CFTC sets the clock ticking for mandatory clearing of interest rate and credit default swaps

Purpose – The purpose of this paper is to explain the rule recently published by the US Commodity Futures Trading Commission that establishes a timetable for the mandatory clearing of interest rate and credit default swaps through a clearinghouse. Design/methodology/approach – The paper discusses the structure of cleared trades in swaps, the classes of interest rate and credit default swaps that are subject to mandatory clearing under the CFTC's new rule and the affirmative and negative specifications for each class, the phased approach adopted by the CFTC for the mandatory clearing compliance schedule, and the end‐user and inter‐affiliate exemptions from the mandatory clearing requirement. Findings – “Centralized clearing,” a process in which bilaterally negotiated trades of derivatives have to be given up to a centralized clearinghouse, is a cornerstone of the new global regulatory system for derivatives. Its proponents argue that centralized clearing will help to mitigate systemic risk by helping counterparties identify and net positions. The paper outlines the clearing rules in the USA for interest rate and credit default swaps. Originality/value – The paper provides expert guidance from experienced financial services lawyers.