All Quiet on the Clearing Front

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

A milestone week for OTC derivative clearing has come – and almost gone. Unless you are immersed in Dodd-Frank (like we are) you probably didn’t even notice.

And that’s a good thing.

Starting this past Monday, swap dealers and active funds* in the United States have been required to clear various interest rate swaps and CDX credit trades. No one would guarantee beforehand that things would go smoothly, but at this point we can say that everything went pretty much according to plan.

At the end of the first day of clearing we reached out to our members to hear about their experiences, particularly any significant issues they may have had. As the adage goes, silence is golden. No issues of any particular concern were raised and three more days of smooth sailing on the clearing front only reinforces that view.

Deadlines always help to focus attention and we know from our members – buy side, sell side and CCPs – that they were working hard through the past weekend to get systems and documentation up to snuff for Day 1 of Clearing. Perhaps a few even listened to our urgings from a month ago. All that hard work paid off.

One reason this first wave of clearing went smoothly is that much of the clearing to which the mandate applied was already underway. Dealer-to-dealer trades in the affected product types have been cleared for quite some time. At least some of the active traders had tested the waters on clearing. This reflects the industry’s commitment to the key tenets of regulatory reform that reduce systemic risk, including the reduction of counterparty credit risk through clearing.

With one deadline successfully met, market participants are looking ahead to several new ones. External Business Conduct Rules (EBCR) become effective on May 1. The next two waves of clearing occur on June 10 (for commodity pool operators, private funds and non-dealer financial entities) and on September 9 (for everyone else, other than commercial end-users).

For the May 1 deadline, we will be rolling out our next Dodd-Frank Act protocol shortly and will be holding an EBCR webinar on Thursday, March 21 (click here to register). For the next waves of clearing we will continue to work with our members and the broader market to assist them however we can to prepare for those important dates. Those next categories of market participants facing the clearing mandate are a bigger universe than the active funds, making the education process even more of a challenge.

Future efforts will be buoyed by the experience of the first day of clearing. When it comes to the many challenges of regulatory implementation, we firmly believe that success breeds success.

* The clearing mandate also applies to major swap participants, but at this point only two firms have registered as such and neither is engaged in new trading.

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