Clifford Chance

An Introduction to the US Cleared Swap Infrastructure

15 June 2011

In September 2009, the leaders of the G-20 stated that "All standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest."

In the United States, legislation to give effect to this statement was a central pillar of the over-the-counter derivates provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Dodd-Frank requires that, following the effective date of detailed rules, standardized swaps that are accepted for clearing by clearing organizations must be submitted by the parties to the relevant clearing organization, unless one of the parties is an end-user exempt from the clearing requirement. Further, unless an end-user exemption applies, if a swap is accepted for trading by a registered execution facility, it must be traded on the exchange or by an approved off-exchange transaction like a block trade or "request-for-quote" (see "Swap Execution Facility").

This new regime will necessarily change the infrastructure within which swaps are transacted. Swap traders will have to become familiar with the roles of the clearing organizations, execution facilities and brokers involved in exchange trading and clearing, and in some cases, will need to execute new documentation to establish the contractual framework for trading and clearing. This briefing note briefly summarizes the roles of the key players in the new market, their regulatory status and the main contracts that bind them together.

It should be noted that Dodd-Frank distinguishes between two categories of swap transactions. "Security-based swaps" are swaps based on a single security or loan or a narrow index of securities or loan and are under the regulatory oversight of the Securities Exchange Commission (the "SEC"). "Swaps" are all other swap transactions, specifically those based on interest rates, commodities, broad-based indices and foreign exchange options, and are regulated by the Commodity Futures Trading Commission (the "CFTC"). This briefing note concentrates on the CFTC regulations, which are, at the time of writing, substantially more developed than the equivalent SEC rules.

Download PDF