WASHINGTON (CN) – The Securities and Exchange Commission will extend temporary rules that allow clearing agencies to act as Central Counterparties in credit default swaps until July 16, 2011 when provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act will come into effect.
The SEC adopted temporary rules that allowed clearing agencies to engage in the practice of novation where the obligation between a buyer and seller is replaced by a central counterparty as the seller to the buyer and the buyer to the seller, to keep still active credit default swap agreements from collapsing as the creditworthiness of participants collapsed along with the financial markets.
In novation, the risk of poor credit by either part is replaced by the creditworthiness of the central counterparty. To encourage the use of novation through central counterparties, the SEC exempted clearing agencies from having to register with the agency.
Under Dodd-Frank, clearing agencies will have to register with the SEC unless they have operated under the temporary rules, in which case, they will be deemed registered by the SEC and the Commodity Futures Trading Commission.