The volume of cleared interest-rate swaps jumped significantly if erratically in the days following the second deadline to begin clearing those transactions, indicating firms had largely succeeded in adapted their systems to the challenge, even as corporate treasury centers were given relief from clearing only days before.
The number of cleared trades climbed from around 700 to over 800 through the week before the June 10 deadline, then dropped a bit on deadline day and proceeded upward to 965 on June 11 and 1,302 on June 12, according to the DTCC’s swap data repository. Trades on Thursday, however, dropped sharply, to 738
Amir Khwaja, CEO of Clarus Financial Technology, noted in a blog post that swap volumes can vary dramatically, and at least a few weeks of data will be necessary to ascertain trends. However, the number of uncleared trades dropped precipitously during the first week of clearing from the week before and remained around 150 through Thursday. If the number of cleared trades bounces back, swap-market participants may have been more adept at preparing for clearing than many had anticipated.
“The inference from this is that all or a large majority of [category 2] firms were able to meet the mandatory deadline and not fail to do so as had been conjectured in the press,” said Mr. Khwaja wrote.
The first round of firms to clear, by April 10, included dealers, major swap participants and active funds doing 200 or more trades a month. The second round comprised “other financial entities,” including regional and community banks, mortgage REITs and financial corporates. And the third category, by Sept. 9, will include nonfinancial end users—those companies which for whatever reason haven’t sought the end user clearing exemption—and third-party accounts.
Treasury center impact?
Among the financial corporates in the second category would have been the treasury centers many large companies use to transact swaps between inter-company affiliates, net them, and then hedge the netted exposure with a dealer or other third party. On June 4, however, the Commodity Futures Trading Commission (CFTC) published a no-action letter that provided just-in-time relief to certain treasury centers, similar to the end user clearing exemption for nonfinancial corporates.
The CFTC had been working on a way to provide that relief for some time, although it was unclear what form it would take, said Luke Zubrod, director at Chatham Financial, who added most corporates were counting on it arriving and hadn’t prepared their treasury centers for clearing.
Mr. Zubrod added, however, that the no action letter’s relief is highly conditional. Among the half dozen or so conditions is that the treasury center must be owned by the company, and a company must have limited affiliates that are “financial in nature,” requiring it to determine whether affiliates meet that regulatory definition or not. In addition, treasury centers must have a guarantee from the parent company, something large companies today often do not provide, in some cases because of the transfer pricing complications guarantees would create.
Mr. Zubrod said the CFTC’s recognition of the issue was positive, but the many conditions reflect a worry that “broad relief might create a loophole for parties who aren’t intended to get the relief.”
Weak relief.
The CFTC’s no action letter essentially says its division of clearing and risk will not recommend prosecution to the division of enforcement if the conditions detailed within the relief are met. “It’s about the weakest form of relief you can get, it can be withdrawn on a whim, and it doesn’t necessarily reflect the views of all the commissioners,” Mr. Zubrod said, adding while many companies will rely on it, others may say, “We’re not going to precariously perch our reliance on no action relief that could be so easily revoked.”
A bill that’s been floating around the House of Representatives for more than a year, HR 677, would make permanent the type of relief provided in the CFTC’s no action letter as well as the exemption and relief it gave nonfinancial companies’ inter-affiliate trades from swap clearing and reporting.