Swaps Regulation: Commodity Pools, Clearing, and Margin

Abstract

This panel was held on Monday, January 28, 2013, at the ASF 2013 conference. Panelists discussed the developing impact of swap regulation on securitization and what it means for the ability to use swaps in securitization as new regulations take effect. The Dodd–Frank Act added a definition of the term “commodity pool,” and the Commodity Exchange Act revised the definition of the term “commodity pool operator.” As a result, many securitizations that held swaps, often solely to hedge interest rate or currency mismatches between their assets and their liabilities, were at risk of being considered commodity pools. By the time the panel took place, however, the Commodities Futures Trading Commission had granted two significant pieces of interpretive guidance and no-action relief that together excluded most traditional securitizations (e.g., credit card or auto loan securitizations), most asset-backed commercial paper programs, many CLOs and CDOs (collateralized loan obligations and collateralized debt obligations), and most covered bond transactions from the definition of a commodity pool. The panel focused on the relief that was granted and the issues that remained to be resolved. The panel also discussed the aspects of entering a swap that would be different for a securitization now than it would have been a year ago. The most significant changes have not yet become effective. Those include clearing and margin requirements and, eventually, a requirement to transact on a designated contract market or swap execution facility if the swap has been “made available to trade” on such a facility. One of the cornerstones of Dodd–Frank’s swap regulations is the requirement that swaps be cleared through a central counterparty. Whether a swap will need to be cleared depends on the identities of the counterparties, the nature of the swap, and whether a derivatives clearing organization is willing to clear it. Even if a swap is not required to be cleared, it may still be subject to margin requirements and margin calls.