CFTC Staff Interpretation on Cleared Swaps Rules (with Lofchie Comment)

The staff of the Division of Clearing and Risk issued an interpretation regarding CFTC Rules Part 22, under which Futures Commission Merchants and Derivatives Clearing Organizations must legally segregate each Cleared Swaps Customer's collateral, but are permitted operationally to commingle the collateral of their Cleared Swaps Customers. The interpretation provides clarification regarding operational issues arising during preparation for the implementation of Part 22. Topics include:

• Definitions of Cleared Swaps Customer Collateral
• Limitations on the Use of Cleared Swaps Customer Collateral
• Treatment of Variation Margin
• Commingling of Cleared Swaps Customer Collateral
• Reporting of Portfolio of Rights and Obligations
• Customer Excess Collateral
• Determination of the Value of Cleared Swaps Customer Collateral in the Event of an FCM Default
• Distribution of Liquidation Gains or Losses in a Default

Lofchie Comment: This is an important set of interpretations to help customers understand their credit risk of clearing either swaps through FCMs. Some of the risks outlined in the interpretation are not obvious; e.g., that even in the case of cleared swaps in which "LSOC" applies, there is fellow-customer risk as to variation margin held at a clearing corporation for a defaulting FCM.

See: CFTC Letter No. 12-31.See also: Press Release.