Register. Publication begins a 90-day countdown for swap dealers and major swap participants to formally register with the regulator and organize their swaps-trading businesses according to the product definitions.
The news should come as a relief for dealers and buysiders who have been lamenting their inability to take significant steps to prepare for clearing, other than wait for regulatory definitions to be hammered out.
"It's nice to have a concrete date set on it," said Anna Pinedo, partner at Morrison & Foerster in New York, referring to the October 12 date for registration.
The entity and product definitions are generally viewed as the first domino to fall in the implementation of clearing.
The clearing mandate is a key provision of the 2010 Dodd-Frank Consumer Protection and Wall Street Reform Act, and aims to increase the safety of the over-the-counter derivatives market in the aftermath of the financial crisis.
The mandate provides for swaps that formerly traded on a bilateral, off-exchange basis to be intermediated by a clearinghouse, with risk limits and collateral requirements approved by federal regulators.
Regulators believe the shift to clearing houses will bring transparency to an opaque market that many blamed for exacerbating the financial crisis. AIG's massive exposure to credit default swaps, for example, was the main reason the giant insurer required a government bailout.
Industry groups are easing the pain of compliance as well.
The International Swaps and Derivatives Association (ISDA), along with Markit, announced on Monday the publication of a system to amend disclosures in swap agreements to comply with CFTC regulations.
The system has been in development over the past year via a documentation committee organized by ISDA and comprised of buyside and sellside lawyers. It consists of a questionnaire that will allow counterparties to make the necessary disclosures to one another to satisfy the CFTC's external business conduct rules.
The compliance date for the external business conduct rules is October 15.
Additionally, a committee of 12 dealer firms, along with consultancy Sapient Global Markets and a swath of end users, announced completion of a connectivity standard for the transmission of swaps trading data.
The Clearing Connectivity Standard, as it is being called, provides a protocol for connecting systems across asset managers, their clearing brokers, and custodians for interest rate swaps and credit default swaps.
The CFTC has been on a rule-writing frenzy over the past couple of years in order to roll out regulation prior to the G-20 clearing deadline of the end of 2012.
Its efforts have established the agency and its chairman, Gary Gensler, as one of the leading proponents of reform of the OTC derivatives market.
But the CFTC's reforming zeal has riled domestic and international market participants alike, with Swiss regulators accusing the agency in July of regulatory over-reach.
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