Mandatory Exchange Trading for Swaps to Begin February 18, 2014

I. Mandatory Exchange Trading

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) mandates that swaps that (1) are subject to the Dodd-Frank Act's clearing requirement and (2) have been made "available to trade" be traded on either swap execution facilities (SEFs) or designated contract markets (DCMs, and such requirement, the Mandatory Trading Requirement).  As described in our previous client alert, SEFs and DCMs are self-regulatory exchanges which serve as trading platforms for swaps.[1] The Commodity Futures Trading Commission (the CFTC) has established a process for certifying determinations by SEFs and DCMs that swaps are "available to trade," and began receiving available-to-trade submissions from SEFs in the middle of October 2013.  Over the past week, the CFTC has begun certifying these submissions.

II. Product-Level Certifications

On January 16, 2014, the CFTC announced that Javelin, SEF, LLC's available-to-trade determination, the first of the available-to-trade determinations submitted, was deemed certified.  Similarly, on January 23, 2014, the CFTC announced that trueEx, LLC's available-to-trade determination was deemed certified, and on January 28, 2014, the CFTC announced that TW SEF LLC's (Tradeweb) available-to-trade determination was deemed certified.  As a result of these certifications, certain interest rate and credit default swaps listed below will be subject to the Mandatory Trading Requirement and must be executed through either a SEF or DCM starting on February 18, 2014,[2] February 21, 2014, and February 26, 2014, respectively.  Available-to-trade determinations are product-level determinations, and market participants may execute swaps subject to the Mandatory Trading Requirement on any SEF or DCM that offers the relevant swaps, not just the SEF or DCM that submitted the relevant available-to-trade determination.[3]  The CFTC publishes on its website a list of swaps that have been made available to trade and all the SEFs and DCMs that list or offer those swaps.[4]

Some uncertainty remains regarding "package transactions" that involve more than one swap or financial instrument and at least one swap subject to the Mandatory Trading Requirement.  The CFTC stated that the inclusion of such a swap in a multi-legged transaction "would not per se relieve market participants of the obligation to trade such swap through a SEF or DCM," and has reserved the matter for discussion at a public roundtable scheduled for February 10, 2014.  On January 24, 2014, the Managed Funds Association submitted a request for no-action relief from the Mandatory Trading Requirement for swaps executed as part of package transactions.[5]

III. Which Swaps Must Be Exchange Traded?

Transactions involving the following USD interest rate swaps will be subject to the Mandatory Trading Requirement as of February 18, 2014, with transactions involving the interest rate swaps highlighted in blue and bold subject to the Mandatory Trading Requirement as of February 21, 2014 and transactions involving the interest rate swaps highlighted in red and underlined subject to the Mandatory Trading Requirement as of February 26, 2014.