Abstract
On June 10, 2013, interest rate swaps between financial entities and swap dealers or major swap participants became subject to the mandatory clearing requirements of Title VII of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank) and the related implementing regulations. Swap clearing is a process by which two parties to a swap face each other through a derivatives clearing organization (DCO) that acts as an intermediary, thereby eliminating direct default risk between the parties. For securitization issuers, the clearing process and the related requirement to post collateral in the form of cash or highly liquid securities are prohibitively expensive and burdensome. Although there are certain limited exceptions to the mandatory swap clearing rules, the availability of such exceptions to newly executed interest rate swaps by securitization issuers is not certain. As of today, interest rate caps and swaps with a conditional notional amount are not required to be cleared under the Commodity Futures Trading Commission (CFTC) first-clearing determination, but such instruments may be required to be cleared in the future. In addition, at this time, no DCO is likely to accept for clearing a swap agreement that contains non-petition and limited-recourse provisions, which are standard provisions in securitization swaps. If no clearing organization will accept securitization swaps for clearing, then such swaps will not be required to be cleared under CFTC pronouncements. Securitization swaps that are not required to be cleared may still, however, be required to post liquid margins to their counterparties under rules that have been proposed by banking regulators and the CFTC. <b>TOPICS:</b>Fixed income and structured finance, interest-rate and currency swaps, exchanges/markets/clearinghouses
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