What’s the Rule? The Commodity Futures Trading Commission on July 26, 2011, published a final rule establishing a framework for derivatives clearing organizations (DCO) that it intends to clear a type of derivative. The commission, based in part on the information submitted by the DCO, will determine whether clearing of that particular swap will be mandatory across the marketplace.
Why is it important? Dodd-Frank required the vast majority of derivatives to be moved from the risky and secretive shadow markets to the transparent clearing system, where a third-party clearinghouse guarantees the underlying trade and imposes margin requirements. Mandatory clearing is at the centerpiece of financial reform to help usher in a system that would prevent another collapse like American International Group.
What did Better Markets Argue? We argued that the process had to be more transparent to give the public and customers a greater voice in the decision. For example, the DCO should make public that it is considering clearing a new class of swaps, rather than giving notice when a submission is made. The clearinghouses should be required to solicit of input from customers and the public to enable a full and fair consideration of a submission. Comments in opposition and in support of the submission should be included as well. Clearinghouses also should have to make public on a decision not to make a submission, including comments for and against.
What did the Agency Do? The commission adopted some of Better Markets’ positions in the final rule. Comments received by the DCO in support and in opposition must be submitted. Customer and public comments will be permitted, but only while the CFTC has the matter under consideration. Unfortunately, the commission did not require a clearinghouse to make a public notice when it is considering a submission nor when it has decided not to submit. Better Markets continues to believe that the DCOs’ responsibility to the public is great and that full disclosure of the process should be made transparent because they are in a crucial position in carrying out the clearing mandate.