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Dodd-Frank Swap Rules to Take Effect in 2013

WASHINGTON (CN) - The Commodity Futures Trading Commission adopted final rules regulating certain types of swaps to be cleared through certified organizations under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In response to the role that the derivatives market played in the 2008 financial crisis, the commission proposed clearing requirements to reduce credit risks and provide an organized method for clearing transactions.

In September 2009, G20 leaders agreed that over-the-counter derivatives contracts should be reported to trade repositories, and that central counterparties should clear those derivatives.

The commission proposed clearing requirements for two classes of credit-default swaps and four classes of interest-rate swaps.

Clearing requirements target only certain types of swaps under the rule. Those swaps must go before a commission-registered derivatives-clearing organization.

If a swap does not clear because of a credit problem, it must be cleared as soon as "technologically practicable" after counterparties learn about the issue, the commission ruled.

For interest-rate swaps, the rules deal with fixed-to-floating swaps, basis swaps, overnight-indexed swaps, and forward-rate agreements involving the U.S. dollar, British pound, euro or Japanese yen. Those swaps must rely on specified rate indexes.

For credit-default swaps, the commission will include a table listing the types of swaps that require clearing.

The commission adopted a phased compliance schedule for mandatory swaps.

Category 1 entities, including swap dealers, security-based swap dealers, major swap participants and active funds, must comply with the clearing requirements within 90 days of a CFTC determination that a swap must be cleared.

Category 2 entities, including commodity pools and private funds, will have 180 days to comply with the clearing requirement. Compliance for all other swap transactions must meet clearing requirements within 270 days after the CFTC issues a clearing requirement.

Swaps between two Category 1 entities have a compliance date of March 11, 2013, and those involving Category 2 entities must comply by June 10, 2013.

All other swaps have a compliance date of Sept. 9, 2013.

The rule takes effect on Feb. 11, 2013.

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